Business

The Rise of Sustainable Entrepreneurship

At first glance, it may seem extremely difficult for a business, especially a manufacturing business, to be both sustainable and profitable. Is this truly the case?
The Rise of Sustainable Entrepreneurship

Summary

  • Sustainable business practices are gaining popularity in local and multinational companies
  • Sustainable business practices show a positive influence on operational performances
  • The market for sustainability is growing rapidly as society becomes more knowledgeable on the repercussions of climate change
  • “Green investing” is becoming the new trend in the stock market
  • Local perspective on sustainability from Nicolas Dostie of Montréal clothing brand Arrière-Saison

Only 100 companies are said to be the source of 70% of global emissions. Mass production and consumerism, the endless cycle that dictates the way we live, play a predominant role in driving climate change. However, society has grown so accustomed to this lifestyle it is hard to imagine it differently, especially since it is the driving force of our economic growth.

H&M: A Rocky Road to Sustainability

As we are constantly acquiring new information indicative of the devastating future that’s in store for us, a collective effort to focus on sustainability has become crucial. At first glance, it may seem extremely difficult for a business, especially a manufacturing business, to be both sustainable and profitable. As a society that loves to buy, buy, and buy, cheaper products are generally what we go for, even if they might harm the environment.

Many big companies are seemingly sustainable and do not take the necessary measures to make a relevant impact. For example, H&M sells their “Conscious Collection” with slogans, a green colour scheme, and coupon codes to push their customers into purchasing a product made of eco-friendly materials and donations from in-store recycling bins. Environmentalist Elizabeth Cline revealed that in 2018, less than 1% of recycled clothing actually turns into new clothing, and 35% are used for carpet padding, painters’ clothes and insulation. Additionally, H&M's website provides minimal detail on exactly how these pieces are better for the environment compared to other products from the company, or whether they have been produced under appropriate working conditions. Many assume that it is a marketing ploy: they remain vague and misleading about their efforts towards sustainability, in order to satisfy the growing socially responsible population.

Pulled from H&M's website. As mentioned, there is a lack of information on their Conscious Collection and its environmental and social impact.

Despite that, after controversies and suspicions from the public, H&M has recently put an emphasis on the transparency of their textile production and has also set some goals towards sustainability. For example, in their “Animal Welfare and Material Ethics Policy”,  they set to have 100% recycled and sustainably sourced materials by the end of 2030. It is a start, but they still fall in the gray area, as most fast-fashion brands with sustainability goals do.

H&M mainly uses organic cotton, a far better alternative to conventional cotton. The growth of organic cotton needs less water and emits less greenhouse gas. Even so, using it in a fast fashion business model like H&M’s still damages the environment to some degree due to mass production. One of the main issues in fast fashion is that the products become obsolete in a short matter of time, due to a lower manufacturing cost. Not everyone can afford to invest in high-quality sustainable products, so H&M makes fashion accessible to the general consumer. But, because it is cheaper to mass-produce clothing, it takes a toll on the products’ durability and quality, which consequently accelerates fast fashion’s cycle of consumerism, meaning items are bought and thrown away quickly.

H&M is taking concrete action in striving for more eco-friendly materials, but their business model restricts them from being able to apply the drastic modifications needed to become fully sustainable. The concept of sustainable fashion is about using good materials, but also about putting these materials to good use, which is something H&M has yet to figure out.

Success in a Sustainable Economy

Businesses shy away from the sustainability route thinking that the costs for operations would be out of pocket and that their profits would be reduced. Many believe that you need to be pinching pennies and rely on the cheapest operational business practices for the best results.

