- Companies do not exist in a vacuum, and sustainability is already affecting your business.
- Sustainability is already standard in many countries regions, but what is not yet clear is the standard.
- Both private and public companies can benefit.
- Benefits include improvements to investor attractiveness, reputation, efficiency, market reach and environmental impact.
Companies are becoming forced to take sustainability seriously, via their suppliers and customers’ activities, as well as their own. In many industries, supply chains are being replaced by supply networks. Companies are nodes in networks of suppliers and customers that connect with others. What emanates from one node affects other companies that may not be directly connected with each other.
When a company makes an aspect of sustainability a condition of a contract to enhance its own sustainability performance, suppliers in its network have little choice but to fulfil the requirement or lose the ability to bid on a contract. Depending on the particulars, suppliers that do participate may pass requirements on to their suppliers, and so on, rippling outward from the first node.
Beyond the existing regulatory mandates on energy and waste in certain jurisdictions around the world, what compels a company, especially one that is privately held, to engage with sustainability? In this unprecedented period of market chaos, many boardrooms are focused on maintaining operations in the short term. To ask them to scrutinize operations and implement a sustainability strategy that may incur immediate operational expenses could be a financial burden too far.
Proponents argue that instead of being a burden, assessing and improving sustainability increases efficiency and profitability, while also reducing negative environmental and social impacts. Adhering to the principles of sustainability by effectively managing business, treating workers equitably, considering external stakeholders and minimizing environmental impact, they say, help make a business sustainable.
Lubricant producers and end-user businesses – original equipment manufacturers, metal machinists and food producers – are in the same sustainability boat. They are all looking to suppliers and customers to help meet their own targets. As sustainability continues taking hold in the business world, there could eventually be no choice for entities, big or small, public or private, but to follow suit.
Major lubricant and chemical companies such as BASF, Croda and Fuchs are building sustainability requirements into their core documents, as are original equipment manufacturers such as Daimler, Volvo and Mercedes. Mercedes went one large step further when it announced in December 2020 that all production materials must be carbon neutral by 2039 at the latest. Suppliers that decline to sign the carmaker’s letter of intent will not be considered for new contracts. Half of its suppliers have signed up to the commitment already.
Mercedes’ policy has the potential to impact various segments of the lubricant industry, directly and indirectly. Its factory fill lubricant suppliers will have not only to improve their operational sustainability but also examine the carbon footprint of their feedstock. One supplier, Petronas, has set a target of carbon neutrality by 2050, some 11 years after the Mercedes deadline.
The same would apply to suppliers of industrial fluids used in the automaker’s factories – gear oils, hydraulic fluids, greases and so on. Might it also affect lube suppliers serving Mercedes’ tier one and two suppliers, such as metalworking fluid marketers?
“No company operates in a vacuum,” said Elaine Cohen, founder and manager of Beyond Business, an environmental CSR consultancy. “Smaller, private companies are all part of larger supply chains, and larger companies are now demanding sustainable practices in their supply chains, and so companies that do not comply may be left out.”
Pushing the Change
Markets are currently the chief driver of corporate sustainability. There are a growing number of investors looking to make what is known variously as green, eco or responsible investment in companies with low environmental impact. This is driving publicly traded companies to invest in sustainability impact assessments and reporting along with technologies to reduce resource consumption, to set carbon reduction targets and to streamline operations.
The business of analyzing corporate sustainability performance has grown rapidly, and now the majority of publicly traded companies and many privately held businesses have sustainability profiles, which are scrutinized and ranked.
Sustainability is measured through an environmental, social and corporate governance, or ESG, rating generated by third-party agencies. ESG ratings allow internal and external stakeholders a way to compare performance internally with competitors and across sectors, and also a way to measure a company’s value and assets. (See The Investor’s Perspective.)
The investment community’s central role in driving sustainability was underscored by the 2020 annual letter to corporate executives written by Larry Fink, the CEO of U.S. investment firm Blackrock. Fink said his firm will center sustainability in its portfolio and risk management strategy and quit investments with high sustainability-related risk. The firm said it will exit investments in coal, increase investment in sustainable exchange-traded funds and urge index providers to establish sustainable versions of their indices, according to a report by Bloomberg.
In his 2021 letter, Fink told companies they should “disclose a plan for how their business model will be compatible with a net-zero economy.” Generally, what Fink says, goes. “We expect you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors,” he wrote.
The significance of Fink’s announcements is that Blackrock is the world’s largest asset manager, with U.S. $7.48 trillion in assets under management, of which $1.8 trillion are actively managed. It has a presence in more than 30 countries with, according to Bloomberg, one of the largest shareholders of most U.S. publicly traded companies and clients that include sovereign wealth funds and pension plans. Where it goes, others follow.
