Identifying the Risks

Sustainability can be a difficult topic to handle, full stop. We like the idea of sourcing renewable, local, and reliable products and services at reasonable prices, but we live in a complex global economy where priorities and values do not manifest equally. Balancing affordability, profitability, and sustainability often causes friction and creates risk. 

For decades, sustainability was the weak leg of this triangle, but with the effects of global climate change creating very tangible risks to affordability and profitability, investors, governments, and consumers have come to push for greater transparency over corporate sustainability. This pressure for disclosure and sustainable transition is mounting across global regions. 

Corporate activities including managing supply chains, adapting to customer preferences, and engaging in mergers and acquisitions (M&A) all carry levels of inherent risk. A strong sustainability strategy and robust sustainability reporting can help companies assess and reduce the risks they face on these key fronts. 

 

Supply Change Shifts

Businesses must weigh supply chain management decisions based on cost of goods, shipping times, product quality and speed, and, of course, environmental and social footprints. With tariffs expected to increase and expand under the new Trump presidential administration, supply chain managers will need to reassess their current strategies and partnerships which can lead to shifting production locations. 

To keep the same unchanged supply chain with the introduction of tariffs, businesses would need to increase prices, accept lower profits, reduce quality, renegotiate contracts, or perform a combination of these strategies. 

While the intended result of the tariffs is to reshore manufacturing to the US, costs and infrastructure factor significantly into businesses’ abilities to make this type of shift. The last time tariffs were imposed, the result was largely manufacturing relocation to other producers in the region such as shifting from China to Vietnam and from Mexico to Costa Rica

Reshoring could reap many benefits to improved reputation, reduced shipping times and risks, lower carbon footprint, and positive community impacts. Morning Consult ran a study in 2023 that found 70% of American consumers held favorable views of American-Made products with nearly 50% claiming they would pay more for them. But are consumer preferences enough, or even possible? Even businesses and industries that want to manufacture in the US are facing uphill struggles due to decades of outsourcing overseas. 

Manufacturing transitions require time to assess and establish new production facilities, logistics routes, local partnerships, and raw material sourcing, amongst many other factors. Leadership will need visibility into the organization’s environmental and social impacts, the biggest corporate sustainability pillars, to properly assess amendments to supply chain strategy.  

You are who you associate with, so businesses must evaluate thresholds of environmental waste and working conditions to ensure they align with their corporate values and stakeholder expectations. Supply chain managers will need to assess what they can ultimately afford when it comes to quality, cost, and efficacy to maintain growth. Sustainability reporting software solutions can help organize disparate data and provide clarity on existing and potential impacts changing strategies may have on sustainability performance.

 

Consumer Preferences

Today’s consumers increasingly favor sustainable as well as domestically produced goods. PwC’s 2024 Voice of the Consumer Survey uncovered purchasing more sustainable products was the top method in which consumers are attempting to impact climate change with 46% of respondents claiming to take this action. 

It’s not just lip service either. A study from NYU Stern looked at 36 CPG categories from 2015 to 2021 and found that sustainably marketed brands realized a 7.34% compound annual growth rate (CAGR) over that six-year time period versus a 2.76% CAGR from conventionally marketed brands. 

As brands look to capitalize on this market trend as seen in the growth of sustainability marketed brands, regulators are attempting to reel in false claims, aka greenwashing, by increasing substantiation requirements for sustainability claims. 

The European Commission found that 53% of environmental claims it investigated in 2020 in the EU were vague, misleading or unfounded, and 40% were unsubstantiated. Moreover, the global consultancy Simon-Kucher found that nearly 70% of consumers perform research on brands’ sustainability claims demonstrating growing skepticism.

While sustainability is a product differentiator and accepted premium, companies must act with integrity to perform due diligence to substantiate their claims or risk regulatory penalties and reputational damage. Companies that do not adapt to these preferences risk losing market share to competitors who prioritize sustainability. The foundational steps include stakeholder engagement to understand revenue-impacting expectations and adoption of technology solutions for accurate impact measurement. 

Highly trusted companies outperform others by up to 400% in terms of market value. – HBR

M&A and Enterprise Value Risk

Investors have historically been major drivers of sustainability transparency due in part to the other mentioned risks of climate-vulnerable supply chains and consumer preferences. There is an expectation of more business-friendly policies in the US and continued decline of interest rates which will spur increased corporate M&A activity this year. 

