Business & Society with Senthil Nathan

#6 Sustainability = Profit? Bridging sustainability strategies and financial performance with Tensie Whelan

• Senthil Nathan • Season 1 • Episode 6

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Can embedding sustainability into your business strategy really boost your bottom line? Join us as Tensie Whelan, an expert in sustainable business practices, reveals how the Return on Sustainability Investment (ROSI) framework can drive financial performance through operational efficiency, innovation, and risk mitigation. She shares compelling examples from the apparel and automotive sectors, demonstrating that genuine commitment to environmental and social issues isn't just good for the planet—it's good for business. This episode delves into whether we've reached peak ESG and why material issues remain critical for long-term competitive advantage.

Why aren't businesses measuring the impact of their sustainability efforts, and how can they start? Tensie tackles this paradox by highlighting the shortcomings of current accounting systems and the necessity of showcasing financial returns within a capitalist framework. We explore powerful case studies from industries like automotive and pulp and paper, illustrating the significant financial gains achievable through sustainable practices. Dive into the substantial benefits within supply chains, consumer trends favoring sustainably marketed products, and effective messaging that resonates across political divides. From sustainable sourcing to the importance of certifications, discover how to make a compelling business case for sustainability investments.

More inspirations from Tensie Whelan:


Book Recommendation: Doughnut Economics by Kate Raworth.

If you want to follow this podcast, please subscribe to the Business and Society with Senthil Nathan on Apple and Spotify. We welcome your comments and suggestions at bspwithsn@gmail.com.


 Senthil

00:03

Hey, it's Senthil here. Welcome to the Business and Society podcast. Every fortnight, we speak to a world-leading thinker to better understand the role of business and society. Joining me today is Tensie Whelan, distinguished Professor of Practice for Business and Society and the Founding Director of the NYU Stern Center for Sustainable Business. She has 25 years of experience working on local, national and international sustainability issues. As President of the Rainforest Alliance, she built the organization from a US$4.5 million to US$50 million budget, transforming the engagement of business with sustainability. Tensie serves on the advisory boards of ALO Advisors, Giant Ventures and Nespresso and is an advisor to the Future Economy Project for Harvard Business Review. I sat with her to understand how businesses can bridge the gap between sustainability strategies and financial performance, particularly the return on sustainability investment methodology called as ROSI, r-o-s-i, developed by Stern. Professor Tensie Whelan, thanks so much for joining me today. 

Tensie

01:19

Oh, it's such a pleasure. I'm looking forward to our conversation. 

Senthil

01:23

Great, let me get the big question first. Has the world seen peak ESG? Going by investor interest in ESG funds there seems to be a sharp reversal. In fact, one researcher has said that ESG investments was a dot-com sort of hype 20 years later, and now it has passed. 

Tensie

01:42

In one way, I would like that to be true, in that these issues are existential, that sustainability covers things like impacts of climate change, which we are all suffering from, impacts of plastic pollution that we are all suffering from, impacts associated with lack of inclusion and inequality, which we are all suffering from. 

02:07

So, there's real challenges for businesses today, whether they're investors or whether they're corporates, and those that actually understand the opportunities that these sustainability issues or challenges create will be those that will gain competitive advantage. Those who manage for the risks as well and those who pursue a business-as-usual approach are going to either, like Kodak, see their business model devolved or have real challenges in terms of customer demand or regulatory risk or other types of things. So, yes, there's been pullback from the kind of focus on ESG investing. I think that a big part of that was that ESG as a construct was poorly understood and poorly implemented to begin with, and we can talk more about that. But I think the underlying material issues for business, those smart business leaders and those smart investors are sticking with it because they recognize that if, for example, they are in property and casualty insurance and they're not paying attention to climate change, their business is at risk. 

Senthil

03:17

You have been writing some important articles about sustainability for the Harvard Business Review magazine. One of them is the Return on Sustainability Investment ROSI framework. Could you explain ROSI to our audience? 

