The Business Case for

Sustainability
The Business Case for Sustainability
Whether managing downside risk, creating business value by incorporating
sustainable solutions, or identifying innovative ways to finance sustainability, the
private sector is becoming the engine of competitive solutions to sustainability
and can help finance and address sustainability challenges in the years ahead.

BUSINESSES FACE SUSTAINABILITY CHALLENGES—THE GLOBAL

CONTEXT

Globally, sustainability challenges are becoming even more material, reaching thresholds of
importance to companies’ long-term strategies, to their customers, and external stakeholders.
From increasing demand for natural resources to economic disparity to climate change,
companies are facing a more complex array of trade offs and risks across their value chains.

Population growth, a rising middle class, rapid urbanization, and economic growth are all
fueling an increasing demand for food, water, energy, land, and other resources. In the last
decade, emerging markets saw an 80 percent increase in per capita income, which in turn is
resulting in an increase in consumption. By 2030, another three billion middle class consumers
are expected to drive up demand even further. Early projections show an 80 percent increase
1
in energy use and 60 percent increase in water use.

Climate change matters to business success. Understanding climate risks and adaptation is
critical to supporting clients. The long-term impact of climate change will be felt by many
businesses as changes in temperature, rainfall patterns, sea level, and storm conditions
require new adaptation strategies. There is also public pressure for companies to decrease
their greenhouse gas emissions, which rose by 6 percent in 2010—one of the highest rates in
recorded history. Many companies are developing climate change strategies, assessing their
internal and supply chain emissions and examining their approach to climate change
throughout their operations and value chain.

Volatility and uncertainty impact both consumers and private sector. In many countries, the
rising price of food has already pushed millions of people into poverty, disproportionately
affecting the vulnerable. Moreover, the high price of resources, including food, energy, and
water, can fuel civil unrest in emerging markets. Volatility of resource prices causes uncertainty
for the private sector, creating risks associated with productivity investments and potentially
distorting supply chain efficiency.

1
McKinsey Study 2011. Resource Revolution: Meeting the World’s energy, materials, food and water
needs.

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THESE COMPLEX CHALLENGES CAN
CREATE VALUE FOR BUSINESS

Sustainability has become an important factor in business The business case for sustainability is also connected to
strategies. Large multinationals and mid-sized companies improved reputation and brand value. The global survey of
are increasingly taking a long-term view toward managing senior executives from around the world conducted by the
environmental and social risks. Many companies Economist in 2011 found that 76 percent of respondents
recognize that by addressing environmental and social think that embedding sustainability into the company’s
issues they can achieve better growth and cost savings, business leads to enhanced reputation and increased
improve their brand and reputation, strengthen brand value. The more a company proves to stakeholders
stakeholder relations, and boost their bottom line. that its business is driven by strong sustainability policies,
Strategic integration of sustainability prepares companies the lower the risks associated with that company. In
to better anticipate and understand long-term trends and contrast, weak environmental, social, and governance
the effect of resource use, and to address stakeholder (ESG) performance can negatively impact a firm’s
expectations. According to a 2011 McKinsey Survey, reputation, which in many cases can be costly. British
76 percent of CEOs consider that strong sustainability Petroleum (BP) is a good example of how a company’s
performance contributes positively to their businesses in brand value can be affected by poor sustainability policies.
2
the long term.

Companies are capitalizing on local conditions and PROTECTING BRAND VALUE

shaping their business strategies to accommodate
constraints on natural resources in a way that allows them
to develop innovative new products, services, and
Due to the Gulf of Mexico oil spill, BP has
business models. This also provides opportunities to lost more than $32 million a day in brand
bolster their growth, profitability, and add societal value. value. BP’s market value has dropped
from $184 billion to $96.5 billion, roughly
2
McKinsey Global Survey results 2011. The business of 48 percent in a period of two months.
sustainability. Developing a good environmental and
social reputation can contribute to a
willingness among customers and
investors to pay a price premium, which
directly affects the company’s bottom line.

CREATING INNOVATIVE SOLUTIONS

Jain Irrigation is an example of a company that created innovative social solutions and feeds
those innovations back into communities. The IFC client, based in Jalgaon, India, pioneered a
system of contract farming in which the company buys farmers’ crops at a guaranteed price,
thereby enabling farmers to plan and obtain loans for irrigation products, such as an affordable
drip irrigation system that reduces water consumption. Jain Irrigation has worked closely with its
rural customers to promote precision farming, which increases output by optimizing the balance
between fertilizers, pesticides, water, and energy. This approach has given Jain Irrigation a
competitive edge: its close relationship with smallholder farmers and the fact that its products are
customized to local conditions make it easier to win business from large agricultural suppliers.

