In an increasingly interconnected, complex and turbulent world, business is navigating uncharted waters. Amidst this uncertainty, the global community came together in a global call to action to guide all stakeholders– including business– in building a more sustainable, equitable and inclusive society. While the Sustainable Development Goals (SDGs) were designed for and approved by governments, they also constitute a global framework for measuring business contributions to society – how companies can ‘win with purpose’.
According to a recent survey, more than two thirds of participating companies said they were already planning to engage with the SDGs, but less than half plan to embed them into their business strategy in the next five years. As the United Nations Global Compact 2016 CEO Survey notes, only 59% of companies report that their company is able to accurately quantify the business value of their sustainability initiatives.² Therefore, the central question is: Should the SDGs really matter to business?
Five ways the SDGs can help business generate value
In short: Yes – the SDGs are more than just an aspirational framework for governments. They are a roadmap for business opportunity. There are a number of compelling reasons for businesses to pursue social impact and engage with the SDGs. Beyond the need to heed society’s call for greater transparency and accountability, blending purpose with profit can generate a unique competitive advantage well-suited to discerning consumers and investors. Five distinct drivers of financial value compel companies to make both social impact and SDG alignment part of their core business in order to:
Generate new revenue by creating new opportunities for market differentiation and growth;
Recruit and retain talent by optimising your work- force;
Increase supply chain resilience by enhancing supply chain sustainability and operational efficiency;
Spawn investor interest by increasing attractiveness to a wider range of investors; and
Assure license to operate by addressing regulatory compliance and managing risks.
Generate new revenue
In our global economy, the emergence of a new global middle class, dramatic shifts in consumer preferences toward ‘responsible’ products and frugal innovation are creating new markets poised for growth.
The global middle class is expected to expand by 3 billion people by 2030. By then, 59% of middle-class spending will occur in Asia; today Asia only accounts for 29%. This emerging market middle class will represent 3 billion new consumers by 2030 and 70% of global consumption.
With unprecedented global demand for goods and services, accessing new markets can be highly lucrative – including those with a growing middle class and traditionally underserved markets. According to a recent study, this segment currently generates over US$ 2.5 trillion in annual income and is growing at a rate of over 8% per year. Beyond the potential for growth associated with a rapidly emerging and diverse consumer base, consumer preferences have also been shifting dramatically:
91% of global consumers ‘unequivocally believe companies must operate responsibly to address social and environmental issues’; 90% would ‘like to see more responsible products and services offered from companies’; and 90% are likely to switch brands to one affiliated with a good cause if quality and price are similar.⁶
Recruit and retain talent
Beyond the generation of new revenue and growth, diversity and inclusion are increasingly tied to improvements in company performance and are accelerating competition for talent. Businesses now compete globally for progressively scarce technical and professional skills. Corporate citizenship (ie a company’s role in, or responsibilities towards society) is emerging as an important criterion in the talent market. This has led to more socially conscious companies gaining an edge in attracting, engaging and retaining top employees. There is growing belief – and evidence – that better and more diverse talent produces better results. For example:
A 2012 research report from Deloitte Australia entitled ‘Waiter, is that inclusion in my soup?’ identified an 80% improvement in business performance when diversity and inclusion were high.⁷
The Center for Talent Innovation in New York found that publicly traded companies that embraced diversity were 45% more likely to have expanded their market share in the past year and 70% more likely to have captured a new market.⁸
Increase supply chain resilience
Optimising supply chains for resilience can lower transaction costs and increase operational efficiency. Beyond revenue increases via growth and new market opportunities, engagement in social impact can help to manage costs and optimise efficiency. For example, supply chain sustainability is increasingly understood to be a core generator of business value while providing meaningful contributions to companies’ reputations and brands. In the growing retailer-driven supply chain environment, suppliers are looking for opportunities to differentiate themselves by not only reducing costs, but by integrating social and environmental considerations. Some key trends that show the need for increased supply chain resilience include the following:
Eighty percent of companies involved in a major survey had at least one instance of supply chain disruption in the past 12 months and over 30% reported that disruptions are causing losses in excess of US$ 250,000.
Significant supply chain disruptions can cut the share price of companies by 7% and can have lasting consequences, especially in industries such as food, where total profits will be at risk by 2030 as a direct result of supply chain disruptions.
Spawn investor interest
Socially responsible investing has eclipsed US$ 6 trillion per year – growing more than 76% since 2012 and meeting or exceeding market returns. The SDGs are coming to be seen as the framework against which many sustainable investments will be assessed for social and environmental impact. Companies pursuing social impact as a part of their core business strategies are seeing increased access to financing in a diversity of forms – from philanthropic grants and impact investments to partial credit guarantees and pay for performance. This phenomenon is not new, but recent trends show that it is becoming more common:
The socially responsible investing industry exceeded US$ 6 trillion in the United States alone in 2014 and stands at US$ 21.4 trillion globally.
Impact investors and development finance institutions have been leading the way in creating a new impact investing asset class that is projected to grow from US$ 51 billion in 2014 to US$ 400 billion in 2025. This figure is likely to continue to grow at nearly 20% per year.
In public markets, major money managers are expanding the practice of environment, social and corporate governance (ESG) integration – the systematic and explicit inclusion of ESG risks and opportunities into traditional financial analysis – to wider portions of their portfolios.
Assure license to operate
Aligning with the SDGs allows companies more options when managing risks associated with their license to operate. An emphasis on transparency and accountability combined with environmental pressures continues to translate into increasing regulatory scrutiny. In fact, policy and regulatory risk has risen dramatically in emerging markets since the 1980s. Companies that explicitly recognise the dynamism of the environment in which they operate can implement appropriate strategies to address it. Strong community relations, goodwill from governments and respect from locals can mitigate political and regulatory risks. Governments are increasingly providing both positive and negative incentives to support domestic production and consumption, which can accelerate inclusive business development. A growing number of countries around the world are supporting inclusive businesses through a variety of policy instruments. These efforts are driven by the governments’ desire to engage the private sector in order to accelerate the pace of addressing poverty and other social and environmental challenges.
To read the full article in Financing the UN Development System: Pathways to Reposition for Agenda 2030’ click here.