Tensie

03:32

Yes. So, what we have seen in our research and working with companies across a variety of sectors, from automotive to apparel, to agriculture, to pharma, to healthcare utilities, etc. is that embedding sustainability core to your business strategy, tackling those environmental or social issues that are material for your sector and managing them as risks or opportunities will drive better financial performance through nine mediating factors, not all of which apply, but some of which will apply to any given sustainability strategy. These include operational efficiency, innovation and growth, employee engagement and retention, sales and marketing and customer loyalty benefits, risk mitigation, supplier resiliency, et cetera. So, you know, just to give you an example, if we think about the apparel sector and the concern around fast fashion, and also that fast fashion not only creates waste and problems for the world, but it actually creates inefficiencies for the company. 

04:38

So, as we start to see more circular strategies, we see companies actually being able to benefit from selling a product more than once. We see them reducing their costs because they're inputting pre-used product into new product. We're seeing that with automotive, for example. For one automotive company we looked at, they were netting $100 million by reusing 2.5% of old car components and putting them into new cars, as well as recycling 10%. So, there's really significant value to be created through investing in sustainability on those topics that are material for you. And one other point in this I will just raise, which is that the easiest one, the low-hanging fruit for companies, is operational efficiency, and companies today think of pollution and waste as a compliance issue, but actually it's the ultimate in an operational inefficiency. You're buying more than you need to pay to dispose of what's left over. That is a huge strategic unlock that not many companies have gotten to, but those that have are seeing hundreds of millions of dollars of benefit. 

Senthil

05:50

You talked about embedding sustainability into business strategy. What do you mean by embedding sustainability? It seems to be one of the building blocks of the ROSI framework. 

Tensie

06:02

Yeah, so what we've seen in the past, and again there's exceptions, but for those companies that are adopting some aspect of sustainability, it'll often be off to the side. You know it'll be like you'll have your annual report and your sustainability report, or you'll have your CSR department and they're doing their bit over here, but it isn't actually incorporated into the business strategy of the company. And, in fact, sustainability unlike CSR, which you know traditionally has meant philanthropy and sort of employee volunteerism, mental social governance issues to drive opportunity and reduce risk that needs to be part of your overall business strategy. That, after all, is what your business strategy is. It's like what are the risks, what are the opportunities separate from sustainability? How do we tackle them and create a better business? How do we reduce our costs? How do we increase our sales? How does sustainability help you do that right. 

06:55

And so, one of the things that we're seeing, for example, is for a lot of B2B businesses who say well, you know, I can understand how this is important for consumers, but you know, we're not seeing this, and, in fact, our buyers don't want to pay any more for it. Well, increasingly this is showing up in the RFPs and even if the buyers aren't paying more for it, they are going to start to choose suppliers who've helped them solve for the problems, because then they can make the claims that they make directly to the consumer right. And I've seen, actually, companies begin to lose market share as a result of not investing in those kinds of solutions for their customers. And I've seen companies actually drive significant partnerships with buyers as a result of investing in some solutions that help the buyers. 

Senthil

07:44

Interesting. Another key component of ROSI is quantifying benefits derived from sustainability practices. How easy is it to quantify benefits and what are its boundaries? For example, let's suppose a company selling a hand wash, how would they quantify benefits? Health and hygiene benefits of washing hands or averted sickness? What are the boundaries? 

Tensie

08:07

Yeah, so there's a couple of categories we need to think about. So, one are intangible versus tangible benefits, and others are indirect versus direct. Okay, so on the intangible versus tangible, an intangible benefit is risk reduction or employee satisfaction, right? versus energy savings, which is a tangible. So, you can actually track intangibles, such as employee productivity and retention as related to, let's say, you have a strong sustainability purpose. We did this work with REI, which is an activewear company. They have a strong focus on sustainability and purpose. We did this work with REI, which is an activewear company. They have a strong focus on sustainability and purpose. They survey both exit interviews, entrance interviews and during the year very robustly their employees. So, we were able to understand the connection between the employees' productivity, or whether they came or left, based on sustainability. And then we looked at the costs that they have of replacing people and how much more revenue was generated by those with high productivity. And then we matched it against industry benchmarks, and we identified $34 million of benefit associated with higher retention and higher productivity as a result of their focus on sustainability, which is about 5% of payroll, so pretty significant benefit. So, there's an example of intangible. 

09:30

Now you mentioned, you know, sort of impacts on human health, like more broadly. So, if you were looking at externalities, as they call them, that would be things like what is the financial impact of our emissions on asthma in the local community? And that financial impact would be, you know, kids having to go to the hospital or people having to go to the hospital and sort of the hospital costs associated with that. That is an externality because it doesn't accrue to the company, at least not now. Actually, ROSI does not track externalities. 