An Oxford study shows the opposite. Co-authored by the Smith School of Enterprise and the Environment and Arabesque Asset Management, researchers created a comprehensive meta-study of 200 different sources that analyzed the relationship between sustainable business practices and their overall performance in 2015. In sum, these are the conclusions that could be drawn:

  1. 45 out of 51 studies conclusively state a positive correlation between ESG (Environmental, Social and Governance) practices and profit. The research shows a focus on many topics regarding the three factors, such as anti-takeover mechanisms, employee relationships, and resource efficiency, which overall stimulates operational performance.
  2. 26 out of 29 studies on ESG practices and their effect on the cost of capital show that sound business practices reduce costs since high sustainability standards tend to improve access to capital, lower cost of debt and cost of equity. It should be noted that the prevalence of anti-takeover measures in these businesses increases costs of equity.
  3. 33 out of 41 studies on the impact of sustainability practices on the financial market performance demonstrate a positive influence. More sustainable firms generally outperform less sustainable firms on the stock market, thus their stocks perform better. Important contributing factors to superior stock market performance are corporate eco-efficiency, environmentally responsible behaviour, and employee satisfaction.

The cumulation of these conclusions demonstrates that the risk of failure in taking a more sustainable way of running a business is not as high as some claim it to be, it might even be a better option. Best to keep in mind that this is an empirical study, therefore the evidence is observational; not every statement is automatically conclusive to every sustainable business.

Sustainability and the General Consumer

In the wake of climate and social activism, sustainable businesses are in a safer position when it comes to lawsuits and scandals, which would generally put them in a better light. As people become more knowledgeable of the reality behind the products displayed in the store aisles, the public demand for better business practices is ever so present. This dramatically affects the number of sales and clients, but it also displays a terrible opportunity for investors.

A Market That Keeps on Growing

Many brand managers complain of consumers claiming they will purchase sustainable products only to change their mind in-store and not buy them. They see the goal to pivot the corporate world towards sustainability as hard to achieve, hence their unwillingness to make their companies more sustainable. It is true that the purchase of unsustainable products is, as of now, higher grossing due to their generally cheaper pricing. However, a report conducted by NYU Stern’s Center of Sustainable Business, which tracked 40% of the market of Consumer Packaged Goods (CPG), shows that sustainably-marketed products delivered 54.7% of market growth rate from 2015 to 2019, which is 7 times higher than non-sustainable products. Additionally, they report significant growth despite the massive economic disruption caused by the COVID-19 pandemic, which cannot be said for many industries. These numbers show that corporate leaders are wrong when saying there is not much of a market for sustainable businesses, because there is one, and it is quickly expanding.

International corporations such as PepsiCo and Unilever have taken this direction, and they prove to be successful even so. PepsiCo took a stride towards sustainability targets. In 2020, they had planned to source 100% renewable electricity globally, across direct operations by 2030 and entire global operations by 2040. They also recently signed the U.N Global Compact Business Ambition for a 1.5℃ pledge. Despite investors criticizing these decisions due to their fear of losing revenue on a short-term basis, their efforts in building a more sustainable food system is an ongoing success, which is noticeable in their quarterly financial reports.

Being a Stakeholder, Not a Stockholder

Nowadays, investors are seeking out companies with positive ESG performances, not only because they are morally admirable, but also because they are generally a safer investment in the long run. Socially responsible investing, otherwise known as ESG investing is gaining space in Wall Street. As citizens are starting to take investing into their own hands with the help of mutual funds, investors can get a sense of relief in knowing that their money is not going towards funding business activities that they find questionable.

Other reasons why ESG investing is gaining momentum are:

  • Risks in investing in businesses that deplete natural resources, such as public scandals and lawsuits as mentioned, could lead to major investment losses.
  • Sustainable businesses tend to have better management due to their higher complexity. Since it is still a relatively new field and options are limited, it requires more intricacy in its business strategy to ensure that people, planet and profit prosper simultaneously.
Despite being under the Trump presidency, who opposed Obama’s green agenda, ESG investments were still surging. Needless to say, a wall was unable to be built around sustainable enterprise.

Thinking long-term

Another aspect that many people seem to forget about sustainable enterprise is the higher performance these businesses will have over a long-term period.

It’s not news that the viability of businesses eventually depends on nature’s resources, which are for the most part in limited quantities. Companies have come up with many different alternatives in an attempt to reduce the effect of our draining of resources, but the extent of our exploitation has reached the point where the opportunity for reparation is getting slimmer and slimmer. What we tend to forget is that, as resources become scarce and their demand gets higher, their value goes up, as we have seen with gasoline price fluctuations.

