Business case for sustainability - SUM: Sustainability Management Wiki

Authors: Janine Barlsen, Jule Hüneke, Isabella Joneck, Svea Kuhlmann
Last updated: September 30th 2023

1 Definition & Delimitation of Concepts

Pressing social and environmental issues as well as the public discourse related to them increasingly require firms to make investments in corporate sustainability and corporate social responsibility. Yet at the same time, in a capitalist system, firms also face the pressure of generating profits, usually requiring them to build business cases for their activities. In general, a business case can be defined as “a pitch for investment in a project or initiative that promises to yield a suitable significant return to justify the expenditure”¹ or shorter an “action or investment with a positive cost/benefit ratio”.² Given that firms use business cases to justify investments, the question arises whether there is a business case for or of sustainability-related activities: Does it pay to be green or good? And if so, when and where? Answering these questions is important, since, if sustainability pays, this will make it much easier for managers and employees to argue why related investments are necessary or possible. Also, it is important to know which types of investments pay and which don’t, since it seems plausible that companies might primarily pursue those activities that pay and neglect those that do not. In this sense, understanding the business case for sustainability is not only of direct relevance for those firms that seek to implement sustainability but also to understand the progress of corporate sustainability more broadly.

1.1 Definition

There is no uniform definition of the “business case for sustainability.” However, in the literature some authors – especially Schaltegger et al. (2012, 2018, 2019) – distinguish between a “business case of sustainability” and a “business case for sustainability.^“³,⁴,⁵In the following, the difference between the two terms as discussed in the literature shall be briefly presented. Given that the scientific literature focuses more on the business case for sustainability (BCS) and shows a somewhat heterogeneous picture regarding the definitions, in the following sections, the term “business case for sustainability” will be used as an umbrella term to describe research dealing with the question of “(when) does it pay to be green/good”.

The “business case of sustainability” builds on the assumption that the primary motive of firms is to make profits and that sustainability serves as a means to this greater end.⁶⁷It assumes that the three dimensions of sustainability (economic, environmental, social) are not equally important but that the economic dimension is most important. Instead, the starting point of this approach is economic success and not the intrinsic motivation to integrate sustainability and thus all three dimensions holistically into the company. Rather, the underlying notion is that environmental and social activities can serve as potential avenues for achieving favorable financial outcomes. This leads to the assumption that sustainability measures are only considered and implemented if they ensure economic success for the company, for example by reducing costs in production. Managing a business case of sustainability is seen as “the result of opportunistic behavior”.⁷ Moreover, by prioritizing profit maximization, this perspective construes business success narrowly as profit optimization, neglecting the broader concept of value creation.⁸

In contrast to the concept of the “business case of sustainability,” the “business case for sustainability” puts much greater weight on social and environmental dimensions, proposing that economic success can and should emerge through conscious and intelligent integration of environmental and/or social aspects.⁹, ⁴^,⁵ The starting point of a business case for sustainability is not the generation of profit in the first place but rather the resolution of a social or ecological problem. The consideration of sustainability as a solution to the mentioned problem may lead to economic success. Therefore, the economic success is the result but not the primary purpose of the implementation of sustainability measures in a company.⁵ ⁵ Also, the literature suggests that companies that adopt the approach of a “business case for sustainability” instead of the “business case of sustainability” put less emphasis on trade-offs between the different dimensions of sustainability but try to create synergies between economic achievements and a comprehensive integration of sustainability within business frameworks. Also, an important difference between the “business case of sustainability” and the “business case for sustainability” is that in the latter case the improvement of sustainability performance is seamlessly integrated into the core mission of a company.⁷Furthermore, this approach suggests that economic success can and should arise through strategic sustainability management.⁴^,¹⁰ Schaltegger et al. (2019) summarize a business case for sustainability as “creating economic success through (and not just along with) a certain environmental or social activity”.⁵

Table 1 summarizes the most important difference between the “business case of sustainability” and the “business case for sustainability”.

	Business case of sustainability	Business case for sustainability
Motivation	Economic success	Solution to ecological/social problem
Role of sustainability	Opportunity for creating profits	Contribution to sustainable development Part of solution to social/ecological problem
Trade-offs in sustainability dimensions	Focus on identifying trade-offs	Focus on creating/using synergies
Relationship business & sustainability performance	Dichotomous concepts	Dichotomous concepts, which need to be aligned to create triple win solutions

Table 1: Comparison of business case of sustainability vs. business case for sustainability, adapted from Schaltegger 2019.

1.2 Components of a business case for sustainability

Schaltegger et al. (2019) define three requirements that characterize business cases for sustainability and simultaneously state the difference between the hierarchic view of a business case of sustainability and the interconnected perspective of business cases for sustainability using synergies. The three requirements are the following:

Voluntary corporate initiatives for solution of social and ecological problems

Rather than just complying with regulations or legal mandates, activities that build the basis of a business case should be voluntary and aim to improve society or the environment. Additionally, these actions and activities also must go beyond the conventional notion of business purpose to exclusively generate profit.

Measurable positive economic outcome of the initiatives

For the evaluation as a business case, the initiatives and activities of the company must be able to generate a positive economic effect for the company. The holistic implementation of sustainability as goal and starting point of the business case for sustainability remains and thus implies the simultaneity of sustainability and economic success.

Causal link between management actions and desired outcomes

A business case for sustainability requires a causal link between the corporate activities and their intended outcome of solving social or ecological problems and a positive economic effect.⁵

1.3 Interrelationship Business Case for Sustainability and other concepts

Business Model Innovation

The scientific literature repeatedly shows a link between the BCS and business model innovation.⁷ That such a connection of both concepts exists and that this is also meaningful and important, becomes clear when comparing the definitions. As presented above, the business case for sustainability arises from the motivation to solve a social or ecological problem and to achieve a positive economic outcome for a company despite this or precisely because of this. Schaltegger et al. (2012) define business model innovation for sustainability as “supporting voluntary, or mainly voluntary, activities that solve or moderate social and/or environmental problems”.⁷ Thus, the definition of business case and business model innovation for sustainability imply the interrelationship of these two concepts. An integrated view of both concepts is therefore useful and necessary when analyzing and dealing with the BCS and the question, whether it pays to be green or good.

