Measuring the value of sustainable practices and positive impact on the bottom line.
To help companies build a business case for sustainable investment, NYU Stern Center for Sustainable Business (CSB) developed its Return on Sustainability Investment (ROSITM) framework. HSBC sponsored partnerships between CSB and several brands in the apparel industry – including Eileen Fisher, REI and Reformation – to apply ROSI to their Environmental, Social and Governance (ESG) strategies to support tracking the financial benefits.
Following is an overview of a conversation between Eric Fisch, National Sector Head, Retail & Apparel for HSBC, Tensie Whalen, Clinical Professor of Business and Society at NYU Stern as well as founding Director of CSB, and Sophie Rifkin, Director of Corporate Research and Engagement at CSB, about what they learned.
Consumer Awareness and Demand for Sustainability is Increasing
According to the UN Environment Programme, it’s estimated that textiles are responsible for 20% of the world’s wastewater and 10% of global carbon emissions. This is combined with other significant social challenges the apparel industry faces on the front end such as poor labor and safety practices and low wages. On the backend, more and more unwanted clothing ends up in landfills every year.
Consumer awareness around the issue of sustainability is on the rise as well, both within the apparel industry and more broadly. That’s why Professor Whalen says the sector has long been focused on investing in and implementing key sustainability strategies. This includes taking steps to improve energy management, focus on employee and suppler well-being and create innovative circularity programs, among others.
The problem, she explains, is that although recent research shows there is a strong correlation between good sustainability practice and financial performance – there’s no clear understanding of causality. “Historically, companies haven't been tracking performance, so they don't know where the value of sustainable practices is being created.”
To get to that point, Fisch says companies need additional guidance. “By partnering with NYU Stern on initiatives like ROSI, our goal is to give our clients the practical hands-on tools they need to judge for themselves the best way to invest in ESG strategies to get to their businesses to net zero emissions,” he says.
This, he adds, is exactly what ROSI is designed to do – to help companies identify the benefits of sustainable investment and quantify returns so they can map out a strategy for the future. “Putting clients on a path to sustainability will ultimately help HSBC realize one of its key sustainability commitments to hit net zero financed emissions by 2050,” says Fisch.
How ROSI Works for Apparel Brands
CSB named eight strategies apparel companies use to drive sustainability. Working Reformation, REI and Eileen Fisher – who each invested in a different strategy – CSB identified what practices each had implemented to support their specific strategies. Using ROSI, they were then able to map out the economic benefits of each practice.
Can Take Back Programs Attract a New Customer Base?
Today, many apparel companies and brands are investing in circularity through take-back programs and packaging solutions as well as increased product longevity and reduced returns. Reformation, a sustainable clothing brand, promotes circularity in a variety of ways – including through its partnership with ThredUp, an online consignment and thrift store. It starts with people sending their gently used clothing to ThredUp for reselling or donating. If ThredUp accepts clothing for resale, users can opt to earn shopping credits for use on Reformation's website.
The company tracked a total net benefit of $1.5 million in 2019 from the partnership by applying the ROSI framework. This came in part from purchases made with credits earned, says Sophie, and access to a new customer base. “By aligning with a similar circularity and sustainability-oriented partner, Reformation was able to attract a different type of customer, someone who may never have shopped with them before.” This, she says, led to lower customer acquisition costs. “The partnership generated more and different types of media focused on circularity as well, which also added to the financial value of the program.”
Gaining an understanding of the value of sustainability strategy is key to decision making, says Fisch. “If you can track and quantify return-on-investment, you’ll make better informed decisions and invest more as you continue on the path to net zero.”
Do Employee Sustainability Programs Lead to Greater Productivity?
A sense of purpose has always been at the core of outdoor apparel and equipment brand REI’s business. That’s why, among other strategies, they focus heavily on employee well-being – ensuring fair compensation and greater diversity as well as increasing employee sustainability engagement programs and improving benefits. Using ROSI to measure these practices, the company was able to see they’d successfully increased productivity and reduce turnover costs. The result was a net benefit of $34 million, roughly 5% of their payroll.
“We’ve seen this in many companies, regardless of sector,” says Professor Whalen. “When you have embedded sustainability and a really strong purpose, you can see much lower turnover and more engagement by employees.” REI had also done very extensive surveys of their employees, which supported the correlation between their purpose and sustainability focus and employee retention and productivity.
What Returns can a Lower Carbon Footprint Really Deliver?
Improving energy management is among the climate commitments for women’s clothing brand Eileen Fisher. Their strategic focus is on reducing greenhouse gas emissions and lowering the carbon footprint of their distribution. To achieve this, they put several internal and external practices in place, including reducing their reliance on air freight. They began by shifting some of their distribution to land and sea, both of which have lower carbon footprints than air.
With ROSI, CSB was able to quantify that shift – showing that the company had spent $1.6 million less on transportation in 2019 than in 2015. While they did find their overall distribution costs went up in 2020 due to COVID-19 nearly tripling air freight, their expenses went up far less than some of their competitors because they'd already started moving toward alternative distribution modes. "I think this illustrates we can look at some of these sustainability issues as a means for longer-term scenario planning around risk mitigation and volatility management as well," says Professor Whalen.
Of course, the results ROSI can deliver are only as good as the depth and quality of data that goes into it, says Sophie. “Cross-functional engagement within a company is essential," she says. In the case of REI, that meant bringing together human resources, finance and sustainability, while for Eileen Fisher it was logistics, transportation, finance and sustainability. “That’s not to say these groups don’t talk to each other, they do – but it's more about sharing data in a different way," says Sophie. Fisch agrees, saying that oftentimes the sustainability and financing teams have different initiatives and their languages don’t always meet up. “With the results of ROSI, a company can demonstrate what those initiatives look like financially so decision makers can get behind it.” Professor Whalen adds that this move toward finding the inherent value in ESG is critical. "What we're seeing right now is that investors are asking for ESG and for financials, but they are not asking for them together," she explains. That's likely to change as more investment is directed toward sustainability transformations, and the question becomes, 'what's the return?'.
“I think we’re only at the tip of the iceberg in terms of taking this framework we’ve developed in apparel and building out the corresponding monetization tools for other industries,” says Sophie.
To find out what HSBC is doing to support its clients sustainability commitments, visit our Sustainable Finance hub.
As a methodology, ROSI is very flexible and will apply to companies of any size or type. In addition to apparel, CSB has collaborated with companies in the automotive, food, agriculture and pharma industries as well as with utilities and private equity firms. You can learn more about the ROSI framework and collaborations on the CSB website.