New products and services: Turning sustainability into commercial value

The greatest value can come when sustainability is used by mid-market companies as a lens to identify new sources of growth, strengthen customer propositions and improve resilience.

Changing customer expectations, regulation and technology are creating opportunities for businesses to rethink products and services. “There is real opportunity to use sustainability as another way of looking at where customers are heading and what they value – that can help businesses improve existing propositions, reach new customers and ultimately unlock growth,” Bethan Casey, Assistant Director in Inflexion’s Value Acceleration team said opening a panel at the recent Sustainability Exchange.

Bethan: We often talk about sustainability in terms of risk or efficiency. Where are you seeing it create growth through products and services?

Jude Bernard, ESG Project Manager at Enviolo: At Enviolo, product development is a good example. We make components for bicycles, so reducing weight has an obvious benefit for the customer, but it can also reduce environmental impact.

In one case, we replaced magnesium with aluminium. That resulted in a 65% reduction in carbon and reduced the emissions associated with the product itself by around 20% compared with the previous version.
So it was both a sustainability improvement and a commercial gain.

Federico Magalini, Sustainability Director at dss+: We see similar opportunities from a different angle at dss+. One example is an oil and gas operator that had already suffered more than $25 million of climate-related damage, much of it uninsured.

We assessed a sample of its assets and identified more than $500 million value at risk associated with climate events. We then identified almost two third of the value at risk that could potentially be mitigated.
The question then becomes commercial: where should capital be allocated to improve resilience and protect value? Sustainability becomes a way of identifying where investment can make the biggest difference.

Josh Holbrook, Director at KPMG: Over the last 18 months, there has been a real shift towards asking what sustainability does for the value of a business. How does it affect EBITDA? What does it mean for the quality and resilience of earnings? Could it affect the valuation multiple? These questions may involve capex, brand, customer demand or supply-chain resilience, but ultimately they feed into enterprise value.

We discussed this with a marine shipping company considering retrofitting vessels so they could operate using dual fuels rather than relying solely on traditional fossil fuels. The rationale included lower carbon intensity, but also greater resilience around fuel supply and the ability to respond to customers increasingly asking for dual-fuel capability in tenders.

That is important: sustainability becomes much more relevant when it is connected to something customers value.

Bethan: So how do companies put a value on these opportunities? What should they measure?

Josh: The things that tend to get CFOs most interested are the economics. What will this cost and does the upside justify the investment?

Specificity is critical. Saying something is “more sustainable” is not enough. You need to connect it to margins, customer retention, pricing, market access or another measurable source of value.

One example was a beauty and fragrance business. It had very little visibility over where some products were sourced. As a result, when customers using its main distribution channel filtered for “sustainable” products, none appeared.

That created an immediate commercial reason to improve the information behind the products. If customers are actively searching that way, failing to meet the criteria means effectively disappearing from part of the market.

Federico: The right KPI will vary by sector. For some companies it might be revenue or margin; for others, access to markets or customers.

Regulation can also create opportunities for new services. In Europe, companies placing products on the market increasingly have responsibility for what happens at the end of those products’ lives.

For smaller sellers, especially trading via online marketplaces, that can be difficult. We worked on pilot projects with marketplaces and policymakers around how platforms themselves could help sellers meet those obligations.

The resulting framework under Article 45 of the EU Packaging and Packaging Waste Regulation (PPWR) allows marketplaces in certain circumstances to provide compliance on behalf of third-party sellers. That helps smaller businesses continue selling into European markets while allowing marketplaces to retain those customers.

Jude: We have seen that with customers too. We worked with suppliers to certify that the aluminium we were using was recyclable. That matters because the frame represents such a significant proportion of a bicycle.

Recycled aluminium can use around 95% less energy than primary aluminium, so there can be both cost and environmental benefits.

It also helped change how customers perceived us. Sustainability is a significant focus for many of them, and showing that we understood it strengthened our position as a supplier.

Bethan: If you were advising a mid-market business looking to incorporate sustainability into its core products or services, what is the single most important thing to get right?

Josh: Identify what is genuinely material to the core business. There are hundreds of things you could focus on, but if an issue is truly material, it will not sit only within the sustainability team. It will touch customers, operations, finance, procurement or product development. That is usually where the value is.

Federico: I would say plan, but start testing quickly. You can design something in an office for months and still not get it right.

There is much more openness now to piloting ideas with suppliers, customers and other partners. Start small, test, learn and then scale. Don’t expect to design the perfect answer in the boardroom.

Jude: Know yourself. Understand where the real levers are in your business and how sustainability could influence them. Once you understand what creates value for you, it becomes much easier to identify what may also create value for your customers.