Creating Shared Value (CSV)

Furthermore, literature has depicted a link between the business case for sustainability and the theoretical framework of Creating Shared Value (CSV) as an “approach for articulating the business case for corporate sustainability”.¹¹ Porter and Kramer (2011) define CSV as “policies and practices that enhance the competitiveness of a company while simultaneously advancing social and economic conditions” implying a relationship to a business case for sustainability concept.¹² Nevertheless, literature shows a controversial view on the CSV concept, debating whether CSV is just a buzzword for existing concepts (e.g. business case for sustainability), an extension or a new, independent concept as analysed by Menghwar and Daood (2021).¹³Therefore, the interrelation between the two concepts must continue to be researched.

2 Literature review

2.1 Origin of the Business Case for Sustainability

The business case for sustainability and the question “does it pay to be green or good” have their roots in a historical debate whether companies that live up to their socially and ecologically ascribed responsibility are economically more successful than others. Thus, a business case is expected to exist if a “firm does well by doing good”.¹⁴ In the literature, the relationship between social and ecological responsibility and economic success has been investigated by investigating the links between the concepts of “Corporate Social Performance (CSP)/Corporate Ecological Performance (CEP)” and “Corporate Financial Performance (CFP)”.¹⁵,¹⁶,³

Literature on the subject must be divided into different analytical frameworks and models. The first research wave until 2000 used mainly qualitative measures to capture the environmental performance.¹⁷The literature in this time provides information about the CSP/CEP and CFP relation by using a linear model, with either positive, negative or neutral outcomes. ¹⁸ Furthermore, it distinguishes between considering three causal effects resulting in different hypotheses and outcomes.¹⁹:

the influence of CSP/CEP on CFP,
the influence of CFP on CSP/CEP
a bidirectional relationship

While studying the causal effect of CSP/CEP on CFP seems most obvious, the reverse relationship (an effect of CFP on CSP/CEP) may appear not as intuitive. However, it is important to consider that environmental and social investments may not only contribute to financial success of firms but that the financial success of firms also enables companies to invest in sustainability, as it provides them with the necessary resources.

The first few debates on the link between CSR and business benefits already occurred in the 1950s.¹The start of an intensive debate on the CSP/CEP and CFP link and thus the cornerstone of the development of the business case for sustainability can be traced back to Milton Friedman’s (1970) statement that “the social responsibility of business is to increase its profits” in the 1970s.²⁰^,²¹

Friedman´s statement fueled the debate about the relationship between CSP/CEP and CFP and the question “does it pay to be green”, resulting in heterogenous results which will be shown in the following.²¹

Effect of CSP/CEP on CFP

Negative Relationship

The first hypothesis emerging in the field, was the trade-off hypothesis, which builds on the consideration of the impact of CEP/CSP on CFP. The hypothesis, based on Milton Friedman’s statement, suggests that the implementation of environmental aspects in operational decisions weakens the financial success of a company, because the costs of implementation exceed its economic benefits.²²The hypothesis was scientifically presented in the study by Bragdon, Jr. and Marlin (1972) analyzing results that a company is either economically successful or acts responsibly, but an agreement of both is impossible.²³ Furthermore, research by Vance (1975) and Aupperle et al. (1985) state a competitive advantage for companies, which do not invest in CEP/CSP, as they do not bear the costs of implementation and thus support the trade-off hypothesis.²⁴^,²⁵

Positive Relationship

In the course of scientific investigations, new hypotheses emerged that contradict the trade-off hypothesis. One hypothesis is the so-called, social impact hypothesis which is based on Latané (1981).²⁶ According to this hypothesis, companies should address implicit stakeholder expectations, including environmental responsibility. Studies of McGuire et al. (1988) show that failing to do so can heighten market risks and the likelihood of more stringent agreements, while environmentally conscious firms experience improved financial performance.²⁶,¹⁹,²⁷

Later, a hypothesis that has received considerable attention in the scientific community is the win-win hypothesis or Porter hypothesis, which posits a positive impact of CEP/CSP on CFP. In their study, Porter and van der Linde (1995) refer to the economic benefits of a national environmental policy, refuting the trade-off between economics and ecology. Additionally, they argue that improved CEP through government regulations leads to implementation of environmental aspects. A more efficient use of resources in the long run for example, resulting in a competitive advantage for companies while lowering emissions. Thus, creating a win-win situation.²⁸

Another hypothesis put forward at a similar time is the natural resource-based view (NRBV) based on studies by Wernerfelt (1984), Barney (1991) and Hart (1995).²⁹,³⁰,³¹ According to this literature a firm’s strategy and competitive advantage receive considerable influence from its environmental performance. The central driving factors encompass pollution prevention, product stewardship, and sustainable development. Moreover, the studies strengthening the NRBV state that a firm’s strategic advantage can be derived from its ability to access strategically valuable resources within its individual resource bundle.³¹,²⁹,³⁰ Furthermore, early analysis by Davis (1973) underpins the later developed NRBV, that corporate environmental stewardship leads to long-term profit maximization while doing good for society.³²

The instrumental stakeholder theory that emerged at the same time supports the NRBV presented earlier.³³,³⁴ Jones (1995) study highlights that environmental initiatives that go beyond a compliance level satisfy stakeholder expectations and are therefore characterized as a proactive eco-governance strategy. Such a strategy, according to research results leads to increased reputation through a transparent display of ecological stewardship, which translates into improved stock market performance.³⁴ Thus, the study suggests a positive relationship between CEP/CSP and CFP.

