Creating an Ethical and Sustainable Business

Navigating the Challenges and Opportunities of Building an Ethical and Sustainable Business

Pierre LeonBusiness Start-up Advice

According to a recent Institute of Business Ethics survey, 86% of UK adults believe businesses are responsible for contributing positively to society. In comparison, 72% say they are likelier to buy from companies that demonstrate ethical behaviour (IBE, 2021). This highlights the growing importance of ethics and sustainability in business, not just as a moral imperative but as a key driver of competitive advantage and long-term success.

However, building an ethical and sustainable business is not without its challenges. From managing stakeholder expectations and measuring impact to overcoming short-term financial pressures and driving innovation, entrepreneurs must navigate various obstacles and trade-offs.

In this blog post, we will explore these challenges and opportunities in depth, drawing on research, case studies, and expert insights to provide practical guidance for UK entrepreneurs looking to embed ethics and sustainability into their business strategies and operations.

The Business Case for Ethics and Sustainability


Before delving into the challenges and opportunities of building an ethical and sustainable business, it is important to understand the business case. While the moral and social imperatives for responsible business practices are clear, companies also have a strong economic rationale for prioritising ethics and sustainability.

Firstly, ethical and sustainable businesses tend to have better financial performance in the long run. A study by the Harvard Business School found that companies with strong environmental, social, and governance (ESG) practices outperformed their peers by 4.8% annually over 20 years (Eccles et al., 2014). Similarly, a report by the Carbon Disclosure Project found that companies with strong sustainability strategies had 18% higher return on equity than those without (CDP, 2021).

Secondly, ethical and sustainable businesses are better able to attract and retain top talent, especially among younger generations. A survey by Deloitte found that 49% of Gen Z and 44% of Millennial job seekers in the UK consider a company’s environmental and social impact when choosing an employer (Deloitte, 2021). This is particularly important in the UK’s skills shortage, where businesses compete for a limited pool of qualified candidates.

Thirdly, ethical and sustainable businesses are better positioned to manage risk and build resilience in the face of emerging challenges, such as climate change, social unrest, and supply chain disruptions. By proactively addressing these issues and engaging with stakeholders, companies can anticipate and mitigate potential risks while identifying new opportunities for innovation and growth.

Finally, ethical and sustainable businesses are more likely to build trust and credibility with customers, investors, and other stakeholders. In an era of increasing transparency and accountability, companies that demonstrate a genuine commitment to social and environmental responsibility are more likely to earn the loyalty and advocacy of their stakeholders, leading to increased brand value and market share.

Challenges of Building an Ethical and Sustainable Business


Despite the clear business case for ethics and sustainability, many entrepreneurs face significant challenges when trying to embed these principles into their strategies and operations. Here are some of the key obstacles and trade-offs that companies must navigate:

Short-term financial pressures: One of the biggest challenges for entrepreneurs is balancing the short-term financial pressures of running a business with the long-term benefits of sustainability. Investing in ethical and sustainable practices, such as renewable energy, fair trade sourcing, or employee well-being programs, can be costly in the short term. At the same time, the payoff may not be immediately apparent. This can be particularly challenging for small and medium-sized enterprises (SMEs) with limited resources and cash flow.

Measuring and reporting impact: Another challenge is measuring and reporting on business practices’ social and environmental impact. Unlike financial metrics, which are well-established and standardised, sustainability indicators can be more difficult to quantify and compare across companies and industries. This can lead to a lack of transparency and accountability and accusations of “greenwashing” or superficial reporting.

Managing stakeholder expectations: Ethical and sustainable businesses must also navigate the often-competing expectations of stakeholders, such as customers, employees, investors, suppliers, and local communities. While some stakeholders may prioritise environmental protection, others may be more concerned with social justice or economic development. Balancing these interests and finding win-win solutions can be a complex and ongoing challenge.

Overcoming organisational inertia: Embedding ethics and sustainability into business practices often requires significant organisational change, from redesigning products and processes to shifting corporate culture and mindsets. This can be met with resistance from employees, managers, and other stakeholders who are comfortable with the status quo or sceptical of the benefits of sustainability. Overcoming this inertia requires strong leadership, communication, and engagement at all levels of the organisation.

Navigating regulatory complexity: Ethical and sustainable businesses must also comply with a growing array of regulations and standards related to environmental protection, labour rights, human rights, and other social and governance issues. In the UK, this includes legislation such as the Modern Slavery Act, the Gender Pay Gap Reporting requirements, and the upcoming Environment Bill. Navigating this complex and evolving regulatory landscape can be time-consuming and costly, especially for smaller businesses with limited resources.

Opportunities for Building an Ethical and Sustainable Business


Despite these challenges, there are also significant opportunities for entrepreneurs willing to embrace ethics and sustainability as a core business strategy. Here are some of the key ways that companies can create value and drive positive change through responsible business practices:

Innovation and differentiation: One of the biggest opportunities for ethical and sustainable businesses is the ability to innovate and differentiate themselves in the marketplace. By developing new products, services, and business models that meet social and environmental needs, companies can tap into growing consumer demand for sustainable and ethical alternatives. For example, the UK’s renewable energy sector has seen significant growth in recent years, with 42% of electricity coming from renewable sources in 2020 (BEIS, 2021).

