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How Sustainable Businesses Outperform Traditional Businesses

17 Dec 2021

The difference between traditional and sustainable business

Traditional business is primarily concerned with profit, economic growth, and providing returns to stakeholders invested in the business.

In 1987, the Brundtland Commission, (formerly the World Commission on Environment and Development) identified the need for sustainable development, for which the three main pillars consisted of economic growth, environmental protection, and social equality. Sustainability was defined as ‘meeting the needs of the present without compromising the ability of future generations to meet their own needs.'

In recent years the importance of adopting a sustainable business model in order to combat the challenge of climate change has been realised. The concept of a triple bottom line was introduced by John Elkington in the mid-1990s, where businesses not only focussed on profitability but also took into consideration their impact on the environment and society.

A sustainable business, therefore, is one that ensures its business model is self-sustainable, and where profitability, concern for the environment, and social equality are all of equal importance. Businesses do not operate in isolation; they rely on aspects such as supply and delivery chains. A sustainable business operates in a holistic way whereby it creates value to the ecosystem it operates within.

Adopting a sustainable business model

For many businesses, their concerns about adopting a sustainable business model centre around how to balance sustainability with profitability. The truth is that the transformation from a traditional business to a sustainable one is challenging and does not happen overnight. It requires a change of culture and understanding that your business needs to operate with a focus on environment, social and corporate governance. It means changing from the traditional vision of business profitability and replacing it with one of a broader social impact.

Are sustainable businesses outperforming traditional businesses?

At one time, investing in a sustainable business was deemed either an extravagance or a public relations stunt. However, in a 2014 article by McKinsey on Sustainability & Resource Productivity, entitled Profits with purpose: How organizing for sustainability can benefit the bottom line, the correlation between sustainability and financial performance, found that those companies adopting sustainable practices outperformed those which had not.

171221In the McKinsey report, the authors explained how “an investment of $1 at the beginning of 1993 in a value-weighted portfolio of high-sustainability companies would have grown to $22.60 by the end of 2010, compared with $15.40 for the portfolio of low-sustainability companies.”

More recently, data from the global research agency Morningstar has revealed that environmentally sustainable funds have topped traditional funds over the past 10 years. Comparing 745 sustainable funds against 4150 traditional funds, Morningstar found the sustainable funds outperformed them in every category.

A study completed by Oxford University and Arabesque Partners also confirmed that companies adopting sustainable business practices had better operational performances leading to positive cash flow.

Customer influence

With sustainability and climate change receiving serious world attention, there has been a notable shift in global consciousness, with investors leaning towards companies that incorporate a triple bottom line into their business model.

A move towards embracing sustainability has already been prevalent in the fashion and footwear industry, and the fact that even big oil and gas companies are now following suit goes to prove this is the only way forward for these businesses to remain a viable option for investors. In addition, we are already witnessing huge technological advancements in ways to include sustainability in our lives and work towards lowering emissions to meet the UN SDGs.

The companies of today must shift their focus to the triple bottom line of people, planet, and profit and adopt the principles of sustainability into their future plans. In order for business leaders to realise positive financial performance, they must find a balance that incorporates sustainable measures.