Effect of CFP on CSP/CEP

Negative relationship

A hypothesis that suggests a negative causal effect of CFP on CEP/CSP is the managerial opportunism hypothesis.³⁵,²²,³⁶Literature by Weidenbaum and Vogt (1987) indicate that managers prioritize their personal goals over shareholder interests which can lead to operational inefficiencies, driven by short-term profit incentives and stock prices. Consequently, environmental investments may suffer, affecting CEP.³⁵

Positive relationship

The slack resources theory developed in a similar period asserts a positive impact of CFP on CEP.³⁷,³⁸,²²Research by Kraft and Hage (1990) suggests that this is because favorable financial performance generates slack resources that companies can allocate to environmental initiatives.³⁸ Similar to the NRBV hypothesis, investing in such activities enhances internal resources, capabilities, and competitiveness, allowing for innovation and eco-friendly developments as a study by Bourgeois (1981) shows.³⁷ However, literature states that limited financial resources might hinder firms’ desire for environmental and social actions, potentially leading to short-term ecological investments when financial slack is available.²²

Neutral Relationship

The supply and demand framework was developed by McWilliams and Siegel (2001) and follows the premise that an optimal environmental investment, which integrates both shareholder interests and the needs of stakeholders such as customers, employees and communities can be achieved through a cost-benefit analysis. They conclude that the same principles should apply to environmental investment decisions as to any other investment. Companies that follow this model achieve comparable profitability, assuming they make optimal decisions and are in market equilibrium.³⁹ The supply and demand theory can also be applied for a neutral relationship in the causal relation CEP/CSP on CFP.

Bidirectional Effect

Considering both previously presented causal effects together, is called virtuos circle according to Waddock and Graves (1997).⁴⁰ It states that “CSP is both a predictor and consequence of financial performance”⁴⁰In their study, they confirmed the hypothesis that “better financial performance results in improved CSP” and “improved CSP results in better financial performance, ceterus paribus.” (Waddock and Graves 1997). Therefore, there might be a positive simultaneous and integrative impact, a virtuous circle as named by the authors.⁴⁰ Nevertheless, the other depicted hypotheses also indicate a negative, as well as a neutral causality in both directions.

In summary, the historical roots of the relationship between CEP/CSP and CFP and the inferred (non-)existence of a business case for sustainability are built on a very heterogeneous basis. Early literature on this topic cannot clearly answer the question, “does it pay to be green” and thus state the existence of a business case for sustainability. Instead, as the historical literature review points out, various hypotheses and theories have been developed, confirming the heterogeneity of the findings. Later literature, as will be shown below, has further explored the heterogeneous data and expanded the question of the existence of a business case for sustainability.

2.2 Status quo: Current status of literature reviews

Given the importance of the business case for sustainability, it is not surprising that the relationship between CEP/CSP-CFP remains an important topic of current research. In fact, in the past decades empirical literature studying the relationship between CEP-CFP has grown rapidly. Similar to the historical research, studies have investigated the question of “does it pay to be green/good?”. In this context, controversies emerged regarding the sign of relation and the causality of the effect.⁴¹,⁴²,⁴³ As a result, in addition to investigating the direct link between CEP/CSP and CFP, scholars have increasingly focused on studying moderating and mediating factors to better understand when and why it pay to be green or good?”.

Next to relevant primary studies, which mostly analyse the relationship via data collected from companies and databases, meta-analyses find wide application in the research of this subject matter. Meta analyses are a quantitative review method, which standardizes and aggregates findings across existing quantitative empirical studies. Given the vast number of studies that have been published on the CEP/CSP-CFP link with differing results, this method has been proven to be useful to understand and consolidate the state of research.⁴⁴ In fact, a considerable number of meta studies have been published in recent years on the CEP/CSP-CFP link that provide a good overview of the field. Therefore, the following literature review section predominantly draws on findings published in meta analyses.

Literature review from 2000 until present

To tie in chronologically, the following part introduces empirical studies and their conclusions of the last two decades.

One study that had an important influence on the field was the one by Orlitzky, Schmidt & Rynes (2003) who conducted a meta-analysis to investigate the cause-and-effect-relationship of CSP and CFP.⁴⁵ They found a positive and significant correlation between the two, indicating that companies with better CSP also tend to exhibit better financial performance. The study also highlighted the importance of considering contextual factors and industry characteristics when assessing this relationship. The authors retrospectively refer to the hypotheses mentioned in Chapter 2.1 and state that the trade-off hypothesis is not supported by the results reflecting the last 30 years of research. Additionally, the authors emphasized the need for more rigorous research methods and standardized measures to further enhance the understanding of the link between corporate social responsibility and financial outcomes.⁴⁵ The demand for a uniform research method and standardised measures is also repeatedly expressed in ensuing studies.