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Investment in resource efficiency is important for small study found that performance was stronger in sectors
and large companies. It helps them strengthen their that were significant users of natural resources, where
competitive advantage. Studies have shown that brand and human capital were particularly important
improvements in resource efficiency in energy and water and where the companies competed on a business-to-
have lead to significant cost savings and lower consumer basis.
environmental impact. DuPont, for example, has cut costs
by $2 billion in the last 10 years by investing in energy
efficiency equipments while reducing greenhouse gas
USING ENERGY EFFICIENCY TO
emissions by 75 percent. Another good example in
reducing operational costs and environmental impact is
DECREASE COSTS
the IFC client Kuybyhev Azot in Russia. Companies are Kuybyhev Azot (KuAz) is a top chemical
working with suppliers to become more resource efficient and fertilizer producer in Russia. IFC
and environmentally sustainable. For example, Wal-Mart supported KuAz with a $20 million loan to
is aiming to save $3.4 billion from reducing supplier
finance a program to identify ways to use
packaging by 5 percent by 2013.
energy efficiency and cleaner production
as routes to reduce costs, increase
There is a correlation between good environmental and
competitiveness, and improve
social performance and financial performance. According
environmental performance. Once
to a Harvard Business School study that tracked
completed, these measures will save the
performance over the last 18 years, companies with strong
company about $9 million in energy costs
ESG performance outperformed companies with weak
3
ESG performance, as measured in accounting terms. The
a year. The resulting reduction in carbon
emissions of over 115,000 tonnes of CO2
3
Eccles G.R., Ioannou I. Serafeim G. “The Impact of a Corporate per year is estimated to be equal to taking
Culture of Sustainability on Corporate Behavior and
Performance,” Harvard Business School, November, 2011. 23,000 cars off the road.

FINANCIAL PERFORMANCE OF COMPANIES WITH WEAK VS. STRONG

ESG PERFORMANCE
25.00

20.00

15.00

10.00

5.00

0.00
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010

Weak ESG Performance Strong ESG Performance

Source: Eccles G.R., Ioannou I. Serafeim G. “The Impact of a Corporate Culture of Sustainability on
Corporate Behavior and Performance,” Harvard Business School, November, 2011.

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CUSTOMERS AND INVESTORS VALUE
STRONG ESG PERFORMANCE
The growing demand by consumers and investors for The socially responsible investing (SRI) market
sustainable products and services, coupled with increased enables investors to have a positive return on their
scrutiny and reporting on corporate responsibility, are investments while also bringing positive impacts to
driving companies to pay greater attention to their ESG society. According to the Ethical Funds global survey
performance. According to McKinsey’s global survey of of investors, 92 percent of respondents think that
7,751 consumers, 87 percent are concerned about the financial returns of SRIs play an important role in their
environmental and social impacts of the products they buy decision to invest in SRIs. Similarly, environmental
and 54 percent are willing to pay a premium for products and social evaluation plays a crucial role in the
that are sustainably manufactured. investors’ decision to allocate their capital to SRI
funds.
Increasingly, investors are considering environmental and
social issues when selecting investments. According to The growth of SRIs has increased exponentially in the
Bloomberg, in 2010, 5,000 investors in 29 countries last 10 years. The SRI market has grown at an annual
accessed more than 50 million ESG indicators in the rate of 22 percent since 2003. By 2015, SRI assets
Bloomberg platform—a 29 percent increase over the under management will reach $26.5 trillion or 15
previous year. Different sustainability reporting percent of the global total. In 2011, SRIs attracted
frameworks such as the Global Reporting Initiative (GRI) about one dollar out of every nine invested. Investors
and the Carbon Disclosure Project (CDP) have become are attracted by SRI markets due to their robust
important tools for investors in making informed financial performance. The majority of SRI funds
investment decisions. The number of companies using outperformed S&P 500 over a 10-year period by an
GRI as a framework for sustainable reporting has average of 6.7 percent. Similarly, over a 5-year period
increased by 73 percent in the last four years, with a the Dow Jones Groups Sustainability Index performed
dramatic increase from developing countries that are at an average of 36.1 percent better than did the
reporting on sustainability measures. traditional Dow Jones Group Index.

KEY DRIVERS FOR INVESTORS TO INVEST IN SRIS

Financial Returns 60% 32% 92%

Environmental Evaluation 38% 50% 88%

Social Evaluation 38% 49% 87%

Meet minimum ESG expectations 29% 50% 79%

Governance Evaluation 27% 49% 76%

Stakeholder Engagement 24% 47% 71%

Well known Name in SRI 24% 47% 71%

0% 20% 40% 60% 80% 100%

Very Important Somewhat Important Not Very Important Not all Important Don't Know

Source: Ethical Funds Global Study 2011.

