Sustainability Gains Ground As ERM Tool

Whether lured by the promise of new opportunity or pushed by the fear of mounting risks, a growing number of public companies are starting to think a little more altruistically—and paying more attention to their ability to sustain themselves well into the future.

“Corporate sustainable development” is a new way of doing business for U.S. companies in particular, where a short-term emphasis on profitability has long driven corporate strategy and decision-making. Now, says David Vidal, research director for global corporate citizenship at The Conference Board, businesses are starting to turn a corner.

The Conference Board recently surveyed nearly 200 major companies about their views on corporate citizenship and sustainability, with two-thirds reporting that the issues are becoming more important within the organization.

Vidal

“It’s generally accepted and understood that company conduct in the United States is driven more by a compliance culture than a norms culture,” Vidal says. “If you start from that perspective, you can see where a compliance approach only gets you as far as the latest lagging indicator. You’re [as] compliant as consensus has agreed upon. It doesn’t do much to help you with emerging issues.”

An emphasis on sustainability, however, focuses on leading-edge thinking and practice rather than the lagging edge, Vidal says. Companies—and investor groups—are starting to look more cautiously at the depletion of natural resources, and the surge in business enterprise systems around the world, and they see a need to think differently.

“The core has been to do business, get a return on that investment, and move on to something else, without much concern for the consequences of that legitimate business activity,” he says. “That’s where sustainability is changing what is understood to be at the core. The way you run your business has to be different if there’s a conflict between your success and society’s success, or vice versa. If you’re depleting your resource base and it has a consequence for the resource base of the world, is that a viable, long-term approach for our survivability?”

Sustainable Development In Action

Various themes of sustainability have sprung up over the years to focus on environmental concerns or employment issues, but the sustainable development movement is meant to take in the full gamut of issues that might define good corporate citizenship and responsibility. That might include not only resource conservation and pollution prevention, but also human rights and employee relations.

Graff

Susan Graff, principal of consulting firm Environmental Resource Services, says she sees that attitude growing within the ranks of Fortune 200 companies, where sustainability isn’t just a philanthropic movement, but a business approach. “It’s a business approach to creating value by creating opportunities and managing risk,” she says. “I can’t think of a company that doesn’t see this as a way of mitigating risk.”

Graff counsels companies to think of their surrounding environment—people, natural resources, consumers, and so forth—as a ledger. “Those are rich sources of capital,” she says. “If you’re not sensing changes in your natural resources ledger and responding with products that mitigate depletion, you’re running a risk.”

EXCERPT

Below is an excerpt from a white paper on sustainability published by the International Federation of Accountants, titled, "Professional Accountants in Business - At the Heart of Sustainability?"

Society has changed and the market has changed and there was no doubt amongst interviewees that sustainability had completely altered corporate strategic goals. Sandrijn Weites of ABN AMRO summed it up: “Sustainability is a boardroom topic. It’s not something you do because it’s nice. The time of the fast buck is over for responsible companies; the number one priority now must be sustainable growth. Our horizon has become not just the next quarter, but the next quarter of a century.”

One way of managing this, he suggested, was to challenge existing corporate assumptions. He explained, “Business managers with day-to-day profit and loss responsibility have a short term focus. Professional accountants in business need to hold a mirror up to these people and start asking questions. A profit of $180,000 may be a loss of a million dollars a year later. You need to get people thinking about the consequences.”

Nick Shepherd of EduVision agreed. “The most fundamental issue for the profession is getting the point across that there is a link between financial performance and sustainability in terms of a return in investment,” he said. “It is about the ability to stay in business as an enterprise.”

Corinne Proske added that professional accountants in business needed to be stronger. “I want more accountants in this field,” she said. “I worry we forget about what we are trying to achieve. We get tied in by the feel-good factor but sustainability needs to be driven by business and it needs to talk business language.”

Ford’s Mark Lewis maintained that, in the broader area of financial analysis, sustainability will be critical for professional accountants to develop analytical tools and techniques that capture the full implications of sustainability rather than just the adverse aspects of short term costs and potential liabilities.

“The divide needs to be addressed,” argued Luis Perera. “Accountants may say they need hard data and people in business may say accountants don’t understand, but it is the professional accountants who need to bridge the divide. We are the people who understand the financial language and the language of sustainability. That should be the main contribution of the professional accountant in business.” “It’s absolutely critical,” said EduVision’s Nick Shepherd. “If our only claim to fame as an accounting profession is counting things which are less and less relevant then that’s an indictment of our profession.”