Horváthová’s (2010) findings also support a positive CEP-CFP relation, implying that companies with stronger environmental performance tend to experience improved financial performance. While a positive correlation between environmental and financial performance is generally observed in the study of Horváthová, various factors such as industry dynamics, regulations, regional contexts, and methodological differences can contribute to occasional negative correlations observed in other studies.⁴⁶ After two primary studies also revealed a negative CEP-CFP relation, namely Ameer and Othman (2012)⁴⁷ and Makni et al. (2009)⁴⁸, Horváthová extended these results in 2012 and demonstrated that there is an intertemporal effect that has an impact on the relation. She states that CEP is leading to CFP decrease after one year, but that after several years the firms would profit from CEP. She thus confirms that her findings are consistent with the Porter hypothesis in the long run.⁴⁹

Another very influential, major meta-analysis is the one conducted by the authors Dixon-Fowler et al. (2013) that were able to reconfirm the results of Orlitzky et al. (2003) and therefore concluded that the BCS could be proven, thus summarising: “It does pay to be green”.⁵⁰^,⁴⁵

Friede, Bassen & Busch (2015) motivate their study by pointing to a lack of a uniform methodology and inconsistencies in previous results on the CEP-CFP relationship. Their study is based on a greater number of primary and secondary studies, which is why more robust results can be obtained. They evaluate the relationship of Environmental, Social and Governance (ESG) and CFP and conclude that roughly 90% of studies find a nonnegative ESG-CFP relation. Additionally, they highlight, that there is a large majority of research with positive findings and that the positive impact of ESG on CFP appears stable over the period.⁵¹

Endrikat, Guenther & Hoppe (2014) published another meta-analysis at the time, focusing on the direction of causality and the multidimensionality of the focal constructs. Their results indicate that a generally positive and partially bidirectional CEP-CFP relationship exists. Moreover, the results suggest that this relationship is more robust when CEP is strategically proactive rather than reactive. The study also uncovers moderating influences of methodological biases, which partly explain the inconsistent outcomes observed in previous research.⁵²

Wang et al. (2016) focused on the causal relationship between CSR and CFP. They concluded that future financial performance is linked to preceding social responsibility efforts, whereas there is no evidence supporting the opposite direction. Therefore, these findings correspond to the instrumental stakeholder theory.⁵³

In the context of studies concentrating primarily on the cause-and-effect relationship, the term “u-shaped relationship” is increasingly used in the more recently published studies. The study by Trumpp & Guenther (2017) examines this more precisely and explores the idea that extremely high or extremely low levels of environmental performance might lead to suboptimal financial outcomes.⁵⁴ The research finds support for the u-shaped relationship, indicating that both very poor and excessive environmental performance could potentially be associated with diminished financial performance. The authors are speaking of the ‘too-little-of-a-good-thing’ effect (TLGT), when companies with low CEP tend to have a negative link to CFP and companies with superior CEP tend to have a positive link. According to Trumpp and Guenther, TLGT integrates the trade-off hypothesis, managerial opportunism hypothesis, win–win hypothesis, resource-based view (RBV), NRBV and instrumental stakeholder theory within the context of corporate environmental performance and financial performance (CEP–CFP), which were mentioned in chapter 2.1. Additionally, the study underscores the importance of finding an optimal balance between environmental and financial goals. It suggests that moderate levels of environmental performance are generally associated with the best financial outcomes, aligning with the notion of a u-shaped relationship.⁵⁴ In brief, according to Trumpp & Guenther, whether the relationship between CEP and CFP is positive or negative depends on the level of CEP.

On the contrary, the study by Hang, Klingeberg & Rathgeber (2018) provides evidence confirming the Porter hypothesis and slack resources hypothesis. By investigating the causal relationship between environmental and financial performance, the authors suggest a bidirectional causality between CEP and CFP. In the short run, which is defined as one year, CFP can increase a firm’s environmental performance in accordance with the slack resources hypothesis. Nevertheless, in the long run, referring to a period of more than one year, this effect might disappear. Looking at the other direction of the relationship, it is apparent that increasing environmental performance has no short-term effect on a corporate financial performance, while a firm will significantly benefit in the long term.⁴³

In the meta-analysis of Earnhart (2018), the author finds mixed evidence on the impact of environmental performance. He states that the influence varies based on the specific financial performance metric and environmental performance indicator utilized in each individual empirical investigation.⁵⁵

Finally, Chowdhury et al. (2023) gives an overview of the empirical literature in the field of CEP-CFP.⁵⁶ The paper provides evidence that in the initial phase of 1994-2014, the question of “Does it pay to be green” was in the main focus. During the subsequent period (2015–2022), publications added to the body of knowledge from diverse angles. These encompassed the effectiveness of proactive environmental strategies, technology-driven innovations, the significance of stakeholder engagement approaches, the evolving role of corporate environmental disclosure as a means of stakeholder connection, the implementation of ESG models in the context of the CEP–CFP relationship, and the influence of corporate governance on sustainability initiatives. These contributions also included new approaches in corporate social responsibility. According to the authors, these findings make a significant contribution to the literature across different time periods, underscoring the evolutionary trajectory of the CEP–CFP domain.⁵⁶

2.3 Summary of relevant Literature

Concerning the causal effect of the CEP-CFP relationship, the following main take-aways can be derived from the analysis of recent literature:

The sign of the relationship (negative/positive) depends on the level of CEP according to Horváthová (2010)⁵⁷ and Trumpp & Guenther (2017)⁵⁴– in accordance with the slack resources hypothesis.
The sign of the relationship (negative/positive) depends on the time. Horváthová (2010)⁵⁷ & Hang, Klingeberg & Rathgeber (2018)⁴³ found an intertemporal effect which is in line with Porters Hypothesis.
In accordance with the instrumental stakeholder theory, a bidirectional relationship can only be partially proven.
Various contextual factors need to be considered: industry characteristics & dynamics, regulations, and regional differences.

Broadly speaking, most of the recent literature sums up, that a generally positive linkage between CEP-CFP can be found, which means that the BCS exists. Particular attention should also be drawn to the publication rate: the annual publication shows a growth trend from 2015 onwards where almost 82% of total publications take place. This indicates increasing attention in academia amidst regulatory reforms and pressure from stakeholders in different countries.⁵⁶

Limitations & Future Research

The CEP-CFP link is the central instrument in empirical research for determining the BCS. Based on the outcomes of the different studies, it appears that several limitations need to be considered.

