Turning Costs Into Profits

Environmental protection and sustainability are now more than merely social concerns. Many companies increasingly focus on renewable energies, using sustainable materials or promoting fair working conditions. Responsible business practices give companies numerous advantages and make them fit for the future. For this to succeed, a comprehensive sustainability strategy is required. This includes not just short-term measures to reduce environmental impacts, but also pursues the goal of the long-term transformation of the company. A sustainability strategy encompasses all initiatives and processes aimed at harmonizing economic, social and environmental goals. This includes measures such as reducing CO₂ emissions, switching to renewable energies, and ensuring sustainable product development as well as fair working conditions and social standards throughout the supply chain.

Companies that do not rise to this challenge risk being left behind in global competition. Not only do they lose market shares to more sustainable competitors, they are also faced with higher costs due to inefficient processes, stricter regulatory requirements and a dwindling reputation amongst all stakeholders. Holistic sustainability management is therefore a strategic necessity today.

ESG – more than just environmental protection

ESG – environmental, social and governance – also plays an important role in this context. In recent years, these factors have become key criteria for investors, lenders and other stakeholders. Companies that perform well in these areas and have a strong ESG performance benefit from more favorable financing options and a positive market perception. Banks assess the risk of companies and projects, taking into account sustainability opportunities and risks as well as other ESG criteria. This assessment determines the conditions for granting loans and interest rates on borrowed capital. A company's ESG performance therefore influences its borrowing costs. Companies with significant environmental problems pay up to 20 percent higher interest rates for loans than similar companies without those problems.¹ The correlation between ESG performance and financial factors also depends on the company's regulatory environment.

Investors also increasingly focus on the ESG performance of companies, as this is a decisive factor in the assessment of risks and opportunities. According to a report by the Global Sustainable Investment Alliance (GSIA), global assets under management in the area of sustainable investments reached USD 30.3 billion in 2022. In Europe, sustainable assets accounted for 38 percent of total assets under management, underlining the growing importance of ESG criteria for investors.² It is therefore essential to not only refer to sustainability in the strategy, but also to integrate it fundamentally into all company processes. One example is to take sustainability into account throughout the entire product life cycle. To reduce corporate emissions, the focus is often on measures in production or in the downstream value chain. However, it is just as important to integrate sustainability in the early phase of the product development process in order to design products with low emissions right from the start. The CO₂ emissions can be significantly influenced by the product design (e.g. through the use of recycled materials). For example, vehicle projects are linked to a specific CO₂ footprint that must be adhered to throughout the entire anticipated life cycle. This enables a significant reduction in environmental pollution and the forecasting and factoring in of future emissions even during the planning and development phase. Experience has shown that manufacturing companies can avoid or at least reduce up to 80 percent of CO₂ emissions at the early stages of product development. This early consideration of emission reduction strategies ensures that sustainability is not merely an afterthought, but an integral part of product innovation.

Taking risks without a plan 

Many companies set ambitious sustainability targets, but often have no concrete plans or measures to actually achieve them.³ Instead, many companies rely on CO₂ offsetting, for example, the purchase of emission certificates, instead of substantially reducing their own emissions.⁴ The sharp rise in prices in emissions trading, leading to perceptible additional costs for companies, must therefore also be taken into account. In 2024, the CO₂ price of the European Union Emissions Trading System (EU-ETS) averaged EUR 65 per ton of CO₂, depending on the industry. By 2035, an increase to EUR 194 is realistic – an increase of almost 200 percent.⁵ The lack of concrete action plans to reduce CO₂ poses a serious risk to achieving the climate targets of the Paris Climate Agreement. According to the Science Based Targets Initiative (SBTi), the proportion of companies with science-based climate targets is 39 percent of global market capitalization⁶, yet implementation often remains inadequate. The introduction of the Corporate Sustainability Due Diligence Directive (CSRD), an EU directive that expands and standardizes corporate sustainability reporting, is driving forward the sustainable transformation of companies. 

However, the current downturn in the global economy, particularly in Germany, is making it more difficult for companies to prioritize sustainability. This can be seen, for example, in the ifo Business Climate Index, which fell to 86.6 points in August 2024 and is therefore well below the long-term average of around 100 points. The year 2025 will be marked by a highly volatile environment for executives, particularly in the German-speaking countries of Europe. According to the latest Change Management Compass from Porsche Consulting, the importance of sustainability has dropped significantly and has fallen by 17 percentage points versus 2023. With operational and financial priorities predominantly on the agenda, the responses from the 220 executives surveyed from German-speaking countries indicate a higher level of immediate stress, making it difficult for top decision-makers to devote their resources to reputation-building initiatives or long-term strategic issues such as sustainability.⁷

