Measuring Return on Sustainability Investment
Dr. Lourival Carmo Monaco Neto, Postdoctoral Research Associate
How to Talk to Your CFO About Sustainability by Tensie Whelan and Elyse Douglas
Harvard Business Review, January-February 2021
*This writing was inspired by insights from the above mentioned Harvard Business Review article. Dr. Monaco has used this inspiration to tailor article insights to apply to the food and agribusiness industry.
The topic of sustainability has been gaining an immense amount of attention, even before the pandemic. Today, it is one of the most important aspects of consideration when discussing business strategies and the business landscape moving forward. The agribusiness industry finds itself in the vanguard of this discussion, as it has dealt with the topic of sustainability for many years and invested a great deal of resources into becoming environmentally, socially and economically sustainable.
These three aspects of sustainability (environmental, social and economic) compose the triple bottom line framework that I prefer to use when discussing this subject. This framework is also called the 3 Ps of sustainability – People, Planet and Profit. The first two Ps (People and Planet) are more intuitive because they are related to aspects more traditionally linked to sustainability; however, the third P (Profit) is just as important. Companies cannot engage in sustainability activities if they are not lucrative. In other words, making money is necessary in order to be able to invest money in sustainability.
But how can we link sustainability to company financial performance? This can often be seen as a difficult task, especially for those with responsibilities directly related to the financial aspects of a business. This difficulty is, in many cases, due to the fact that those involved with sustainability activities don’t always speak the same language as those on the financial side, meaning they don’t use the same metrics. Even if metrics such as return on investment, return on assets, etc. are being used, it is extremely hard to measure the benefits of some sustainability activities. More often than not, most of the expenditures in sustainability are viewed as cost, not investment.
An example of this can be seen on farms when growers are unable to identify the benefits of some conservation practices such as cover crops, reduced or no till planting, terraces and so on. In many cases, this major challenge of farmers not being able to see the effect of conservation practices on their bottom line decreases their willingness to adopt such practices. A majority of the time, the benefits are intangible and difficult to put numbers in front of, such as improving a farm or company’s reputation with their customers.
One means of measuring the benefits of sustainability activities is to identify, understand and measure some of the drivers of corporate financial performance. These drivers are called mediating factors, and these factors include: innovation, operational efficiency, sales and marketing, customer loyalty, risk management, employee relations, supplier relations, media coverage and stakeholder engagement.
The goal is for sustainability activities to impact one or more mediating factors, which therefore helps to increase a company’s financial performance. Many strategies can be used to achieve this goal, such as improving logistics, reducing waste and using larger SKUs.
Additionally, the Return on Sustainability Investment (ROSI) analytical method developed by the NYU Stern Center for Sustainable Business can be used to measure the financial returns of sustainability activities and strategies. The ROSI method is a five-step process:
- Identify current sustainability strategies
It is surprising how many companies lack a full grasp of the sustainability strategies and initiatives they employ. Many of these strategies and initiatives often exist in agricultural input retail and manufacturing companies, but there is rarely a clear view of what they are, what areas they are located and their specific goals across the entire company. Putting these strategies and initiatives in a table or matrix can help bring clarity.
- Identify the related changes in operational or management practices
After sustainability strategies are identified, the next step is to understand what has changed in the company due to those strategies. These changes can take place on a tactical, strategic, operational or management level and can be minimal at first glance; however, they are capable of adding up greatly over time, not to mention the synergistic effect they can have on company culture.
- Determine the resulting benefits
Next, we must focus on understanding the nonmonetary benefits of the identified strategies and changed practices and how they affect mediating factors. For example, a crop protection company that decides to use bigger SKUs to reduce plastic usage may see an operational benefit due to having more product and less package weight on a truck.
- Quantify the benefits
Once the nonmonetary benefits are clear, we can quantify their financial value. Usually comparing the financial results of a new practice against how it was done before is a good way to achieve this quantification. Revisiting the example above, imagine how many truckloads over a season could be saved by using bigger SKUs.
- Calculate the overall monetary value
By totaling the financial value created (or lost) by each practice in a strategy, we can identify which strategies generate the most value and where we may want to focus resources. Companies can measure how much they spend on a sustainability strategy and/or practice by analyzing the number of man hours invested, machinery/equipment bought or identifying any other investments necessary. By identifying nonmonetary benefits and discovering ways to measure their financial value, it is possible to measure the return on sustainability investment.
Technological advances are being made in many areas such as big data, biotechnology, robotics and machine learning, just to name a few. These technological improvements have trickled down into everyday life in the forms of widely available internet connection and cell service. Any piece of information can be accessed by a few clicks of a mouse or a few swipes on a phone. Mobile banking is no exception, and it has the potential to become a standard business practice. Mobile banking still lags behind other forms of technology in terms of adoption as some people still prefer to use other means such at Automated Teller Machines (ATM) or drive through banking. However, the rate in which people are adopting mobile banking is increasing rapidly.
Using an omnichannel strategy has been understood as a potential next step after a multichannel strategy is implemented. The multichannel strategy employs many channels in which customers can choose to interact and buy from a supplier. It also has the potential to benefit companies in gaining access to new segments of the market or even interacting and selling more often to already existing customers; however, the omnichannel promise goes much further. Omnichannel marketing proposes an integration of different channels (distribution and communication channels) to offer a smooth and satisfactory customer experience journey.
Economists have always been interested in the interactions between capital and labor. In a recent paper in the American Journal of Agricultural Economics, Drs. Diane Charlton and Genti Kostandini exploit the enactment of 287(g) immigration policies to estimate the impact of labor shortages on technology adoption and productivity of U.S. dairy farms. Their results provide key insights into the extent to which technology can compensate for shortfalls in farm labor.