Firstly, the reliance on various meta-analyses introduces a significant challenge due to the diverse methods and data used across these primary analyses. Each meta-analysis draws from studies that have employed distinct approaches, including variations in methodologies, data sources, and analytical techniques. For instance, the incorporation of regional differences and industry-specific nuances further adds complexity to the analysis.

The volume of conducted meta-analyses and the process of selecting specific meta-analyses are also aspects that warrant careful consideration. The number of available meta-analyses can vary significantly, and selecting the most appropriate ones for inclusion may not always be straightforward. The reliability and credibility of these meta-analyses can vary which can influence the overall findings and conclusions of the study. These factors may impact the generalizability and robustness of the findings, emphasizing the need for cautious interpretation and underscoring the necessity for further research to address these limitations comprehensively. For example, a core problem in studies linking CSP/CEP and CFP is a social desirability and significance bias. Analyses that do not find a statistically significant effect tend to not be published in scientific journals, suggesting that such the current literature tends to be biased toward studies that either show a negative or positive relationship (rather than none). Also, given that environmental and social activities are desirable for both society and sustainability researchers, it seems probable that in several cases analyses that found negative relationships between CSP/CEP and CFP ended up not being published. This would result in studies with negative findings being underrepresented in scientific journals, leading to meta analyses being biased as well.

One way to address such biases lies in conducting more primary experimental studies and studies that exploit exogeneous shocks to reveal insights into the causal relationship between CSP/CEP and CFP. In fact, recent years have seen a rise in such studies, which has helped further improve our understanding of the CSP/CEP-CFP relationship.

3 Drivers and Barriers

In practice different factors in the market influence the commercial success of the BCS. These can act as a driver of the business case.⁷ Even though literature refers to these aspects primarily as drivers, they can also influence the economic success of the BCS in a negative way and thus act as a barrier of the BCS. The following sections provide an overview of the most important factors that shape the emergence of a business case for sustainability.

Employees

Employees are considered one of the most valuable resources of a company as motivated and well-trained employees can increase the performance of a company and thus its profits.⁵⁸ Employees increasingly value sustainability and put their focus on this topic and thus have important implications for the realization of the BCS.⁵⁹ Specifically, sustainable practices has positive effects on the recruitment of talent, the motivation and productivity of employees as well as retaining employees in the company.

Studies show that ESG performance is connected to a positive impact on a company’s attractiveness to potential employees.⁶⁰,⁶¹ As working for a company with responsible practices in place provides their employment with a greater meaning.⁶² In addition to that, not only the attractiveness is positively influenced by sustainable business practices. Studies also indicate that there is a positive impact on employees that are already working for the company. Not only their motivation and productivity increases, but also employee fluctuation decreases for companies that implement sustainable practices.⁶³^,⁵⁹ Reducing employee retention has an important impact on the costs companies have to pay for their workforce. The recruitment of new talents as well as costs for training new employees with the skills needed, substantially increases if employee fluctuation increases.⁶³ Thus, companies can reduce their costs and increase their performance when implementing a BCS. It is important to note that these studies can only be applied to employees that value sustainability. Therefore, the implementation of sustainable practices in the context of the BCS might also have negative effects on potential employees and employees that are working in the company already, but this is not further analyzed in empirical literature.

Risk management

Firms are exposed to many risks in the market. Especially as climate change is progressing risks like weather extremes increase, which impact companies in various ways.⁶⁴ In contrast to the risks that regularly occur in markets, environmental risks cannot be influenced by businesses and furthermore have multilayered impacts on companies.⁵⁹

Thus, it is recommended to adapt to these risks in order to reduce costs that can arise when such risks materialize. The BCS provides companies with options to prepare for these risks by implementing sustainable practices. A large body of literature concluded that implementing actions aimed at increasing sustainability of a company reduces environmental risks.⁶⁵ , ⁵⁹ , ⁶⁶

In practice, companies whose value creation depends largely on land use, such as Unilever, Mars, and Nespresso, intended to reduce their risk of rendering land unusable and increase the resilience to weather extremes by investing in the Rainforest Alliance.⁵⁹

To conclude, the reduction of risk is a driver for the implementation of the BCS as the implementation can help to control risks and lower the impacts they have on companies. The most important reason why the reduction of risks is a driver of the BCS is that potential costs induced by those risks are substantially lowered.⁶⁷

Innovation

Solving environmental issues in many cases requires the innovation of products or processes.⁶⁸ Furthermore, innovation helps to act on the increasing demands of consumers for sustainable products.⁶⁹

The BCS not only addresses the increasing demand for sustainable products but further helps to solve problems that consumers are faced with, which can increase customer retention.⁷⁰ For example Procter & Gamble reduced their consumers electricity costs by developing detergents that can be used for washing clothes at low temperatures and thus decreased the energy used for heating water.⁵⁹

This is also an example of the fact that the capability to innovate provides companies with new business opportunities. Furthermore, innovative products can be sold at higher prices as consumers tend to have a higher willingness to pay for innovations that cannot be provided by other products.¹²⁶ In addition to product innovations, the innovation of production processes also provides opportunities to increase efficiency and lower costs. For example, the company 3M, a technology company, innovated by product reformulation, the reconditioning of production equipment and by that managed to increase the efficiency of waste management and lowered their pollution.⁷¹^,⁵⁹ However, it needs to be considered that innovation requires the adoption of processes, resources used, the training of employees and other aspects which incur costs.⁷²

Thus, innovation provides companies with an incentive to implement a BCS as this holds opportunities to lower costs and broaden the customers they are selling to. However, potential innovations may also hinder the implementation if companies perceive that the implementation and development of such innovations will incur higher costs than it will bring benefits.