10:03

There is an organization out of Harvard, George Serafeim, does his impact-weight weighted accounting work which is focused on externalities. I'm focused on internalities, in other words, the things that have a positive or negative impact on the company's bottom line, because I don't think they're even doing that well. So, until they learn how to do that, I think externalities is something that's going to take them a while to get to. But anything, you know, certain things that you might think of as externalities actually do have an internal impact, right. So reputational impacts of something that you do that has more of an impact on a community can still have an impact in terms of lawsuits, in terms of people not wanting to work for you, you know. So, there's absolutely areas that you can look at in terms of your external impact that can translate into an internal financial cost or benefit for you. 

Senthil

10:52

So, let's take scope one, or direct emissions from a business operation. Should businesses account for it? 

Tensie

11:00

If it's cost to them, absolutely. Right, I think this is an area so fascinatingly, when we're looking at our return on sustainability investment work and we're looking at significant avoided costs related to reduction of, let's say, emissions, right? Finance does not track avoided cost. 

11:22

I mean, this is not just on sustainability, it's on anything, so they're not tracking avoided costs. Because they're not tracking avoided costs, they do not know that there is really significant benefit. And for an automotive company, we saw $235 million of avoided costs and some revenue associated with their waste management strategies things like recycling paint and solvents. Nobody was tracking that. Nobody had any idea of the magnitude of benefit because, again, the finance team does not track avoided cost. That is a huge area for sustainability and really for operational efficiency. So, from my perspective, that's an area where, until companies start actually putting in place the methodology, like ROSI, to start tracking the returns on their sustainability investment, which 90% of companies are not doing. And this is also fascinating to me because, like, in what world do you not track the returns on whatever investments you make, right? And so, I've never understood this, even though I don't come, you know, like I come out of a background of nonprofits and so like, but I'd like to talk to for-profit leaders. Why aren't you tracking this? So, anyway, I think what we're seeing now, though, is a real, unfortunately because of the backlash and other things, but we're seeing, oh well, actually, I guess we do need to understand the value creation pathways here and in order to justify, because this is why I do all this research. We need to be investing at capital as well as OpEx at a much larger scale if we're going to be getting to the goals, we need to have our children and grandchildren live in a world that we want to see them in. And the only way to do that in a capitalist framework is to demonstrate that those investments are going to give you good returns. Right, and they do. 

13:13

But until we start to put in place the framework to do that, we have a real challenge, and some of it is really not just that they don't recognize sustainability, but it's intrinsic to some of the accounting systems. The same for our people, and this is particularly the US, but it's not only the US. We, for example, treat investment in training our workers as a cost, but that's insane because we're making them more productive, I mean, if it's working right, so why would we see that as a cost and not an investment in improving performance? So, there's just so many challenges that we have just with basic accounting not understanding intangibles, not looking at avoided costs, not looking at employee relations correctly right, and then on top of that, we add sustainability, which finance team generally doesn't understand. And then we have even more challenges. And, by the way, CSOs don't generally understand finance, so you have like a lack of communication skills there as well. 

Senthil

14:10

Talking of cost, some sustainability practices have more cost than benefits in the medium to short term right. For example, adopting organic practices tends to reduce yields for a few years. Committing to living wages or fair price hits business margin. Should business give up profit maximization temporarily? Can business undergo transition in financially profitable ways? 

Tensie

14:35

Well, in many other sectors, business will undergo a short-term downturn in order to make investments. I mean investments in AI right now are not generating anything back to the company, but they're making the investments anyway because they see this as important to building out their future right. So, any company will make determinations about investments for future benefit. Not everything has to be in the next three months. I think we need to be applying that same lens and approach to sustainability. But I would also say that in every single industry we've looked at, every single industry has a series of sustainability strategies and practices to tackle the material issues, and most of those strategies and practices will drive financial returns. Not all of them, but if you look at them all as a group, you will find that quite a few of them will drive enough revenue and benefit that it will pay for some of the things that might be more costly. So, when we looked at automotive, we identified 18 different sustainability strategies. The majority of them were actually driving financial benefit, but one managing for conflict minerals was a cost, but when you applied it against everything else, it didn't matter because you were making so much money off of the other sustainability investments tackling material issues. So, I think companies need to be thinking about the broad swath of activities, identifying low-hanging fruit like operational efficiency that will bring in extra funds, be able to use those funds to be able to invest in those things that might have a longer payback time. But also, this is another big problem that companies don't look at the full scope of benefits. 