Companies are therefore increasingly focusing on measures to increase efficiency and maximize profits. As a result, sustainability is often deemed to be only a secondary goal. However, the short-term mindset of many companies harbors several risks: 
 

1. Financial risks: Companies that do not reduce their CO₂ emissions will face considerable financial burdens and expensive emissions certificates due to rising CO₂ prices. These additional costs can have a significant impact on profitability, especially for those companies that rely heavily on fossil fuels and use emissions certificates to offset them. In addition, the availability of fossil fuels such as natural gas will be in question in the next two decades. According to forecasts, at the current rate of consumption, our natural gas reserves could be exhausted by 2060, which would lead to drastic cost increases and potential supply shortages. In the long term, companies will also lose the opportunity to harness sustainability as a sales driver and to maximize the benefits of sustainable business strategies.⁸
    
2. Missed transformation: Without timely action, the EU may become increasingly dependent on foreign technologies and markets. This would seriously jeopardize the economic existence of many companies. The CO₂ price or the carbon border adjustment mechanism (CBAM), which regulates the import of CO₂-intensive products into the EU, may not be enough to protect European companies in the long term.
    
3. Regulatory risks: The requirements for transparent reporting on sustainability performance are increasing, in particular as a result of new regulations such as the CSRD and the EU taxonomy. Companies that do not meet these requirements risk not only sanctions such as fines, but also considerable damage to their reputation (e.g. if due diligence obligations in the supply chain are neglected). This can undermine the confidence of investors and customers and further weaken their market position. This will be particularly relevant due to the strict monitoring of compliance with the decarbonization pathway, which will be very closely monitored by regulatory authorities in the future. Companies that do not meet these requirements risk losing their competitiveness on a global level.

New business areas and market segments

Sustainability can help companies to open up new market segments, develop innovative business areas, use new technologies and thus position themselves as pioneers in new markets. One example of how this can be achieved is direct air capture technology (DAC), in which CO₂ is filtered directly from the air and used as a raw material. Companies investing in this technology early on will be able to open up new markets in CO₂ reduction and establish themselves as pioneers in a rapidly developing segment. One company that has invested in this business area at an early stage is the German chemical company Covestro. This stock-exchange listed company harnesses the captured CO₂ to produce innovative materials such as the plastic polycarbonate, which is used in numerous areas, for example in the automotive industry for car bodies.⁹ By using CO₂ as a raw material, companies not only open up new markets for sustainable materials, but also opportunities to participate in CO₂ certificate trading and to generate additional income streams.

Better for the bottom line

Companies can reduce their costs by up to 20 percent through sustainability-oriented processes and the sustainable use of resources.¹⁰ This also includes the reduction of CO₂ emissions and energy consumption, which can lead to considerable cost savings in the long term. The US logistics service provider FedEx has succeeded in reducing its energy costs (including fuel) by 75 percent by switching from combustion engine to electric trucks.¹¹ Another approach to reducing costs is utilizing sustainable raw materials. In order to evaluate the economic viability of such decisions, companies can compare the "green premium" – i.e. the higher price of lower-CO₂ materials – with the costs of CO₂ certificates or offsetting measures. The green premium per ton of material is calculated with respect to the savings per ton of CO₂ avoided. If this additional price is lower than the offset costs, companies can not only reduce their environmental impact by using sustainable raw materials, but also save money. This also includes the reduction of stranded assets, i.e. assets that lose value due to transitioning to more sustainable business models. One example of this is the USD 17.5 billion write-offs by the British oil company BP in its traditional oil and gas business and the resultant increased focus on expanding the renewable energies business in 2020.¹²

Sustainability as a top issue for the CEO 

A key success factor in the integration of sustainability within companies is the role of CEOs and top management – they must actively drive change. Their task is to set the course for sustainable transformation and ensure that sustainability is anchored in all areas of the company. CEOs who treat sustainability as a marginal issue risk losing touch with the global competition. This reluctance not only jeopardizes the achievement of climate targets, but also the future viability of the companies themselves. Sustainability must not be viewed solely as a compliance task, but as a strategic opportunity to open up new markets, achieve cost efficiency and gain a pioneering position in an ever-evolving global economy. The difficulty for CEOs lies in recognizing the link between a successful sustainability strategy and the company's success, since the focus is usually on KPIs such as sales or earnings before interest and taxes (EBIT). Sustainability initiatives, on the other hand, call for long-term investments and changes whose positive effects – such as a reduction in energy costs and CO₂ emissions or enhanced reputation – become visible only gradually over the course of the transformation. Consequently, they are often regarded as mandatory tasks rather than strategic investments.¹³ Consistently focusing on sustainability allows not only the full potential to be utilized, but the future viability of the company to be secured. By prioritizing and transparently communicating sustainability initiatives, CEOs increase employee commitment, foster a culture of change and direct important investments into sustainable technologies and projects.