Reputation

The reputation of a company is a very important resource as companies with a good reputation appeal to a wider range of customers and thus have the opportunity to charge higher prices as their products and services are perceived as worthier and tend to have lower costs of capital and a higher market value.⁷³

As consumers increasingly value sustainability and about 84% consider sustainability aspects when making purchase decisions they search for companies that provide them with such a standing.⁷⁴ It is observed that the implementation of sustainable practices has a positive impact on the reputation of a company and thus its value.⁷⁵, ⁷⁶ One example where a company could have potentially lowered their costs by implementing sustainable practices in the first place is when NGOs accused Nike of supporting child labor along their supply chain and consequently their sales dropped.⁷⁰

In conclusion the changes in reputation encourage companies to implement a BCS as it provides them with a wider range of customers as well as possible business partners and therefore provides business opportunities.⁷⁶

Regulations

Without regulations like taxes or pollution permits, which confront companies with the costs incurred through their value creation, businesses create too much pollution and use resources in an unsustainable manner in many cases. If those practices are perceived as being more profitable, there would be no incentive to reduce those negative aspects.⁶⁵ Furthermore, in many situations firms are not aware of the benefits the implementation of BCS holds for them.⁶⁶ Many managers perceive that implementing environmentally friendly practices incurs costs. In those cases, regulations provide opportunities to make sustainable practices more profitable compared to conventional business practices.⁷⁷ In contrast to this, regulations are sometimes perceived to be connected to costs, as firms would have reduced their impact on the environment if it would have been profitable.⁷⁸ For this reason, it is argued that environmental regulations reduce the competitiveness of firms. However, with the focus on the BCS regulations can be seen as a driver, as they incur costs for not implementing sustainable practices thus making the implementation of sustainability more profitable than doing business the conventional way. However, it can be argued that it is not only a driver but rather makes the implementation of sustainability mandatory.

Costs

The reduction or increase of costs is one of the most important factors that influences the implementation of BCS. Thus, it is analyzed in the majority of literature and as mentioned in section 2.1 hypothesis like the win-win hypothesis and the Porter hypothesis have been developed to account for these implications.

Many studies indicate that the costs of implementing a BCS, for example through implementing new technologies, or training employees for new processes, are perceived to be higher than the actual benefits the BCS can provide.⁷⁷, ⁷⁹ In practice companies might also hesitate to implement sustainable products as the materials for such products are more expensive than the prices of conventional materials.⁸⁰ In line with the perception that the implementation of BCS is connected to higher costs is the finding of Revell et al. (2007) that a majority of small and medium sized enterprises consider increased costs as a barrier for improving sustainability.⁷⁷

In contrast to these findings the implementation of sustainable business practices holds diverse opportunities for reducing costs. These cost reductions are encouraging companies to implement BCS. Some opportunities to reduce costs have already been analyzed in the sections before, for example the decrease in employee retention, managing risks through sustainable practices and innovating products or processes. In addition to that optimizing production processes also holds the potential to increase the efficiency of resource use and thus reduce the costs, the company has to bear for such resources.⁵⁹

In conclusion costs can hinder the implementation of BCS if the costs of implementation are perceived to exceed its benefits. However, they are more likely to be considered a driver as the implementation provides various opportunities to decrease costs and thus have a positive impact on the value generation of the company.

Financial performance

The final driver or barrier to the BCS is the financial performance of companies. As stated in chapter 2 the connection between CEP, CSP and CFP has been analyzed for a few decades now and concluded that the implementation of sustainable business practices is generally considered to have a positive impact on the financial performance of companies and thus can be seen as a driver for the BCS. Furthermore, chapter 2 finds that financial performance is impacted by corporate environmental performance. Moreover, companies engaging in sustainable practices have experienced higher sales growth and lower cost of debt. Additionally, during crisis the share prices of companies that have responsible business practices in place are more stable than for companies that have not implemented such practices.⁵⁹ In the above sections different aspects have been analyzed and positive as well as negative relations could be observed in connection with environmental practices and financial performance.

As BCS are only implemented if there is a positive impact on potential profits, financial performance can act as barrier if the financial performance would be negatively affected by the sustainable business practices. Overall, the analysis implies that financial performance can be seen as a driver as well as a barrier of the BCS.

4 Practical Implementation

In practice, it seems difficult for companies to apply and implement the identified theoretical contents to their specific businesses. Therefore, the implementation part suggests steps that could support companies in implementing the BCS, as well as tools and two examples that have already successfully completed the steps. If a company management wants to implement the BCS, it is less about the basic plan of a business venture – compared to the original Business Case when starting the company or developing a new product range – and more about adapting it to be more sustainable.

However, due to the fact that companies are founded and managed for economic purposes, it is necessary for their management to develop the majority of its social commitment in the context of the company’s economic goals.⁸¹⁸² The management must recognize, establish and strengthen the links between non-monetary social and environmental activities on the one hand and business or economic success on the other.⁸¹^,⁸³ As mentioned in the definition part above, the goal and purpose of the BCS is to create this link so that economic success is created from environmental and social activities.⁸³ Research by Schaltegger & Wagner (2006) indicates that most companies have the potential for one or even several BCS’s, but this must be actively created through intelligent sustainability management.⁷⁰

Kemp in cooperation with the World Wide Fund for Nature (WWF) (2002) presents a roadmap concept, which supports the development of the BCS in a company through six steps.

