Financial Performance: An Integral Piece of the Sustainability Pie

One would be forgiven for equating sustainable development with environmental responsibility. After all, the widespread onslaught of green marketing buzz in recent years has generated as much confusion over sustainability issues as it has highlighted the importance of conducting responsible business practices.

Environmental responsibility is only one piece of the sustainability pie. When sustainable development emerged in the public consciousness after the 1987 publication of Our Common Future — a document that helped lay the groundwork for global environmental milestones including the 1992 Earth Summit, the adoption of Agenda 21, the Rio Declaration and the creation of the Commission on Sustainable Development — economic and social concerns were considered as integral as environmental concerns in the emerging model of sustainable development.

While the value of environmental sustainability is not to be diminished, in any discussion of the relationship between sustainability and profit, it is fundamental to remember that financial sustainability and growth is an intrinsic element of the sustainable development paradigm.

It would be foolhardy for any business to downplay the role of sustainable practices or to expect that the increasing popularity of sustainable development is simply a trend that will pass or fade as the next fad emerges, or as turbulent economic conditions make it more difficult for business to invest in what the uninitiated might describe as “frivolous” initiatives.

Sustainable development has only grown in popularity in the last two decades, namely since Paul Hawken's seminal works, The Ecology of Commerce (1993) and Natural Capitalism: Creating the Next Industrial Revolution (1999), helped business leaders comprehend their role as the most powerful force to reverse the degradative effects of the industrial age.

In the past 2 years — counterintuitively enough, after the onset of the late-2000s global recession — the popularity of sustainability initiatives has reached a fever pitch.

A 2009 consumer survey conducted by Cone, a Boston-based strategy and communications firm, confirmed that an increasing customer demand for sustainable products persisted throughout the recession, with 44 percent of respondents indicating their preference for sustainable products hadn't been affected by global economic conditions, and a full third indicating they were more likely to invest in sustainable products than they were previously.

CEOS PURSUING SUSTAINABILITY

This trend toward sustainability extended from end users to the very top of the corporate ladder at large corporations around the world. A study released in June, “A New Era of Sustainability: UN Global Compact-Accenture CEO Study 2010,” and based on the findings of a survey of 766 CEOs from all corners of the globe, confirmed the economic downturn also generated the same unexpected effect: rather than tightening the purse strings in the recession's heights, CEOs opted instead to pursue sustainability initiatives with renewed vigor. An alarming 80 percent of respondents suggested the global recession had increased the importance of corporate sustainability and 81 percent already had integrated sustainable development into their core business strategy and operations, an increase of 50 percent since a similar question was posed in 2007.

Most importantly, the study showed an overwhelming majority of CEOs — 93 percent — indicated that sustainability would be critical to the future success of their business. “CEOs believe that, within a decade, a tipping point could be reached that fully meshes sustainability with core business — its capabilities, processes and systems, and throughout global supply chains and subsidiaries,” the study noted.

This trend was mirrored on an operational level according to a contemporaneous poll of nearly 700 supply chain executives across a variety of sectors by eyefortransport (EFT), a logistics and transportation information and services company. The survey, which evaluated key drivers for return on investment (ROI), showed the No. 1 driver — improving customer relations — didn't budge from its top spot in the 2009 and 2010 surveys. However, “A significant change in the market was highlighted by ROI jumping from ninth place in the 2009 survey to second place in 2010 as a key driver for shippers to invest in sustainable supply chain initiatives,” according to the report. Entirely outside of the moral imperative associated with adopting sustainable systems, professionals increasingly acknowledge the essential benefit of sustainable development lies in cost savings and financial rewards, according to the study.

In short, consumers, CEOs and supply chain experts overwhelmingly acknowledge that, far from a trend, the movement towards sustainable business infrastructure and practices is not going anywhere — except up. Further, business leaders acknowledge sustainability strategies directly are linked to financial performance.

Consider as well that outside of the acknowledgement that sustainable development is directly proportional to profit, increasingly government and stakeholders around the world are applying pressure on organizations to not only engage in sustainable practices, but to be transparent and accountable when it comes to communicating sustainability performance to the global community.