On both the selling and buying sides M&A exposes businesses to significant scrutiny, and high risks can devastate enterprise value. After deals are complete, company culture clashes could lead to costly personnel turnover. 

A robust sustainability strategy enhances transparency and accountability, which are critical during M&A due diligence. Potential buyers are more likely to invest in companies with well-documented and verifiable sustainability practices due to lower perceived risks associated with the acquisition. This transparency not only boosts investor confidence but also enhances the overall valuation of the company, making it a more attractive target for acquisition and beneficial for the selling parties.

Post-merger, a synergy of sustainability values can reduce likelihood of undesired employee churn and help foster a unified corporate culture. This makes maintaining a robust sustainability strategy and transparent performance appealing to acquiring companies as well, ultimately safeguarding enterprise value and ensuring a successful merger.

 

Taking Action to De-Risk with a Strong Sustainability Strategy

Implementing a robust sustainability strategy can help businesses mitigate risks that arise with dynamic supply chain shifts, consumer preferences, and M&A to secure long-term value. This starts with alignment to key stakeholders ensuring your business understands its expectations from customers, investors, communities, partners, employees, and governments. 

While companies might not satisfy expectations on day 1, they can address what they know and set expectations on how and when they may shorten the gap. Visibility is key. Developing processes for collecting reliable data to track environmental and social performance, along with traditional financial metrics, will enable company leaders to identify high-risk areas within their operations. By understanding where their business is most vulnerable, leaders can take proactive measures to address these risks and enhance overall resilience.

Good data and a strong sustainability strategy also allow companies to plan for different scenarios whether they be related to new partnerships, new supply chain channels, shifting customer demands, increased regulatory scrutiny, M&A opportunities, or climate-related disasters. This ability to plan will help companies adapt to changing business environments through improved enterprise risk mitigation.

As no surprise, a robust strategy built on transparency and documentation to support sustainability claims will reinforce consumer and stakeholder trust. This transparency not only enhances the company’s reputation (important for dealmaking and goodwill), but also differentiates it from competitors who may not be as forthcoming about their sustainability efforts whether positive or negative.

Accelerate Sustainability Strategy with Software

No one can do it all alone, and spreadsheets won’t cut it. Carbon calculations across multiple sites and entities are too complex. Multiple technology systems that collate ESG data scattered across departments and locations are too difficult to manage. Formatting reports for compliance across different standards and regulations carries too much risk of error or inconsistency. Purpose-built sustainability reporting software manages all of this.

 Employing sustainability reporting software improves accuracy, consistency, efficiency, and transparency of your metrics. Automating data collection and reporting processes ensures that the information you report externally is accurate and consistent, which is vital for maintaining credibility with stakeholders and meeting regulatory requirements.

Every company is different, so it’s important to look for software that can be configured to specific corporate structures and reporting obligations, allowing your team to tailor the system to meet your unique sustainability reporting needs. This flexibility ensures effective attribution for roll-up metrics, data completeness tracking, and custom reporting on sustainability performance, regardless of industry or company size.

Look for a Partnership

What many sustainability software partners lack, however, is subject matter expertise and support. Too often, enterprise software companies will modify their existing products used for GRC, EHS, or financial reporting to appeal to sustainability reporting market share with minimal investment. Other times they acquire a successful carbon calculating product and dissolve many of its resources. 

Either way, you may be stuck with a tool that works only somewhat well and lacks support from sustainability experts that provide guidance to help your company mature its sustainability strategy and reporting. A true sustainability software partner will give you and your team confidence that your data is accurate, and you can adapt to changing business conditions, effectively manage risk, and make a positive difference. 

A strong sustainability strategy is essential for de-risking business operations in today’s complex environment. By addressing the risks associated with shifting supply chain conditions, changing consumer preferences, and increased M&A activity, companies can enhance their resilience and create long-term value. Sustainability reporting software further supports these efforts by ensuring accuracy, consistency, and transparency in sustainability reporting, ultimately building trust with consumers and stakeholders.

Find out how IsoMetrix can help you de-risk
your business through better sustainability reporting today.