Sustainability

What is Sustainability?

Sustainability is basically the ability to provide for the needs of the current generation using available resources without causing future generations any problem with providing for their own needs. The concept doesn’t only apply to the environment, which is considered the most pressing pillar of sustainability today, but also to other aspects, including the people and the economy. This is an important part of PEST Analysis and ESG analysis.

The Three Pillars of Sustainability

The three pillars of sustainability are planet or environment, social or people, and profit or economics.

1. Planet

Let us first discuss the first pillar, which is the planet, and use agriculture as an example. Imagine a piece of land that has been farmed for palm oil for decades. Ideally, farmers should take breaks in between harvests because the land’s quality will be compromised if it is overused. If overused, it will take several years before the land can be useful again, which means future generations won’t be able to use it for a while.

2. People

People sustainability, on another note, includes giving priority to the welfare of a given set of workers of a company. Let’s say, for example, Target gives bi-annual skills training to its workers that they can use in the future. The skills that they acquire can be useful to the operations of Target in the future.

Also, it may include providing workers with more flexible working hours and a more conducive working environment. Doing so makes the workforce happier, which will eventually lead to a more productive company.

3. Profit

As for the economy, which is referred to as profit, sustainability means using a particular set of resources in a responsible way that will allow them to be used on a long-term basis. Furthermore, it means making money and growing the company without negatively impacting the other two pillars, people and planet or environment.

For example, a diesel power plant operates 24 hours a day in a city using diesel engines that emit black smoke and produce a very distracting sound. Though it is making profits because of its non-stop operations, the smoke it emits surely pollutes the air, while the noise can cause long-term disorders to the residents. Sustainability should mean balancing the profit and its impact on the surroundings.

The great thing about sustainability is that if the people and the planet are taken care of, profits will also be achieved.

Five Domains of Sustainability

The diagram above illustrates how sustainable communities are achieved, and it involves the overlapping of different domains, including the three pillars of sustainability, namely, planet (environmental), people (socio-cultural), and profit (economic). If one is missing, then a sustainable community will not be achieved.

For example, a community already has a contented set of residents because they have almost everything they need within reach, such as work opportunities, parks, and groceries, but don’t have stable communication lines for internet connection and landline and cellular phone access. The technological domain here is missing. Therefore, the community is not sustainable because, without communication lines, there will be no interaction or opportunity for growth and collaboration with other communities.

In another example, consider the same community with a lot of job opportunities from booming companies, contented people or residents, and an impressive transportation system. However, the community lacks a public policy that will protect its residents from one of the booming companies that does not follow acceptable standards of waste disposal. Eventually, the community will be destroyed, and its resources will be depleted.

Therefore, no community can be sustainable if one of the domains is missing.

Sustainability Challenges in Finance and Investments

The relationship between profit and the other pillars of sustainability is clear and very easy to understand. However, it can be challenging for many companies or businesses because it may mean not going full-speed at making profits because of consequences to the environment and the people. What organizations should do is adjust their profit targets and invest in programs that will promote sustainability.

Going back to the example above about the diesel power plant that doesn’t adhere to acceptable standards of waste disposal, the company can invest in conducting research on how it can minimize its waste. They should understand that adhering to sustainability can spell better earnings on a long-term basis and that the earnings in the next few years and decades are as important as the earnings in the next quarter.

Related Readings

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

• Corporate Social Responsibility (CSR)
• Hotelling’s Theory
• Normative Economics
• Pareto Efficiency
• Strategic Analysis
• See all ESG resources