ROI OF SUSTAINABILITY

The recent announcement by the Obama administration that all government contractors will have to track their greenhouse gas emissions (a rule likely to take effect by 2011 or 2012) follows a growing trend towards sustainability regulations among governments in developed economies. Coupled with the growing popularity of voluntary sustainability and corporate social responsibility (CSR) reporting frameworks — including the well-established Global Reporting Initiative (GRI) and the recently announced International Integrated Reporting Committee (IIRC), a framework of guidelines that unites financial, environmental, social and governance reporting — it is clear transparent sustainable development programs are moving from nice-to-have to both expected and enforced requirements for doing business.

But the best starting place for any business leader to proactively embrace a sustainability ethos and corporate paradigm is to make a shift away from perceiving sustainable development in terms of how much it will cost, and towards assessing the ROI that will be generated through the adoption of sustainability initiatives. It is not unlike the dynamic known as the cost of poor quality (COPQ), which emerged in the field of quality management in the late 1980s. COPQ is best thought of in the following way: by neglecting the importance of quality, an organization literally pays to generate waste and other problems, often in the form of scraps, reworks, recalls, rejects, reworks, service calls, warranty claims and more. Similarly, in the areas of environmental, social and economic responsibility, organizations essentially commit capital to generate waste.

Since the purview of sustainable development is so vast and comprehensive, the ROI of sustainability initiatives manifests in myriad ways, some direct (basic cost savings through curbing resource consumption and waste) and some indirect (risk mitigation and avoidance). Examples of direct and indirect impacts of sustainability on financial performance include:

Resource conservation and waste reduction: Curbing consumption of water, energy and resources (anything from essential office materials like paper to raw materials for manufacturing) by implementing conservation policies and tracking waste statistics generates the obvious, direct effect of cost savings. That is, by consuming fewer materials either in operations or production, an organization will save money associated with the acquisition of materials.

Penalty aversion and regulatory compliance: Any organization committed to sustainable development and reporting on its progress in achieving its sustainability goals will be required to track essential environmental, social and economic metrics including, for example, air emissions. A business committed to tracking, analyzing and reporting on air emissions data will be better prepared to avoid the costly fines of notices of violations associated with exceeding permitted air emissions tolerances.

Brand image: While boosting environmental, social and economic performance should be the crux of any sustainability strategy, the marketing and publicity aspects and opportunities are not to be diminished as ROI-generating facets of sustainable development. By leveraging a proven commitment to social responsibility and environmental responsibility, an organization stands to place in high-profile rankings on CSR performance, attract and retain top-tier talent, gain media attention and public respect, and improve sales by enticing more high-level, global clients.

Customer and consumer relations: One need look no further than Wal-Mart's example to see how sustainability initiatives are pervading supply chains across all industries. For the past 5 years, America's largest retailer has been on a mission to green its massive supply chain, recently announcing it plans to cut 20 million metric tons of greenhouse gas from its supply chain by 2015 (a move tantamount to taking nearly 4 million cars off the road). Wal-Mart's initiatives affect thousands of other companies around the globe and represent an emerging cause-effect relationship between suppliers and corporate behemoths.

That is, as one organization seeks to achieve and report on a certain level of social and environmental performance, it will expect the same standard of performance and transparency across all elements of its vendor base and supply chain. Further, from a consumer standpoint — as the 2009 Cone Consumer Survey reiterated — end users increasingly will demand sustainable products. Businesses simply will have to meet certain standards of sustainable development in order to retain clients and grow their business.

Though the essential financial benefits of conserving resources, for example, easily can be quantified and tracked, it is more difficult to pull tangible ROI statistics from the cost- and risk-aversion factors associated with some of the above points except on a case-by-case basis. However, proactive corporate strategies beat trial-and-error hands down as the best recipe for optimizing returns on sustainability investments.

WHERE TO START?