*Figure 1: The Route Map for the BCS (adapted from Kemp, V. & Loop Environmental Networks Ltd. 2002*)⁸⁴

Step 1: Identifying significant impacts

The first phase (Step 1) involves a status quo analysis and is denoted as “identification of significant impacts”. This stage aims to comprehend the environmental consequences resulting from the company’s current business model and its manufactured products. The most efficient approach to pinpointing specific environmental and social effects is to carry out a thorough examination or evaluation of the company. For example, one outcome could be the determination of the total greenhouse gas emissions. There are various tools that could be used for this step, most of which are based on scientific principles, such as the Environmental Impact Assessment.⁸⁴

Step 2: Identifying key issues

In the next step (Step 2), an assessment is made to ascertain whether the identified impacts possess immediate or future external significance, the “identification of key issues”. This is also the step to identify operational units where opportunities could arise to create value through improved ethical, environmental, and social performances. As a company, it is important to know the stakeholders for sustainability issues as well as the main drivers for change (here not explicitly the BCS). These are, according to Kemp, globalisation, global wealth or poverty distribution, government and laws, environmental concerns, social expectations, and lastly pressure from employees, investors, and consumers.⁸⁴ This largely coincides with the identified main stakeholder groups by Kreiss et al. (2016): Community, Customer, Employees, Government, and Investors.⁸⁵ For the BCS, the focus on society is particularly important and thus put at the centre of the strategy.⁸⁶ For this, tools such as an issue or stakeholder matrix or the stakeholder dialogue can be used.

Step 3: Establishing sources of potential threat and opoprtunity

The third step (Step 3) involves analysing the recognized problems to ascertain whether they could offer a chance or pose a danger to the company. Proprietary risk assessment instruments and similar resources can aid managers in comprehending the character and scope of these threats.⁸⁴ For a well-defined BC, managers must identify the drivers that steer social and environmental achievements and how these accomplishments impact the company’s ultimate, enduring profitability. This amplified emphasis on exhaustive identification and measurement of performance drivers is also mirrored in prevailing management ideologies.⁸⁷^,⁸³ Schaltegger et al. (2011) further investigate the interactions between drivers and sustainability strategy on the one hand, and business model innovation on the other hand as mentioned in chapter 1.4.⁸³ An in-depth analysis of the drivers and barriers of the BCS was already covered in Chapter 3.

Step 4: Identifying and prioritising proposed actions

The next step (Step 4) is to decide whether the topics either offer opportunities for competitive advantage or are of strategic importance for the company. It must be analysed whether they are compatible with the corporate strategy or whether they can be integrated into the business strategy in such a way that additional value is created. This corresponds to the basic concept of creation of shared value, mentioned in chapter 1.4. To assess the relevance for the company they should be measurable in terms of costs and benefits.⁸⁴

A distinction can be made between actions whose benefits are directly measurable, based on “hard” facts, and those that are much more difficult to measure.⁸⁵ Tangible benefits derived from sustainability initiatives are characterised, for example, by cost reduction or increasing efficiency. They can be directly expressed in numbers to assess whether an investment is worthwhile, for example savings in energy, waste and emissions. However, for the creation of a robust BCS, it requires the inclusion of intangible benefits, encompassing all levels of value creation.⁸⁵^, ⁸⁸ Intangible benefits arise, for example, from positive effects resulting from the increased sustainability of the company, such as stronger employee loyalty, a better image with customers or a better position with investors. In practical application, it is often difficult to measure only the effects of sustainability measures. This applies to both benefits, tangibles and intangibles.⁸⁵^,⁸⁶

Demonstrating sustainability-specific effects in this context has proven to be challenging due to their interconnection with other financial information within the company, rendering their quantification either excessively complex or unnecessary.⁸⁵ When it comes to intangible benefits, many can be evaluated qualitatively, obviating the need for quantification. Businesses that are attentive to their stakeholders’ demands can assign greater significance to qualified intangible benefits in business scenarios. Employing a return on investment (ROI) methodology, utilizing measurable indicators associated with the particular intangible benefit being portrayed, is one approach for quantifying intangible advantages.⁸⁵^,⁸⁹ In practice, employee satisfaction and retention, measured by reduced absenteeism and health care costs, have proven useful for quantification.⁸⁵ Two other tools that may be mentioned are the “total cost assessment methodology” and the “SDEffect”. The former is primarily intended to enable the inclusion of all costs or their avoidance in the estimation of sustainable projects, while the latter is a framework developed exclusively for sustainability projects that can be used to measure how sustainability initiatives affect the market value of a company. This is done along the lines of traditional accounting tools “ratio analysis”, “discounted cash flow analysis”, “rule of thumb valuations”, “economic value-added analysis”, and “option pricing”.⁹⁰^,⁸⁵^,⁸⁶

The results of these assessments can be documented in the form of a concise selection of prioritized actions. These actions are determined based on factors such as their ability to generate and sustain value, alignment with the overarching corporate strategy, and practical feasibility. This information serves as the foundation for a business case that centers on opportunities for value creation and sustainability. The analysis may also indicate the necessity for a fundamental re-evaluation of existing strategic intentions. Management can support itself in this phase by employing a combination of techniques. Firstly, tools are required to check the company’s business operations for external influences. Many of these tools rely on key market dynamics to identify potential sources of competitive advantage. In addition, tools and measures help to assess whether the actions derived eventually bring potential benefits to the company. It is recommended to use the most important financial drivers and indicators. Cost-benefit methods can be used at this point and usually include both quantitative and qualitative information in the analysis process.⁸⁴

Step 5: Highlight actions with strategic implications

Sustainability issues often involve complex relationships where benefits are long-term, indirect or intangible. They may also mean that one has to look beyond current market conditions and has to define strategic options that do not lend themselves to conventional forms of business assessment. Therefore, the fifth step of the route map should focus on which implementation measures are long-term and therefore primarily strategic in nature. Managers need to identify and evaluate possible different strategic options and scenarios.⁸⁴

In the literature, there are various approaches and typologies for integrating sustainability aspects into the corporate strategy or setting up a sustainability strategy. These are mostly oriented towards the basic idea of Social Responsiveness Categories according to Carroll (1979).⁹¹ The approaches of corporate management can be classified as reactionary, defensive, accommodative or proactive.⁹² Since the reactive strategy completely neglects environmental and social aspects, only the other three strategies are considered for the reference to the BCS. The defensive orientation aims to maintain the existing corporate strategy and only implement minimum requirements, such as those imposed by legal regulations, so that no disadvantages arise for the company as a result.(Roome, 1992; Schaltegger et al., 2011) In contrast, the accommodative strategy is more open to changing internal processes and applying sustainability management systems to control the organisation. There is partial awareness for the need of change, but the core business as such is not questioned.However the proactive strategy integrates environmental and social goals holistically into the corporate strategy and implementation takes place at all levels. This means an orientation towards sustainability in the core business as well as in all business processes, the entire product range, and the profit strategy.⁹³^,⁸³ Using this concept, companies can analyse the interrelationships between their sustainability strategy and the business case drivers. Since the sustainability strategies place different emphases regarding the impact of those drivers, it is relevant which approach the management chooses.