16:24

I'll give you an example. We were talking to a CSO of a pulp and paper company. The pulp and paper company in the Southeast doesn't pay anything for water. They use all pulp and paper companies use an enormous amount of water. The pulp and paper company in the southeast doesn't pay anything for water. They use all pulp and paper companies use an enormous amount of water. The mill manager said why are you bothering us about water? It doesn't cost anything. 

16:46

The CSO did an analysis and found out that the amount of energy required to move around, heat and cool that water and the waste disposal cost of that huge volume of water was $1.5 million per mill per year for free water. Because the folks weren't looking at what the embedded cost of all this work was, right, that would be a short term. I mean there'd be some capital investment. But when you're talking about you know I think they had three mills down there, like close to $5 million a year in wasted expense that you weren't even tracking you could start to build a very good case for the capital investment that would actually reduce your risk exposure, reduce your energy and greenhouse gas emissions and results in a much more positive bottom line, right. So, it's those kinds of things that companies need to just get a lot more fluent in in terms of where they're making investments. 

Senthil

17:35

Most of the sustainability risks are in supply chains Scope 3 emissions, human rights, for example starting from automobile to food and beverages, agriculture. Are suppliers willing to transform? With lower margins down the chain, they probably have less headroom to transform, don't they? 

Tensie

17:55

So, I, you know, in my previous work I did a lot of work with supply chains and continue to do a lot of work with sustainable sourcing. But in the work that we did when I was running Rainforest Alliance, we worked with hundreds of thousands of producers as well as intermediary brokers and then the brands in agriculture and forestry products around the world, and what we saw, you know, was actually financial benefit throughout the chain. So, for example, small cocoa producers in West Africa, Ghana and Ivory Coast, very low productivity, really challenged from an environmental and social perspective. Engaging with the Rainforest Alliance certification improved the productivity significantly, reduced their costs significantly, reduced the quality of the product and made them sort of suppliers of choice for the intermediaries. So, there was financial benefit for them. Then we saw for the intermediaries, they now have a higher quality product that their buyers were actually offering them a premium for so they could claim sustainable sourcing, Rainforest Alliance certified and then be able to sell those products at a premium. In addition, we saw fascinating things like these intermediaries, these like Barry Callebaut or other companies that are buying these products. They use insurance. They have insurance to cover a lot of theft that happens, you know, as the coffee or cocoa whatever gets transported place by place by place. And so, with the certification, there was actually traceability and paperwork that had to be signed at every stop. So, all of a sudden, all that coffee and cocoa stopped dropping off the back of the truck and insurance premiums went down. So, there was a benefit to the product. So, you start to look at this and you start to find benefit after benefit after benefit. So, from my perspective, sustainable sourcing actually drives a lot of benefit throughout the chain. 

19:50

The other point I will raise is we're doing a lot of work around consumer purchasing of sustainable products and in order to have a valid claim that consumers can go for, you need to have your full supply chain right certified in some way. Of course, we want you to get a certified by Rainforest Alliance, but it could be anybody. You need to have a good sustainability certification to make the claim and increasingly now with the crackdown on claims, it's really important and what we've seen is that sustainably marketed products. So, we have access to all of the purchasing data, not surveys actual purchasing in the United States of all consumer packaged goods products. Been looking at the data for 10 years. We get it from Circana, which used to be called IRI, everything from mom and pop to Target to Amazon. 

20:32

Sustainably marketed products are going twice as fast as conventional, at a 28% premium on average. In 2023, during a high inflationary year. Right, when you'd think that at that kind of premium, you'd start to see a drop off. In fact, what we saw is private label growing share cheaper. You'd expect that. Sustainably marketed growing share… Who lost out Conventional brands? Who thought, like I'm going to do business as usual, right, because it's cheaper, it's less risky. Well, in fact, that was the riskiest choice, right? So the final point I want to make on all this is like and for your listeners is like so many companies feel that business as usual is less of a risk, when, in fact, and they don't actually monetize what the risks might be of a business as usual approach, when, in fact, business as usual may end up costing them a lot more than actually investing in where we're all heading, which is around a more sustainable plan. 