An uninitiated organization — perhaps a young yet fast-growing company just beginning to toy with the idea of pursuing sustainability initiatives in the interest of boosting financial performance — might wonder, given the multifaceted, complex purview of sustainable development, where exactly to start. The answer is simpler and more straightforward than discourse suggests, and some of the following hints provide a sensible starting point:

Develop a proactive strategy: Just as a sustainability framework is an intrinsically integrated framework of interrelated elements affecting all areas of business management, ad hoc and reactive actions have no place in a sustainability management strategy. Rather than defining policies on a reactive basis, develop a comprehensive, proactive sustainability strategy to build a sustainable development program that is holistic, effective and worth reporting on.

Certainly, start small: plan a series of simple conservation initiatives to roll out within the first few months or year; your organization can't expect to become an industry leader in one day. However, integrate short-term goals with anticipated long-term accomplishments and delineate exactly how you want your organization to progress towards its sustainability objectives over a 4- to 5-year time frame. Also, as a part of your sustainability strategy, conduct a SWOT (strengths-weaknesses-opportunities-threats) analysis as well as an assessment of risks and opportunities to determine where your organization can have the greatest impact.

Calculate the ROI: You may have achieved the buy-in of senior management, or your CEO may have provided a clear mandate to undertake sustainable development initiatives. Either way, acknowledge sustainability programs are an investment and spell out in clear, concrete terms the tangible ROI a sustainability strategy will generate in the near- and long-term.

As suggested above, some indirect savings values will be colored by probabilities and expressed as ranges. However, an honest, comprehensive breakdown, which can be developed in-house or facilitated by a consultant or software solutions provider in many cases, will give your organization a clear analysis of what gains can be expected from the adoption of a comprehensive sustainable development program. As the years roll on, your organization can compare actual data against ROI expectations to tweak its sustainability program for the most effective results.

Understand the role of metrics: Without defined, tracked sustainability metrics, you have no sustainability program. Not only will you be unable to monitor the success of sustainability initiatives and continually improve sustainability performance, you won't be able to tie such initiatives to ROI and you won't be able to share your track record with stakeholders.

Use software to track metrics and forecast: Certainly, though conventional paper- and spreadsheet-based platforms can be and are used to track environmental, social and economic performance, the advantage of integrated software solutions over such archaic means is undisputable. In particular, some configurable software products already geared towards streamlining the management of EHS systems can be extended to cover most — if not all — aspects of a complete sustainability program.

Moreover, some systems are prepared to capture, correlate, assess and automatically report on sustainability data, eliminating the time and effort spent on manual data collection, entry and assessment by employees — personnel that most likely could focus their energy on improving the caliber and scope of your sustainability program. By automating the assessment and reporting on key sustainability metrics with software, organizations can analyze trends and forecast to streamline the allocation of resources and identify potential weaknesses in their sustainability programs and cut costs.

Communicate commitment/performance to stakeholders: While the primary function of sustainability initiatives will be the returns they deliver through conservation efforts and a number of other cost-savings effects, don't miss the boat on the wealth of opportunities that accompany clearly communicating sustainability efforts and accomplishments to stakeholders. When developing a sustainability strategy, consider incorporating an ongoing sustainability reporting plan that conforms to existing frameworks (such as the IIRC and GRI). While some critics have complained that comprehensive sustainability reporting can dominate resources and distract from essential business operations, proper planning, resource allocation and the use of software solutions (with configurable reporting capabilities) can render reporting a seamless and automatic process.

Even before sustainability benchmarks have been achieved, once a commitment to sustainable development has been solidified by way of a documented sustainability strategy, an organization can begin touting its agenda. The marketing, publicity, sales and customer relations benefits that flow from flaunting environmental, social and financial sustainability are too substantial to ignore.

Critically, do not fall into the trap many newcomers to the sustainability game find themselves in by being either overly ambitious or forgetting to frame priorities accurately. Remember that your organization is a business first and foremost. Instead of framing your business priorities in terms of environmental issues, frame environmental issues in terms of your business priorities.


Paul Leavoy is a former journalist and researcher for Intelex Technologies who writes on environmental, health and safety issues affecting businesses around the globe. John Phyper is the co-author of Good to Green, a book on managing business opportunities and risks in the era of environmental awareness.

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