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Make a Stronger Business Case for Sustainability

Jul 9, 2024 | Public | 0 comments

Leaders can’t escape the global imperative to reduce the contributions businesses make to environmental degradation, but deep down, many harbor doubts: Can a profit-driven organization also be sustainable? Pressure to grow revenue and control costs is constant. How can a leader feel confident in pursuing more sustainable choices and defending them to boards and shareholders sensitive to the often higher costs of greener approaches?

The dueling pressures to do business sustainably and to maximize profits leave many leaders stuck, unsure what to do. Many falsely categorize sustainability as a compliance issue, taking a wait-and-see approach and aspiring to do the minimum. But they miss new opportunities and are less prepared for the energy transition away from fossil fuels. As with any major disruption, companies that take smart steps forward can carve out an advantage and avoid being left behind.

Some CEOs may succeed at rallying stakeholders to support green initiatives based on principles alone. But the practical reality for many leaders is that they must build a business case for sustainability. We believe that focusing on the classic economic levers of the marketplace can give leaders a framework for thinking creatively about how to find a path that does right by both the business and society. We’ll explain how our framework provides three pathways to profitably and sustainably creating new value for society, customers, and companies.

Frame the Sustainability Opportunity in Economic Terms

Our framework can help build a case for sustainability-driven strategic opportunities by using the levers of cost reduction, creating a willingness to pay more, and reaching new customers, illustrated by the traditional price-demand curve. (See “The Classic Profit Maximization Framework.”) Applying this accepted economic logic, one can make the business case for sustainability when choices affecting costs and demand expand the profit rectangle or avoid reducing it. We look at examples of how to do so below.

The Classic Profit Maximization Framework

Managers often assume that the increased cost to produce more sustainable products and services will require charging a green premium, but relying on an increased willingness to pay isn’t the only way to maintain profits. The well-accepted profit maximization method finds the price and quantity that maximizes profits given the cost and demand curves (when searching for a unique price rather than a series of prices). The shaded rectangle represents this maximum profit.

ABOUT THE AUTHORS

Karel Cool is a professor of strategy and the BP Chaired Professor of European Competitiveness at Insead. Atalay Atasu is a professor of technology and operations managementActive Design: An approach to the development of buildings, streets, and neighborhoods that uses architecture and urban planning to make daily physical activity and healthy foods more accessible and inviting and the Bianca and James Pitt Chair in Environmental Sustainability at Insead, and academic director of the Insead Sustainable Business Initiative. Nathan Furr is a professor of strategy at Insead.

REFERENCES (9)

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9. Ibid., 113.

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