by Murray Hogarth
Creating value is the most powerful driver for business action.
So it’s strange that the V word often is missing from the debate about the role of corporations in making the world a better place.
Opponents of corporate responsibility and sustainability always have plenty to say about cost, scaring off managers and shareholders alike with dire forecasts of lost future earnings. Advocates are far less effective at delivering a positive message to investors about value creation and the “business case” for sustainability.
Obviously at the more extreme end of the environmental and social justice/human rights movements the activists involved don’ t want to harness the power of corporations and the market to drive sustainability. They want a revolution to sweep them aside, leading to a new, greener and more equitable world order.
But a more prosaic reason why the value case for sustainability has been left languishing is the lack of hard financial expertise and understanding of how business operates among less radical sustainability advocates. That’ s slowly changing, especially as progressive business players enter the fray, but it is still the dominant paradigm.
Unfortunately the revolutionary instincts of the “extremists” and the lack of financial and business skills among “moderates” both play into the hands of sustainability’s enemies in the corporate and political domains.
Sustainability has made significant inroads into individual corporations, and even some industry sectors, but it certainly hasn’ t taken Wall Street by storm. Nor are the US Treasury or similar institutions in other countries showing any real signs of embracing sustainability as a guide to making decisions on their spending or their revenue raising.
If this can be changed, however, then the battle will be nine parts won.
It’s not a matter, as some think, of “selling” sustainability to Wall Street but rather of earning recognition that value is being created. Nor is it a matter of changing the whole way that business success is measured, as many champions of the so-called Triple Bottom Line seem to believe.
UK-based sustainability guru John Elkington’s Triple Bottom Line is an excellent aid to business in understanding that sustainability creates social and environmental performance expectations as well as financial ones. But there is still only one bottom line that counts with the vast majority of investors and companies have to create value for shareholders, or convince analysts that they have potential to do so, in order to register on it.
The good news is that many of the benefits that can flow to a business from sustainability-based strategies can be measured in traditional financial areas like margin improvement, risk management, growth enhancement and capital efficiency.
There are many examples. If a manufacturer uses less energy to produce the same amount of goods, a case of eco or energy efficiency, then that’s margin improvement. If a mining company improves its likelihood of developing a mine site through attention to social and environmental details then that reduces risk by increasing resource security.
If an oil company attracts better quality recruits and retains more top staff due to its corporate values then that can enhance its ability to grow. If a chemical company makes and sells less chemicals but earns more by also selling knowledge on how to apply them more effectively then that can lead to capital efficiency.
One of my new colleagues at Ecos, Boston-based Don Reed, belongs to the rare breed of sustainability advocates with real financial skills. He’s a certified financial analyst (CFA), a veteran of Wall Street advisory firm the Carson Group, and most recently a senior executive at a major green-minded think tank, the World Resources Institute (WRI) in Washington DC.
Until last year Don was Director of WRI’s Corporate Engagement Program and Deputy Director of its Management Institute for Environment and Business. In his view, no other question thwarts companies from pursuing corporate sustainability strategies more than that of “What’s the business case?”
” Corporate leaders rightly want to know how corporate sustainability will affect shareholders,” he says.
WRI has just released (December 5) a major report by Don called Stalking the Elusive Business Case for Corporate Sustainability, which is available on the Internet at www.wri.org. He also authored an earlier WRI report Green Shareholder Value, Hype or Hit? His work and his professional passion are both focused on exploring how delivering better social and environmental performance also delivers better results for companies at the financial bottom line.
Don says: “Most previous attempts to address the question have focused on anecdotes, generic arguments, or academic studies, which have failed to persuade all but a few early adopters that corporate sustainability adds value for shareholders.”
“Stalking takes a much different approach applying both conventional and emerging techniques of financial analysis to address the question of specific strategies at specific companies. This reveals new options for embedding an applied understanding of value creation through corporate sustainability in everyday business decisions.”
Don’s key point is that the companies that are “doing” sustainability have to take the lead on demonstrating how value is being created to build the business case. They are the players best equipped to earn Wall Street’s recognition, though first they have to make the case internally.
The paper concludes that companies will become increasingly sophisticated about this issue as the financial stakes involved in social and environmental strategies increase. “The first key audience for this will be internal financial staff,” it says. “Once chief financial officers become comfortable with these applications of financial analysis, they will then be willing to make the case to shareholders. This step is essential if companies are to claim credit for the value of their corporate sustainability strategies.”
A focus on value creation doesn’t repudiate the need for corporations to provide benefits for society, as well as their shareholders. It simply means that all business actions taken in the name of sustainability should ultimately translate into shareholder value, and that this can be measured in traditional areas rather than at some new multiple bottom line.
Sustainability strategies will not be successful or sustainable unless they deliver shareholder value. Without this pragmatic focus, many in business will see sustainability as a soft option like philanthropy, or as a fad, rather than as a robust and enduring framework for guiding business in the 21st Century.
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