Therefore, it is inevitable for entrepreneurs to enforce sustainable practices. And with society being more conscientious about the harm consumerism has on our ecosystem, the market for sustainable goods will keep growing.

Now that a broader vision of sustainable business has been shown, let’s turn to a more local perspective.  

Many local businesses in Montreal have taken the direction towards sustainable practices, even the youngest ones such as Arrière-Saison, a Montréal-based clothing brand founded by a team of young entrepreneurs.

Nicolas Dostie, the 17-year-old co-founder of the clothing company and health science student at Collège Jean-de-Brébeuf, emphasizes the importance of social responsibility through his brand.

‘’Our company is based on high values of sustainability and ethical fashion. We want to encourage locally produced clothing to reduce the carbon footprint all while making sure the people who are making the products are in ethical working conditions.’’

Nicolas Dostie at Arrière-Saison's production facility.

Local brands tend to mostly fund their businesses through their own means and are certainly not boasting millions of dollars of annual revenue. But, as Dostie points out, turning to similar production practices as Zara or H&M is just not worth it.

‘’Arriere-Saison would have been more profitable if our production was held in China or other manufacturing countries of course, but it’s not worth it. It’s a risk we are willing to take; we remain profitable even if we are investing more in the clothing we are making.”

The Cost of Fast Fashion

Fast fashion brands are on top of the list of the biggest polluters due to their extensive use of water in mixing dyes and chemicals for various steps of textile production, which drives up carbon emissions. Not only are they major contributors to the deterioration of our environment, but they are also behind the poor conditions of millions of workers across the globe. For example, AHA, the company that produced 90% of Zara Brazil’s garments, got into legal trouble with the Brazilian government for mistreating their workers back in 2011. Investigators reported the poor conditions the workers had to endure: 16-hour shifts, $156 to 290$ a month (minimum wage in Brazil in 2011 was $344 a month), and dangerous and unhealthy conditions. Although Zara is not directly the root cause of these workers’ mistreatment, they allowed this to happen and are gaining profit from it.

For many sustainable brands, a reliance on marketing and customer loyalty is crucial for profitability, and for many reasons. The competition, fast fashion brands, have price tags that hook consumers, which takes away a big part of the market. Also, local production restricts creative liberty. For instance, Dostie explains that due to limited materials in Canada and the USA, it is harder to offer a wide variety of products and to find ideal materials. Therefore, an effort into selling high-quality and fashionable products is very important for local brands, contrary to fast-fashion who can sell thousands of products without putting too much of an emphasis on quality and durability. Not to mention the higher cost of local production, whereas “manufacturing countries”, such as China, could have cost them 4x less. All this to say that there is much to put on the line in selling sustainably sourced products.

Nevertheless, it is important to note that a student-run business is usually able to withstand lower profit due to fewer personal expenses, which in a way helps them stay afloat and still practice corporate sustainability. But, it is just a minor plus in working towards a greater purpose and it only provides temporary financial relief at the start. In years to come, the stakes will get higher for Arrière-Saison, which is something to take into account even in the early stages of running a sustainable business.

To illustrate, Malice Studios and Saintwoods, two local apparel brands that have been around longer, also emulate these high standards of sustainability, yet both sell at prices about twice as high as Arrière-Saison. This is likely due to both the higher costs of capital towards equilibrating the spendings on larger projects, retailing, etc, and to possibly establish themselves as an expensive, upscale clothing brand. Could be either, could be both. Whatever it may be, the balance between profitability and spendings in corporate sustainability is difficult to keep up with. But for Arrière-Saison and other brands alike, it is a risk they are willing to take for a sustainable future.

Although, with the rise of sustainable entrepreneurship on a local and international scale, we can only imagine that it will get easier from this point forward.

Endnote

Sustainability is no longer just the mindset of a contrarian, it is a reality we must turn to. Since it will inevitably become the dominating business practice in years to come, it might be time to destigmatize this topic in the corporate world. Corporate social responsibility may not be the way to get optimal profit in the short run, but it certainly diminishes costs in more ways than one.

Credits

Photo by Marianne Krohn

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