One of the big challenges for sustainable business is that sometimes it costs more. Although higher costs driven by sustainable decision-making is not always the case, if you are providing higher quality, paying your workers or suppliers more, or reducing pollution from your products then sometimes this costs more. While it is beneficial to ensure the extra costs are doing some good it is important to bear in mind that in business lower cost is not always better.
Simplifying Business
Business sometimes sounds much harder that it is. Andrew Winston, in a piece in the MIT Sloan Management Review, notes how the language makes people think there is a depth to decisions that sometimes there isn’t. What does it mean to have a positive NPV? It means that a businessperson came up with some guesses about the future and added them into a spreadsheet model and the result looked good.
Clearly the value of this depends a lot on the assumptions about the future. This isn’t a bad thing, but it does mean that someone saying “negative NPV” isn’t a conversation stopper. Don’t let jargon make you believe that something — for example a sustainable choice — is economically impossible. The next question should be, ‘let me see your numbers and how you came to your conclusion’. There is a decent chance their thinking won’t be as strong as their assertion. (Sometimes they will have no justification). If you can dig into the assumptions maybe the sustainable choice is possible if you think harder and make some tweaks.
Remember in business there are a lot of important items that aren’t properly recorded. If your sustainable business idea will improve customer loyalty this isn’t something that accountants know how to deal with. As such, don’t be surprised if loyalty isn’t properly addressed in the NPV projections. If your plan is to pay for sustainability by boosting customer loyalty and the value of customer loyalty isn’t assessed in the model you shouldn’t be surprised if your plan doesn’t look great in that model. That doesn’t really say anything about whether the plan is good or bad, it is more about the limitations of the model.
Lower Cost Is Not Always Better
Winston talks about three business myths.
Winston, 2024
- Myth: Businesses always choose the lowest cost option
- Myth: Business leaders always depend on hard numbers and ROI
- Myth: Business leaders rarely take expensive leaps of faith
Myth: Businesses Always Choose The Lowest Cost Option
The idea that businesses always choose the lowest cost option is clearly absurd. Many brands rely on the quality of their materials. Others spend on lowering their emissions which helps get secure partnerships. Some firms “overpay” their staff and get loyalty and higher quality labor in return.
Many smart, strategic decisions in business cost more (even a lot more) than doing nothing. Only in sustainability is that considered a deep problem.
Winston, 2024
Myth: It Is All About The Numbers
Managers don’t always rely on the numbers. Indeed, sometimes it can be hard to put good numbers on a decision. This happens all across business, there is nothing special about sustainability in this respect.
Winston gives the example of spending on AI. Managers are throwing money at AI. Will it work out? Maybe. The point is that the managers don’t have meaningful numbers on what will happen, they just think they need to invest in AI. Numbers are really important, but they aren’t everything.
Myth: No One Takes Leaps Of Faith
Business leaders do take leaps of faith. This can take courage if investors aren’t on board with the leap. The challenge is that managers may (will) know more about the decision than analysts. What is more, Investors and the analysts who advise them have their own biases. Not least the fact that their interests are often short-term. They like the short-term because if the firm does well in the short-term investors can always ditch the shares before any long-term problems occur. The fact that investors react negatively to any plan may indicate it was a bad plan, or it may not. Maybe the plan’s payoff was just longer than the investors wanted to commit to. Maybe the investors just didn’t get it.
As such, managers may be confident that they know best. Does it always work? Nope. Sometimes it does though. Investing in sustainability may be a good plan even if the investors don’t see it.
In almost every story you read about a CEO doing something for the long haul without a clear payback, you hear about the analysts who punished them and didn’t understand.
Winston, 2024
Sustainability Can Be Financially Successful
Lower cost is not always better. Even if the sustainable action costs more that doesn’t necessarily mean it is a bad choice. Business is a complex endeavor. One thing you can conclude safely though is that anyone who suggests that sustainability can’t be financially sensible because it costs more isn’t one the world’s deeper thinkers about business.
For more by Andrew Winston see Environmental Strategy And Competitive Advantage, Net Positive Business and Managing For Stakeholders
Read: Andrew Winston (2024) Sometimes Sustainability Costs More. So What?, MIT Sloan Management Review, November 8th