Senthil

21:39

The consumer angle is very interesting. Is this a phenomenon unique to the United States or are you seeing this across the globe? 

Tensie

21:47

No, it's across the globe, unfortunately, all of the other studies that you look at, whether it's Globescan or Edelman or Bain or whatever, which is all really good information, but it's all surveys, not actual purchasing. The surveys also are generally the same kind of willingness to pay more, commitment to paying more. But again, they're surveys. You have to take them with a grain of salt. We now are going to get access to Circana data in a European country, so we will hopefully have that data next year and we'd like to continue growing our ability to reach out to some other markets. But what we've seen in those survey results is that they do mirror. They seem to support or in fact our data versus survey support the surveys right. So, but yeah, it's a challenge because for anything other than CPG for example, we'd love to look at apparel and electronics there isn't the data out there, so it kind of just collects this for CPG, like Nielsen does, and there just isn't good access to data otherwise. 

Senthil

22:47

We very much look forward to it and thank you so much for making most of your work open source. It's really incredible to see the entire ROSI framework on spreadsheet available on your website. 

Tensie

22:59

Well, thank you, and we've got all of our consumer research. We also have some really interesting research we did with Edelman up there around how best to message from an environmental sustainability perspective, and we're now working on a new study with them around social messaging. But just on that point, what we found is that a certain set of messages work across, and this is US but work across red state, blue state, young, old, rich, poor, educated, uneducated, does not matter and generational, et cetera. So fascinating, right? This is not a polemic issue, even though politicians are trying to make it that way. When you get to, I care about my family's health and, for example, environmental issues are strong there, or they care actually. They care about sustainable sourcing is another message that works really well. So that's all on our website. We're also doing a lot of work around value creation for private equity, so if there's anybody interested in that, that's on our website. 

Senthil

24:02

Great, you were once a successful executive in the international development sector, but later you moved into academia and did some path-breaking work to advance businesses' impact on society. How do you do that?

Tensie

 Throughout my career and I've been a social entrepreneur I've been building organizations my whole life, right? Rainforest Alliance, I built, this NYU Stern center for sustainable business, I built, the New York league of conservation voters federation. So, like many, many organizations and the way I do it is to look at and understand kind of what the trends are, where the problems and opportunities are, what my or my team's unique skills are to be applying to that, because obviously you can't boil the ocean. You've got to focus. So that's another really important particularly in non-for-profits, you need to focus and then again, like I was talking about with ROSI, like always you know you've got to be able to unfortunately, like in non-profit world, but this is the same in business you have to do business development, not forever. You have to raise funds to do your work. So, you need to be able to demonstrate a track record, prove that you have an impact. So, I, in my strategy, sort of identifying where the opportunities are, then I'll identify those things that can help get some traction early on. I'll identify partners who are what I would call, like you, our force multipliers, who can help us get the word out in great ways and who I can learn from as well, because this is always an iterative process. So, building partners, building a board of people who are, you know, at the C-suite level, who can really help me with connections and fundraising and insights. You know, strong communication skills are really important, and you know I'm always learning. It's not like I've got it locked down but, you know, constantly writing and you know, sort of getting the message out there, speaking on podcasts et cetera, really important. 

26:08

And as a journalist in my former career, it's actually I have missed. I missed when I was running Rainforest Alliance, I only got to write memos. I'm excited to be able to do a little more writing now. The other thing I would just say going into academia, I'm doing it a little differently than many because I'm focused on what they call translational research. Like I am not interested in purely academic research. I want to generate research that's going to help people like you or the people listening, improve the work that they're doing. And I find, you know, pure academic research fascinating, but and I want to have the credibility and, you know, make sure our research is robust, but I want to have it be used, and that's my focus and I think having had an experience of working with many many different businesses in many different parts of the world, many different parts of the value chain. I learned a lot about what their challenges were and was able to bring all that to the academic community. 

Senthil

27:10

That's awesome. Professor Tensie, thank you so much for taking your time today and joining me and sharing your valuable perspectives. 

Tensie

27:18

Thank you so much for inviting me. It was a real pleasure, and you know great to chat and connect again. 

Senthil

27:27

Thanks for listening to the Business and Society podcast. 

00:00 / 27:45