Does it pay companies to be green?
New research suggests there can be financial benefits for manufacturers that engage in sustainable and pro-environmental practices, but only if their corporate customers also value sustainability.
Researchers from UTS Business School and Nanyang Business School tracked more than 500 US manufacturing companies and their key corporate customers over a decade, to find out if there was a link between strong sustainability performance and higher sales.
The study, just published in the Journal of Operations Management, revealed that sales revenues were only higher when corporate customers valued and championed sustainability. If corporate customers did not value sustainability then sales were lower.
For example, manufacturers that supply products to corporate customers such as Hewlett Packard or Walmart, which champion sustainability, have significantly higher sales if they also pursue sustainable practices.
Since 2013, Hewlett Packard has required suppliers to undergo environmental audits, and Walmart has pledged to source 70% of its goods from suppliers that can provide product life‐cycle information, so their suppliers benefit from enhancing their green credentials.
To generate financial returns from sustainability efforts, companies should assess whether their sustainability performance is in line with that of their corporate customers.
Lead researcher Dr Hillbun Ho says most manufacturers are not willing to bear the higher costs associated with making a greener product, because they believe their corporate customers are not willing to pay extra for environmentally friendly products.
“Companies that do adhere to pro-environmental practices have to weigh up whether they bear the higher costs or pass these on to customers, with higher prices potentially reducing sales and profitability,” he says.
Dr Ho suggests that to generate financial returns from sustainability efforts, companies should assess whether their sustainability performance is in line with that of their corporate customers.
“A supplier with poor sustainability performance can benefit from expending more resources on tackling sustainability issues only when its customer base consists mainly of firms with high sustainability performance,” Dr Ho says.
He says companies must engage in innovation alongside their sustainability efforts to achieve cost-effective sustainable practices.
“Pursuing sustainability goals can stimulate innovation in product design, material use and reuse, and production processes,” he says.
“Only by finding innovative ways to advance sustainability at low cost can companies maintain competitiveness and address sustainability issues at the same time.”
While the research looked at the manufacturing industry and its business customers, it also has implications for end consumers.
“While many consumers claim they prefer to buy products from companies adhering to high environmental and social principles, they are often not willing to pay more for sustainable products,” says Dr Ho.
“In fact, some market research shows that consumers are deterred from buying socially responsible goods because of higher prices,” he says.
“If end consumers aren't willing to pay higher prices, suppliers have limited incentives to improve their green manufacturing processes or produce green products.”
Dr Ho suggests that governments, NGOs, and industries should work together to raise not only consumers' understanding of the benefits of green products but also the higher costs involved in producing such products.
“Consumers must understand that their willingness to pay higher prices for green products is the ultimate driver behind companies' sustainability efforts,” he says.