What Is Sustainability?

Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. The concept of sustainability is composed of three pillars: economic, environmental, and social—also known informally as profits, planet, and people.

How Sustainability Works

Sustainability encourages businesses to frame decisions in terms of years and decades rather than on the next quarter's earnings report and to consider more factors than simply the profit or loss involved. Usually, a company will issue sustainability goals and will work towards them. The goals are often reasonable—cut emissions by 5%, for example—so that when the business achieves their sustainability marks, they are able to call themselves "green" or "sustainable."

These companies can achieve their sustainable needs by cutting emissions, lower energy usage, sourcing products from fair-trade organizations, and by ensuring their physical waste is disposed of properly and with as little carbon footprint as possible.

Disadvantages of Sustainability

The push for sustainability is evident in areas such as energy generation where the focus has been on finding new deposits to outpace the drawdown on existing reserves. Some electricity companies, for example, now publicly state goals for energy generation from sustainable sources such as wind, hydro, and solar.

[Important: Sustainability emerged as a component of corporate ethics in response to perceived public discontent over the long-term damage caused by a focus on short-term profits.]

However, moving toward sustainable production is often a complex process for companies. By basing decisions on longer timelines, some of the higher upfront investments in efficiency and renewable sources are easier to justify. Investors have had to adjust their expectations for returns because a company that commits to the sustainable development of resources may have more modest earnings results in the near term.

Many companies have been criticized for exploiting cost-cutting measures such as offshoring production to obtain cheaper labor. This practice, although beneficial for the bottom line, often comes at the price of compromised worker safety and security.

Obtaining cheap offshore labor famously occurred in the clothing industry following the 2013 Savar factory collapse in Bangladesh, where over 1,100 people died. As a result, many of the companies that are most sensitive to consumer backlash, usually retailers and restaurants, have announced sustainability plans to reduce carbon footprints, packaging waste, and animal suffering.

For example, a factory that allows its waste to flow into a nearby body of water to avoid the short-term costs of proper disposal can cause expensive and significant long-term environmental damage.

This has caused some investors to shy away from sustainable investments—at least until the companies become more transparent with their monetary practices.

Example of Sustainability in a Big Brand Company

These large retailers and restaurants are protecting their brand in the eyes of their customers, but these decisions also filter through the supply chain. When a large company such as Walmart commits to sustainability, producers, and suppliers worldwide who supply Walmart must report on their business practices.

This includes sourcing food but also clothing items and electronics from companies and countries that not only treat their workers well but are committed to sustainability down the chain as well. If there are practices that are unsustainable, the suppliers must phase them out in order to continue to serve Walmart.

Key Takeaways

  • Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs.
  • Investors can be wary of companies who commit to sustainability. Although the optics can be beneficial to share price, investors worry about companies being transparent with their earnings results.
  • Big brands often make pledges to sustainability, but it often takes a long time to achieve sustainability goals.