© 2010 IMD International. Not to be used or reproduced without permission.

Building the business case for sustainability in SMEs

A structured framework on how to build the business case in companies

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IMD’s Center for Corporate Sustainability Management (CSM)

CSM’s mission as a research and learning platform:

Contribute to and propel the successful mainstreamingmainstreaming of social and environmental issues on the corporate strategic agenda through

Relevant and practical research Cross-fertilization of corporate learning

... thus helping companies to “get things done” in developing and thus helping companies to “get things done” in developing and rolling out viable sustainability strategiesrolling out viable sustainability strategies

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The CSM platform is open to:

Companies that see business advantages in building social and environmental issues into their business strategy and aligning their organizations behind them

Companies that either are or wish to become sustainability leaders

IMD’s Center for Corporate Sustainability Management (CSM)

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Lombard OdierDarier Hentsch

Philip MorrisTetra Pak

CSM has a membership: Here are just a few of the companies and organizations we work with…..

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CSM empirical research: examples

2004

20062008

2009

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After consultation with corporate stakeholders, IMD’s CSM has a three pronged mission:

MAINSTREAMING: Ensuring that CSM research/learning is integrated in programs across IMD business school

GETTING THINGS DONE: Helping companies to overcome barriers and roll out sustainability strategies internally

PROVIDING A “FORWARD PERSPECTIVE”: Liaising with external institutions and acting as a facilitator/radar allowing companies to access knowledge in this field (helping with “early awareness” stakeholder consultation)

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The value proposition of sustainability for companies

Sustainability is about

securing long-term supply of strategic resources while allowing companies to stay in business to keep producing what customers and consumers need

Sustainability is NOT ONLY a differentiator, but

a potential entry point to markets and a key to securing existing markets

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Some challenges of integrating sustainability into strategy

Different definitions and interpretations: Creating uncertainty in discussions

Lack of KPIs, metrics: Where and how to set the focus?

Closing knowledge gaps: Convincing colleagues of the value-added and how to integrate into products/services

Avoiding accusations of GREENWASH: and assure long-term success

Avoiding confusion with cause-related marketing

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Compliance levelof activity under

consideration

Level of environmentaland social performance

Economic value generated

Company creates economic value by improving environmental and

social performance beyondcompliance

The Smart Zone:Economic gain is high

Further improvements of environmental and social performance lead to decreases in economic performance

Further improvements are associated with an economic loss

The smart zone

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Consumer

How do stakeholders act as transmission belts?

Stakeholders

Sustainability issues

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Value drivers - shareholder value pyramid

* Adapted from Rappaport (1986)

Value Drivers Stakeholdersatisfaction

OperationalreadinessStrategy

& vision

Innovationin product & services

Others…

Dividends and share prices

Shareholder Value

Costmanagement

Salesgrowth

duration

Capital deployed

Value Contribution

Employee motivation,

Working relation with regulators

EHS management

systems,Resource efficiency

Openness to societyand new markets,

Brand value and reputation

More incentivesfor innovation, especially de-materialization services

SustainabilityContribution(examples)

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SA contribution(examples):

Reputationand brand value

Efficient use of resources

Employeemotivation

Influence on regulatory regimes

SHAREHOLDER

VALUE

Value DriversCost of Capital

Value Growth Duration

Operating Profit-Margin

Sales GrowthRate

Income Tax Rate

Working CapitalInvestments

Fixed Capital Investments

Value drivers

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SA issues affecting strategic risks and opportunities

Radical innovation for new products and markets

Economicperformance

Socialperformance

Environmentalperformance

Incremental improvements in

SA issues affecting operational risks and opportunities

Economic value

• Brand value and reputation• License to operate• Attract and retain talent

Net cost decreases throughincremental innovation

Net revenue increasesthrough radical innovation

Systemization of sustainability issues, value drivers and relevant corporate activities

• Local air pollution• Biodiversity

• Health• Safety

• Human rights• Monetary flows

eg Mortality/Povertyeg Climate change

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Step 1: Understand the concept of the ‘SMART zone’

Step 2: a) Identify stakeholders and understand how do they act as transmission beltsb) Identify economically relevant issuesc) Assess the economic potential of these issues by rating them

Step 3: Benchmark on relevant issues and how addressing them might contribute to the business strategy

Step 4: Understand the concept of value drivers

Step 5:a) Identify the value driversb) Assess how the value drivers are pushing the agenda

A business case is not found. It has to be built.

Step 6: Develop a set of narratives to communicate the business case to key internal decision-makers

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Annexes

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Issues in the food and beverage industry

PesticidesPollutionLabor issuesTraceability

TraceabilityObesityNutrition/HealthAllergiesResponsible marketingAlcohol abuseAdvertising to childrenPackaging WasteRecycling

Pollution - chemicals/pesticides)Soil degradationLong term raw material supplyHuman rightsPovertyChild laborWorker health and safety

Eco-efficiency/EnergyWater securityFood safety/traceabilityEmissions (air and water)Packaging waste /RecyclingHealth and safety of employeesDiversity

Human rightsWork conditionsCorruption/BriberyFair tradeAnimal welfare

Corruption/briberyQualityFood safety/traceabilityPackaging wasteRecyclingTransport (‘food miles’)

Sustainable agriculturePrices/Farmers incomeAnimal welfareWater securitySustainable aquacultureFair tradeSlaveryTraceability

InputIndustry

TradeProcessor

Food Industry

Restaurants

ConsumerFarmer

Catering

RetailerInput

IndustryTradeProcessor

Food Industry

Restaurants

ConsumerFarmer

Catering

RetailerFarming systems