Good ethical practices are here to stay. For professional accountants in business, being answerable for behavior on the issue of sustainability is vital to improving public perceptions and to winning stakeholders’ trust. All professional accountants in business now need the knowledge to handle the responsibility that comes with their expanding roles as it’s clear sustainability can no longer be an optional add-on for business.

Source

IFAC Report On Accountants & Sustainability (August 2006)

At Wal-Mart, for example, the company is taking notice of the difficulty in siting new retail locations, Graff says. Local communities often dislike the big-box retailer’s notorious dominance, and increasingly are resisting efforts to establish new stores. As a result, Wal-Mart is calling on vendors to compress package sizes so the company can operate within a smaller footprint, she says.

3M started its sustainability efforts by building on a successful pollution prevention campaign that took root some 30 years ago, says Keith Miller, manager of environmental initiatives and sustainability at the company. In targeting pollution, the company found it also was creating less waste, which flowed through to the bottom line.

Miller

“We showed we could not only reduce pollution but also save the company money,” he says. “That gave us a business case for getting involved in sustainability.”

That first effort has mushroomed into a variety of initiatives, he says, all based on good business sense. The company has built a positive reputation for good environmental practices, good for marketing, and has established operational efficiencies, which saves money. 3M also has focused on market opportunities, creating environmentally friendly products that appeal to environmentally conscious customers.

And the sustainability path is a means of managing risk at 3M, Miller says: As it reduces emissions and addresses environmental problems, it reduces possible liability in the future.

All of those efforts can be leveraged to improve the company’s hiring efforts as well, Miller contends. “There are a number of studies that show the top students coming out of college are looking to work for companies that are ethical, have good environmental programs and are doing the right things,” he says. “This helps us attract and retain good employees. People want to work for a company that has good social programs. It improves the morale in the company.”

Weites

For some companies, it takes a wake-up call to get the process started, says Sandrijn Weites, senior vice president of sustainable strategy and reporting for ABN Amro Bank in Amsterdam. The bank is one identified by the International Federation of Accountants as a model of sustainability thinking as the concept takes root in Europe.

ABN Amro received its wake-up call in 1998, Weites says; that’s when the bank financed a mining operation in New Guinea, then became the subject of petitions and protests over the way the mine was operated.

“We did our homework and two weeks later a senior executive said you’re right, we’re financing a mine where human rights issues and environmental pollution issues are occurring,” says Weites. Sustainability suddenly had much more appeal.

Ultimately, the bank worked with the mining company to work out problems and continue the operation, but it inspired ABN Amro to formulate its corporate values and business principles and measure future projects against those standards.

“We exist because our shareholders allow us to exist,” Weites says. “We need to respect all of our stakeholder groups in order to be sure we’re allowed as a company to stay in business.”

Making The CSR Commitment

The decision to follow a path of sustainability may or may not represent an upfront cost to companies, depending on their line of business and how they choose to tackle the issue. For 3M, the pollution- prevention program reaped a quick cost savings to easily justify the decision, Miller said.

Silvers

In the short term, a move toward sustainability is likely to hit the bottom line, says Samuel Silvers, a principal with Deloitte Consulting. “If you view it as a cost and not an investment in the future, it’s more expensive,” he says. “In the short-term, on a profit-and-loss basis, where capital markets view value being driven, right now the markets are not giving a premium for organizations following sustainable development.”

The costs of ignoring longer-term issues aren’t necessarily immediately obvious, but they will make themselves apparent soon enough, Graff at ERS says, especially with issues like environmental problems or employee turnover.

“Ledgers are set up to capture costs, and they don’t catch all the indirect costs,” she says. “But the future costs of natural resource consumption are expensive. The company may win in the short-term [by ignoring longer-range issues] but eventually someone is going to pay.”

Silvers says the core financial processes for an organization that embraces a sustainable development view may not change. Instead, it is the performance metrics that will change.

For example, he says, a company might choose to pay closer attention to the percentage of energy consumed via various energy sources, or the depletion and consumption of raw materials. From a personnel standpoint, a company might shift its attention away from recruitment costs and instead focus on turnover costs.

“Measurement drives behavior,” Silvers says. “The finance function would act as a catalyst toward behavior change.”