Due to the inevitable link between the sustainability strategy and the business model of a company, the choice of a strategy always influences the business model as well as the extent to which it needs to be changed.⁸³ Bocken et al. (2013) have introduced a value mapping tool designed to assist companies in integrating sustainability at the core of their business model. This tool can be employed independently to aid companies in recognizing their values and generating ideas for reshaping their value proposition. Alternatively, it can be integrated as part of a broader value identification process, combined with other complementary tools.⁹⁴

Step 6: Determining prefered actions for a business case

The final step includes determining the preferred actions based on the previous analyses to be included in the BCS. It is useful to use financial measures to assess the expected benefits. This step is particularly important for measures that require additional investment for example in new, more energy efficient technique and machines.⁸⁴

Ultimately, the measures are rated according to their potential to generate benefits for the company. The levels of government regulations, pressure from investors, fostering innovation, effective risk management and increased operational efficiency can be classified “low hanging fruits”. They help companies to improve their financial performance in the short term. This then enables them to achieve long-term benefits through reputation management and shared value creation and thus competitive advantage.⁸⁶

In addition, this sequence provides a consistent framework for monitoring and communicating progress during the implementation of the BCS. Another possible outcome is that it highlights potential weaknesses in the overall business strategy, triggering a more fundamental review of long-term strategic options. In addition, the use of standard business valuation and assessment tools can help companies communicate their proposed strategies to financial stakeholders using standard terms. The use of financial performance assessment tools will also provide a standard framework for monitoring progress during the implementation phase of a business plan.⁸⁴

In conclusion, a company’s journey towards a BCS may start by complying with general regulations, but these can be seen as drivers of product and process innovation. Companies need to develop new capabilities and attributes, including a system-wide approach to addressing sustainability issues and societal concerns by developing a culture of collaboration with long-term thinking, process redesign and financial modelling and reporting. In addition, vision and mission need to be rethought so that sustainability and ecology are placed at the centre. Programmes such as Mission Zero and sustainability indices are essential for time-bound results.⁸⁶

In the following, the topics of practical implementation mentioned above will be exemplified by the case of the company Ben & Jerrys as wel as the Siam Cement Group.

The Case of Ben&Jerry´s

Ben & Jerry’s Homemade Holdings Inc. is an American ice cream manufacturer that is part of the Unilever Group. The company is seen as an appropriate example of how sustainability has been integrated into the entire business strategy. Therefore, with regard to the implementation part above, by applying the steps of the Route Map, Ben and Jerrys has developed and started to implement different business cases. Every employee in each department is asked to question themselves if there is a more sustainable way to implement every step of the company. The setting of targets and the evaluation of progress is always done with reference to the defined sustainability goals and is conscientiously carried out and followed up, for example, by reducing wastewater or CO2 emissions or the use of paper in the offices. All of these are good examples of the above requirement that the impact of actions must be measurable. After Ben&Jerrys took the step of identifying sustainability issues for the BCS from the Route Map, several areas for improvement have emerged. A specifically identified sustainability issue in Ben&Jerry’s ice cream production is waste generation. To address this issue, baseline values were established for each waste stream. This enabled the identification of where to start reducing impacts. As a result, it was decided that the wastewater, which previously required extensive and costly treatment for ice residue, would be relieved by supplying the ice residue to a local pig farm. This resulted in cost savings for the company as well as for the community which results in a positive BCS. Additionally, the company received positive national attention and publicity.⁹⁵

The Case of the Siam Cement Group

The second company example shows which structural changes were necessary to implement the BCS in corporate strategy, which was explained above by the connection of the BCS with sustainability strategy and Business Model Innovation.

The Siam Cement Group (SCG) is a Thai conglomerate that produces cement, paper and chemicals. Since 2015 they want to be a role model for corporate governance and sustainable development. For the BCS, they redesigned their business model in three steps. First, they looked at production and changed cement production from a wet to a dry process. This saved the water in the process as well as the energy for the subsequent drying. The company also implemented a “Zero Waste to Landfill” policy to find a way to dispose of waste without affecting ecological systems. The next step was to implement a sustainable supply chain. This involved sourcing only from suppliers certified as sustainable or meeting SCG’s green procurement standards. The final step was to create an eco-value label based on a study that showed that customers value eco-friendly products. This made SCG the first company in Thailand to introduce such a label, which shows that the products were manufactured through an environmentally friendly process. A special focus was placed on stakeholder interest. The company uses various tools, such as stakeholder dialogue, surveys, or joint meetings, to achieve sustainable development based on participation and good corporate governance.⁹⁶

The Siam Cement Group is thus an example that has taken into account and gone through many of the points mentioned for the implementation of the BCS. The first step was to identify issues that would improve the sustainability of the company. The interests of the stakeholders were taken into account and thus the drivers of the BCS were addressed. Tools were used to evaluate the measures and thus determine positive, respectively select the relevant BCS. On this basis, the business model was then redesigned in order to implement the proactive strategy of the company and to establish sustainability holistically in the company.

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