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IMPROVEMENTS IN ESG PERFORMANCE
CAN RESULT IN GREATER DEVELOPMENT
IMPACT

The success of a company is inextricably linked to the design strategies that help Coca-Cola reduce the
success and sustainability of the communities in which environmental impacts of its supply chain. By 2015,
they operate. The Coca-Cola Company and Newmont Coca-Cola’s main supplier in Zambia will become 25
help illustrate how companies are integrating sustainable percent more water efficient. Through the Coca-Cola
development objectives into their core business strategies, Foundation, the company invested about 1.3 million in
thereby benefiting the communities and local economies in community development programs that include
which they operate. sustainable management of water and watershed
resources, installment of waste, and sanitation
The Coca-Cola Company played an important role in the facilities.
sustainable development of communities in Zambia
Newmont Mining Corporation is a leading gold
through the value of goods generated, jobs created, and
producer with operations in five continents. Newmont
its positive impact on the supply chain. Coca-Cola
invested $588 million in the Ahafo Mine in Ghana to
procures approximately 25 percent of inputs from local
develop four mining areas, and build and operate
smallholder farmers. Remaining inputs are purchased
related mine facilities. IFC supported the project with
from companies based regionally. Smallholder farmers
$125 million in loans or about 21 percent of total cost.
play an important role in growing the sugar that is used in
Prior to investing in the Ahafo Mine, Newmont
Coca-Cola products. In the case of Zambia, sugarcane
engaged with local communities to responsibly resettle
workers are among the most vulnerable to labor violations
and compensate roughly 1,700 households located in
due to the lack of formal contractual arrangements to
the mining area. Due to resettlement of communities,
protect their rights, and the low-paid/seasonal nature of
Newmont built new homes and schools and residents
their work. For this reason, Coca-Cola introduced an audit
were granted legal title to the land, along with potable
program to assess whether supplier and bottler
water and access to electricity. Additionally, Newmont
workplaces uphold internationally recognized labor and
launched a community development fund to contribute
environmental standards. Through its local partners,
an estimated $500,000 annually to support community
Coca-Cola introduced programs to support HIV/AIDS
development programs such as the provision of water,
services for its employees and their dependents free of
sanitation, upgrading local clinics and training centers,
charge, including education and awareness-raising
HIV/AIDS programs for workers as well as a program
programs, voluntary testing and counseling, and free
on malaria prevention, and an information forum for
antiretroviral drugs.
women in the community. In addition to Newmont’s
community programs, IFC introduced linkages
Since Coca-Cola uses water as the primary ingredient in
programs to increase local participation in the project
its beverages as well as in its manufacturing activities, the
and bring additional benefits to the surrounding
company’s most significant impact is on water resources
communities.
at the agricultural stage. Therefore, Coca-Cola required its
suppliers to promote better management practices and

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IFC AND SUSTAINABILITY

A focus on sustainability is part of IFC’s vision: sound

economic growth, driven by private sector development, is
crucial to poverty reduction. IFC is committed to ensuring
that the benefits of economic development are shared with
the poor and vulnerable, and that development takes
place in an environmentally and socially sustainable
manner. IFC’s sustainability strategy is focused on
transforming markets, driving innovation, and adding value
to clients by helping them improve their business
performance.

IFC’s Sustainability Framework, originally adopted in

2006, reflects IFC’s commitment to sound environmental
management and social development. It is designed to
address the concerns of people who are affected by IFC’s
projects and achieve greater development impact. IFC’s
Performance Standards on Environmental and Social
Sustainability are an important aspect of the Sustainability
Framework.

The Performance Standards have become globally

recognized as a leading benchmark for environmental and
social risk management in the private sector. They are
often prerequisites for companies to raise funds,
particularly from international markets. IFC’s Performance
Standards are reflected in the Equator Principles, now
used by 72 financial institutions around the world. In
addition, other financial institutions also reference IFC’s
Performance Standards in their policies—including 15
European Development Finance Institutions and 32 Export
Credit Agencies from countries belonging to the
Organisation for Economic Co-operation and
Development.

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International Finance Corporation
2121 Pennsylvania Ave., NW
Washington, DC 20433
www.ifc.org/sustainability

For more information please

contact Elizabeth White
(ewhite1@ifc.org) or Edmond
Mjekiqi (emjekiqi@ifc.org).