Collaboration and partnerships: Another opportunity for ethical and sustainable businesses is the ability to collaborate and partner with other organisations to drive systemic change and create shared value. This can include working with suppliers to improve social and environmental standards in the supply chain, partnering with NGOs and community groups to address local challenges, or joining industry initiatives to drive collective action on issues such as climate change or human rights. For example, the UK Plastics Pact brings together businesses, governments, and NGOs to tackle plastic waste and pollution (WRAP, 2021).

Access to capital and investment: Ethical and sustainable businesses are also increasingly attractive to investors and financial institutions looking to align their portfolios with social and environmental goals. The sustainable finance market in the UK has grown significantly recently, with green bonds and sustainability-linked loans reaching record levels in 2020 (PwC, 2021). This provides opportunities for entrepreneurs to access new sources of capital and investment to scale their impact and growth.

Talent attraction and retention: As mentioned earlier, ethical and sustainable businesses are better able to attract and retain top talent, especially among younger generations. By creating a purpose-driven culture and offering opportunities for employees to make a positive impact, companies can foster greater engagement, productivity, and loyalty among their workforce. This is particularly important in the UK’s “Great Resignation,” where record numbers of workers are leaving their jobs in search of more meaningful and fulfilling work (Microsoft, 2021).

Resilience and adaptability: Ethical and sustainable businesses are better positioned to anticipate and adapt to emerging challenges and opportunities in a rapidly changing world. By building strong relationships with stakeholders, investing in long-term value creation, and embedding sustainability into their core operations, companies can develop greater resilience and agility in the face of disruption and uncertainty. This was evident during the COVID-19 pandemic when companies with strong ESG practices outperformed their peers regarding financial performance and stock market returns (Fidelity International, 2021).

Conclusion


Building an ethical and sustainable business is not a simple process but a complex and ongoing journey that requires navigating various challenges and opportunities. As we have seen from the research and case studies presented in this blog post, entrepreneurs willing to embed ethics and sustainability into their core strategies and operations can create significant value and positive impact, not just for their own businesses but for society and the planet.

However, this requires a fundamental mindset shift from a narrow focus on short-term profits to a broader vision of long-term value creation for all stakeholders. It also requires a willingness to embrace change, innovation, and collaboration and be transparent and accountable about business practices’ social and environmental impact.

For UK entrepreneurs looking to build an ethical and sustainable business, a range of frameworks, tools, and resources are available to support this journey. These include the B Corporation certification, which provides a rigorous standard for social and environmental performance, accountability, and transparency (B Lab UK, 2021), and the Future-Fit Business Benchmark, which offers a science-based framework for assessing and improving the sustainability of business practices (Future-Fit Foundation, 2021).

Ultimately, the challenges and opportunities of building an ethical and sustainable business are relevant for entrepreneurs and society. As we face the urgent crises of climate change, social inequality, and biodiversity loss, businesses have a crucial role in driving the transition to a more sustainable and equitable future. By embracing the principles of ethics and sustainability, entrepreneurs can build successful and resilient businesses and contribute to a better world for all.

References:

B Lab UK. (2021). About B Corps. https://bcorporation.uk/about-b-corps

BBC. (2021). BrewDog chief James Watt apologises after ‘toxic culture’ criticism. https://www.bbc.co.uk/news/uk-scotland-scotland-business-57406399

BEIS. (2021). Renewable electricity in the UK. https://www.gov.uk/government/statistics/energy-trends-june-2021-special-feature-article-renewable-electricity-in-the-uk

CDP. (2021). Transparency to Transformation: A Chain Reaction. https://www.cdp.net/en/research/global-reports/transparency-to-transformation

Deloitte. (2021). Millennials and Gen Z: A call for accountability and action. https://www2.deloitte.com/uk/en/pages/consulting/articles/millennials-and-gen-z-a-call-for-accountability-and-action.html

Eccles, R. G., Ioannou, I., & Serafeim, G. (2014). The Impact of Corporate Sustainability on Organizational Processes and Performance. Management Science, 60(11), 2835–2857. https://doi.org/10.1287/mnsc.2014.1984

Fidelity International. (2021). Putting sustainability to the test: ESG outperformance amid volatility. https://www.fidelityinstitutional.com/en-gb/editorial/esg-investing/putting-sustainability-to-the-test-esg-outperformance-amid-volatility-a0a50e-en/

Future-Fit Foundation. (2021). The Future-Fit Business Benchmark. https://futurefitbusiness.org/benchmark-documents/

IBE. (2021). Attitudes of the British Public to Business Ethics 2021. https://www.ibe.org.uk/userassets/publicationdownloads/ibe_survey_attitudes_of_the_british_public_to_business_ethics_2021.pdf

Microsoft. (2021). 2021 Work Trend Index: Annual Report. https://www.microsoft.com/en-us/worklab/work-trend-index/2021-annual-report

Patagonia. (2021). Our Core Values. https://eu.patagonia.com/gb/en/core-values/

PwC. (2021). The State of Climate Tech 2020. https://www.pwc.co.uk/sustainability-climate-change/assets/pdf/state-of-climate-tech-report-2020.pdf

The Body Shop. (2021). Our Commitment. https://www.thebodyshop.com/en-gb/about-us/our-commitment

Triodos Bank. (2021). Our Approach. https://www.triodos.co.uk/our-approach

WRAP. (2021). UK Plastics Pact. https://wrap.org.uk/taking-action/plastic-packaging/the-uk-plastics-pact