Why a sustainable approach to business is important for your bottom line

The Companies Bill, introduced in India some years ago, has made companies rethink the definition of profit and bottom line. Earlier, corporates assumed that resources were infinite and exploiting them to the maximum highlights business efficiency and improves bottom line. It did not make a difference whether this led to inefficient use of our natural resources or lead to environmental degradation.

Focusing on people was not important - they were just tools to churn out more and more goods in the marketplace and ensure a larger share of the market. However, today we have reached a stage where we recognise that the ability to manage people and conserve natural resources should be the focal point of an 'efficient business strategy'.

The idea of CSR and Sustainability reporting, introduced in the Companies Act, today provides financial value besides driving innovation, reinforcing the old adage of "what gets measured gets managed". It also establishes a new definition for bottom line and profitability of a company.

In 1994, John Elkington coined the term "the triple bottom line", which is now clearly relevant for Indian companies. The constituents of triple bottom line are also called the three Ps: people, planet and profit, or the "three pillars of sustainability". We all are familiar with the traditional model of profit or bottom line analysis, which is undertaken through a profit and loss account. But Elkington has added in two other key dimensions to bottom line that are about to dramatically change the meaning of profitability.

One such important measurement of bottom line, which is not reflected in the typical profit and loss account, is the company's "people focus". In simple terms it is a measure of how socially responsible an organisation is throughout its operations. The "people focus" of a company should not be seen in isolation; it has a direct bearing on a company's bottom line that is not reflected in the balance sheet P&L account.

One can illustrate this point through some simple examples. For instance, a company that focuses on a robust succession plan ensures there is no time wasted in finding a leader, and thus helps in ensuring that there is no impact on the company's profitability. That it because time is money and speed of transition is the essence of a successful company.

Nurturing talent and encouraging those who have a bright future is also important as it helps a company to retain employees, which again has a bearing on overall productivity. A company that spends time and effort to ensure job rotations, offering multi-tasking opportunities to its employees will have more happy and passionate employees. That again has a direct bearing on efficiency. Corporates that undertake engagement surveys regularly to get feedback and bridge the gaps in the organisation are much more agile to competition and can make quick changes to face new market challenges. That again has a direct bearing on the bottom line of a corporation.

Earlier, many corporates thought that making investments in engaging employees in well thought-out community programmes was a waste of time. However, increasingly companies are using it to allow employees not only to give back to society but also build their morale. This engagement also provides leadership opportunities to employees who can become the "future leaders" needed for any successful company. Also when a company engages with the community and addresses their issues, they are seen by the world and stakeholders as good corporate citizens. This helps build their reputation, which indirectly has an impact on the company's valuation.

The other important element, said Elkington, is measuring the company's "planet" account - a measure of how environmentally responsible a company is. Corporates have to increasingly realise that doing so is not a fad but is inexorably linked not only to its own bottom line but also to that of its clients through cost reduction. For instance, higher usage of renewable energy translates into cost savings and also reduces one's dependence on traditional fuels whose prices fluctuate, creating instability in costs. At the same time it reflects the company understands of environmental concerns.

Another example is the increasing usage of fly ash, a waste from power generation. As much as 55 per cent of the fly ash produced in the country is being used in construction, which again is helping in reducing overall cost of construction as well as reducing waste and emissions.  

A sustainable approach towards business is important, again not merely because it is the fashionable thing to do, but it has a direct bearing on the health of the business and its bottom line. Preservation of natural capital, for instance, has a direct bearing in improving shareholder value. Also if a business does not respond to stakeholders' concerns, it runs the risk of being non-compliant, besides overall loss of reputation. All these repercussions can have an adverse impact on its business. On the other hand, if the sustainability focus is adopted in line with the core business strategy, an organisation can be compliant, communicate its green efforts and differentiate from other competitors.

(The author is MD & CEO, Ambuja Cement.)