Background and Literature Review
Context of Corporations and Products
Corporations are among the main actors which can profoundly influence sustainability through their products and services that span across different locations through their supply chains and markets. There are broadly five forces requiring corporations to improve their sustainability performance more than ever before. These are megatrends (environmental, social, demographic), regulatory pressure, stakeholder pressure, supply chain risks and competitive pressures (Manda 2014). The developments underlying the megatrends are population growth and rising disposable income, increasing urbanization, growing share of elderly population, climate change, water scarcity, bio-diversity loss, resource scarcity, poverty and inequity (UN 2012; GSSD 2014; WWF 2012; UN DES 2013; Rockstrom et al. 2009). The regulations on corporate and product sustainability, emission standards and trading schemes are growing in many countries and regions (e.g. the USA, EU, China and India) (US-EPA 2014; World bank 2014; EC 2014; EDF and IETA 2013). The number and activity of global NGOs targeting the working standards among suppliers and the pollution they are causing is increasing year by year (O'Rourke 2005; Economist 2014; Jun 2014). Consequently, the interest of investors in sustainability aspects of corporations is growing. Companies are trying to reduce risks, reduce costs of scarce resources, and develop new products that can improve their sustainability performance and provide competitive advantage in the market.
Despite these pressures, managers in companies are still pressed to deliver value, and their performance is measured on how well they deliver the value. Therefore, managers often face the challenge of addressing stakeholder concerns in day-to-day business while simultaneously improving value and thereby financial performance of companies (Hart and Milstein 2003).
Opportunities for Sustainable Value Creation
It was found that the improved environmental and social performance of companies can have a positive impact on the financial performance through reduced costs, improved revenues, and avoidance of risks (Epstein 1996; Eccles et al. 2012; Hart and Milstein 2003). For example, process improvements could lower energy and water usage and save operational costs (Worrell et al. 2003); and improved raw material utilization not only decreases raw materials costs but also reduces costs for handling and disposal of waste while simultaneously reducing the environmental footprint. There are several risks that can be avoided by sustainability performance improvements (Koplin et al. 2007). Increased scarcity of raw inputs such as water can lead to disruption of operations, i.e. lost production activity, which will impact the revenue earning capacity. Companies have to increasingly pay higher fines for violations, they need to compensate wrongdoings, and need to earn the license to operate from the local communities by avoiding negative impacts. These are called regulatory and legal risks. There are possibilities for damaging corporate reputation, i.e. reputational risks, from media and NGO campaigns for not meeting stakeholder expectations such as workers' health and safety and labor practices, and safe living environments for local communities. Market and product risks can also occur when customers move to other products with better sustainability performance or when governments and organizations impose sustainable procurement policies.
On the other hand, there are several value creation opportunities for companies with superior sustainability performance for each risk category mentioned above. It is possible to obtain additional revenues from environmentally and socially superior products through a premium. Moreover, high sustainability performance of companies can positively influence the desire of customers to buy their products (brand image), the desire of employees to work for them (preferred employer) and the desire of investors for providing long-term capital (blue chip status or good rank in indexes such as Dow Jones Sustainability Index). Companies with superior sustainability performance can differentiate their products in the market against competitors to attract new customers and, consequently, create a competitive advantage. Business to Business (B2B) companies can help their customers, i.e. end-producers, to meet their sustainability goals by supplying superior intermediate products. In essence, the existence of a company or its profit making capacity can be affected by several ways described above through various risks and opportunities created by sustainability performance and stakeholder reactions. This shows the overlap between shareholder and stakeholder value which are interdependent and interrelated.