Blackrock is also part of an association of 370 investment firms that pressure greenhouse gas emitters to reform. Combined they manage $41 trillion in assets.
Aside from attracting the attention of investors, companies that want to improve sustainability performance have access to a new segment of the credit market known as sustainability-linked finance. (See Sustainability-linked Finance.)
According to EcoVadis, one of a growing number of rating agencies, those companies that report their performance sustainability have scores on the Kaplan-Zingales Index that are 0.6 lower than those for low-sustainability companies.
The Kaplan-Zingales Index is a relative measurement of a company’s reliance on external financing. A higher score implies a greater likelihood a company will struggle under tighter financial conditions since it may have difficulty financing ongoing operations.
“The real mover for a company is financial,” Melissa Menzies, a member of the sustainable finance solutions team at Sustainalytics, an agency that rates organizational sustainability, told Lubes’n’Greases. “If you want to exist as a company and to continue bringing value to your shareholders and … society … you have to seriously think about what material sustainability risks face your business.”
Much has been written on the importance of brand loyalty and trust for long-term success, but in brief without them, longevity is impossible. Reporting sustainability is an ideal vehicle for building and maintaining stakeholder trust and brand loyalty, as demonstrated by multiple surveys.
“Reputationally, a company that is transparent and operates according to sustainable principles will build trusting relationships with customers, employees, communities etc., and therefore have a better chance of long-term success,” Cohen said. “This is just as important for smaller companies as it is for larger ones.”
Moving toward making more sustainable products, such as bio-based lubricants or fluids for electric vehicles, appeals to a demographic that is highly concerned by its environmental impact – millennials.
“Millennials are the most up-and-coming demographic for investment, they’re the most up-and-coming demographics for just buying products and services and being consumers in a capitalist economy, and they’re increasingly looking for that sustainability angle in a company’s business model to make decisions about what to purchase and what type of investment product they want,” Menzies said.
According to Pew Research, the number of Millennials exceeded Baby Boomers in 2019. While the environmental attitude gap between Boomers and Millennials is far narrower than most people perceive, according to research carried by the MIT Center for Transportation and Logistics, these youngsters still represent a large and proportionally growing demographic with economic clout.
Employees are immediately and most strongly affected by sustainability measures that largely play out in their workplace. These go beyond things such as renewable energy installations and schemes to reduce water use into the realms of staff retention, salaries, relations between labor groups and management, occupational safety, morale and loyalty. A valued, content and well remunerated workforce is certainly more sustainable than the reverse.
Younger generations of graduates also take more notice of a company’s sustainability performance when applying for jobs.
Efficiency and Risk Identification
The process of reporting sustainability is an effective way of taking a holistic look at where a company can make efficiency gains across the board and where supply network risk might be. Aside from savings on energy use and carbon emissions, there is also an opportunity to examine:
- Raw materials sourcing – Are feedstocks renewable? Is the supplier reliable? Is the supplier pursuing sustainability? Can raw materials be sourced nearer to home, thus reducing their carbon impact? What happens when supply lines are cut?
- Recycling and waste reduction – Can packaging be recycled and can it be made with more recycled material? Does the lifecycle assessment of a company’s products include reuse or recycling?
- Process efficiency – How can process efficiency be monitored and enhanced?
This detailed examination can lead to profitability gains that feed back into the virtuous sustainability cycle.
“If you want to exist as a company and to continue bringing value to your shareholders and … society … you have to seriously think about what material sustainability risks face your business,” said Menzies.
Reporting current sustainability activities has a role to play in determining long-term strategy, not just sustainability. (See Material Issues.) It can also focus the senior team’s attention on compliance with existing and impending regulations, pay equity and employee wellbeing.
Last, but by no means least, reporting addresses the first and most often emphasized core principles of sustainability – environmental impact.
“For the company, understanding their impacts on people and planet as a business, and showing transparency, will ultimately make the company stronger and more resilient,” Thijs Reuten, head of policy at the Global Reporting Initiative, told Lubes’n’Greases.
For some companies, however, the challenge of decarbonization may be too great to overcome.
“They will always be businesses that by virtue of what they do will cease to exist. That’s the unfortunate truth,” said Menzies.
The drive toward sustainable business is happening, whether companies choose to get onboard or not.
“The other financial component is that you don’t want your business to become redundant, you don’t want stranded assets on your books and you don’t want to start losing investors and customers because it’s too expensive to continue – you’re either in a dying industry or you haven’t diversified,” she said.