Ignoring This Profit Driver Will Pinch Portfolios

More companies point to sustainability factors as profitable boons, not costly busts.

Alyce Lomax
Alyce Lomax
Jan 23, 2014 at 5:20PM
Investment Planning

Sound companies focus on efficiency and control costs. Environmentally conscious sustainability initiatives were long considered expensive, profit-draining strategies -- not exactly conducive to conservative fiscal management. However, today's companies are increasingly viewing these initiatives in terms of cost reduction and even revenue generation.

In other words, these are exactly the initiatives investors look for in attractive stocks.

For too long, negative actions like layoffs and corner-cutting have been viewed as go-to methods of reducing costs and boosting profitability. Over the long term, though, these often weaken companies.

Innovative, environmentally friendly strategies can brighten corporate futures -- and strengthen our overall economy.

Changing business models
Boston Consulting Group and MIT Sloan Management Review have been conducting surveys about sustainability and corporate strategy for several years. In February, they released a new report called "The Innovation Bottom Line," which reported the results of a survey of 2,600 executives and managers worldwide.

The major takeaway that investors should focus on is the increasing number of corporate managers who are reporting profits from sustainability strategies. These managers rose by 23% last year to 37% of the total respondents.

In addition, the practice of tacking on "greenwashed," feel-good programs to boost PR is losing appeal. Green is getting serious attention now. "Sustainability-Driven Innovators," as the report defines them, are companies that are actually changing their business models to include sustainability, and they increased in number by 20% on a year-over-year basis. That's not window dressing; that's world-changing.

A competitive advantage
According to report coauthor and MIT SMR executive dditor David Kiron, "Sustainability-Driven Innovators also bring a strong execution focus to their efforts, are much more likely to place customers at the center and work closely with many stakeholders, and drive sustainability objectives through skillful organizational change." In addition to cutting costs, these help give companies a competitive advantage.

Among the profit-related findings:

  • 50 percent of survey respondents who had changed three or four business model elements said they profited from their sustainability activities, compared with only 37 percent of those who had changed only one element of their business model.

  • When innovations to both target segments and value-chain processes were among the three or four business-model changes, the percentage of respondents who said sustainability added profits climbed from 50 percent to nearly 60 percent.

  • More than 60 percent of respondents at companies that had changed their business model and had sustainability as a permanent fixture on their management agenda said they have added profit from sustainability.

Granted, such changes aren't easy, especially for huge companies that are accustomed to business as usual and focused on what worked before. Convincing both investors and corporate leaders that this type of lofty thinking can be profitable instead of costly isn't always easy.

However, the authors included case studies from quite a few huge companies that have been shifting their businesses to include sustainability. This is a great thing for shareholders who recognize the importance of innovation.

Green initiatives and greenbacks
We see building evidence of green efforts from consumer goods companies and retailers. However, plenty of companies, even in unexpected industries, are increasing their energy efficiency and reducing waste. Here are just a few examples of the companies that are beginning to release figures behind their initiatives.

A massive company like General Motors (NYSE: GM) can recycle on a massive scale, and that's exactly what it's doing through common-sense thinking combined with innovation. In fact, the auto giant has been generating $1 billion annually by reusing and recycling plant refuse. This is part of its zero-waste initiative; it now recycles 90% of its waste, and about 100 of its facilities are, in an amazing achievement, operating with zero waste.

Many companies that utilize trucking fleets require energy resources and generate carbon emissions. UPS (NYSE: UPS) is a clear example. It's been working to retool its trucking logistics, saving money while it saves fuel costs, which represent an average of 5.6% of its operating revenue.

It now operates 2,000 alternative-fuel vehicles and has worked to change the way its hubs function. Less obvious initiatives include regular preventive maintenance inspections and advanced aviation technology to increase efficiency in the skies.

Sprint (NYSE: S) revealed last year that expansion of its "Retail Energy Management System" will better manage energy use in its retail stores, reducing energy costs by 15%, representing $1.5 million in annual savings. The wireless company expects the initiative to save about $15 million during the next decade.

A healthy environment for great returns
Obviously, investors should always perform their due diligence on all the companies they invest in. A single good factor never makes a good investment. There are many elements at work in the living organism that is any public company.

However, given these developments, investors can ponder some takeaways. First, these strategies represent real innovation and, for the biggest companies, the potential to thwart rival upstarts.

Increasing reports that these strategies can boost profits are reason enough for investors to adjust their opinions on what sustainable, responsible investing really is -- and how it can help boost their stocks' returns.

Check back at Fool.com for more of Alyce Lomax's columns on environmental, social, and governance issues.