Treasury Practice

Sustainability: it’s the business

Published: Jan 2013

The mere mention of ‘sustainable business’ provokes a range of reactions among today’s corporate community. For the cynics, sustainability still conjures up images of animal rights activists or long-haired ‘green’ campaigners. Others just brush it off as the latest, rather intangible, fad. But for a growing professional contingent, corporate sustainability is becoming a trusted tool in their risk management armoury. So what exactly is sustainable business? What benefits does it offer? How can these be measured? And how can companies evolve from sustainability laggards into sustainability leaders?

Enter the triple bottom line

Back in 1994, the year that the Whitewater Inquiry began, corporate sustainability was very much in its infancy. To help embed the concept in the mass consciousness of business executives, John Elkington, co-founder of strategic advisory firm SustainAbility, coined the term the ‘triple bottom line’ (TBL). Through this, Elkington proposed that companies must pay attention not only to financial risks, but to the social and environmental threats to their profitability, too. This trio is sometimes referred to as ‘the three Ps’: profits, people and planet. By the late 1990s, the idea had gained significant traction, especially among the big global brands and fossil fuel CEOs. As Western consumers became increasingly aware of the use of sweatshop labour and the environmental impact of excessive hydrocarbon usage, corporate sustainability became not only a buzzword but a watchword for cutting-edge organisations.

Today, the fundamental pillars of TBL still form the basis of business sustainability; however the approach has evolved beyond a pure accounting play. While there is no globally accepted definition of what sustainable business is, the gist is that by being connected with ‘the three Ps’, a company can build resilience to external shocks, as well as contributing to the communities around them through sustainable development. According to the World Council for Economic Development (WCED), sustainable development ‘meets the needs of the present without compromising the ability of future generations to meet their own needs’.

Case study

CSR at Alliance Boots Group

Diagram 01: CSR at Alliance Boots Group

Source: Alliance Boots

The group’s framework of csr-at-alliance-boots-group priorities covers the four key areas outlined above. This framework is called the ‘scorecard’ (see diagram) and is used across businesses within the group. Business plans are presented to the social responsibilities committee for approval and progress against these plans and the scorecard are monitored centrally.

“Corporate social responsibility forms a natural part of our group’s business culture,” explains Ornella Barra, Chairman of the social responsibilities committee at Alliance Boots. “People lie at the heart of Alliance Boots and our commitment to them is as important today as it has ever been. Our CSR approach continues to reflect this, whether through improving the health of communities around the world, creating healthy workplaces, striving to encourage healthy living or reducing the impact of our activities. As we grow, so too will our commitment to the local communities we serve.”

How are companies interpreting this?

A well-established manifestation of the sustainability drive is corporate social responsibility (CSR). Once again, this is a term that lacks a firm definition, but it broadly revolves around a company taking responsibility for its impact on society and the environment. A typical CSR programme will tackle four aspects of a company’s reach:

  • Workplace.
  • Marketplace.
  • Environment.
  • Community.

To see how this might work in practice, let’s take a look at how international pharmacy, health and beauty group, Alliance Boots, approaches CSR:

Like Elkington’s triple bottom line, the concept of CSR has moved on in recent years. Nowhere is this more evident than in the European Commission’s (EC) communication on its ‘Renewed EU strategy 2011-14 for Corporate Social Responsibility’. According to this paper, the EC previously defined CSR as ‘a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis’.

However, the communication goes on to say that: ‘The economic crisis and its social consequences have to some extent damaged consumer confidence and levels of trust in business. They have focused public attention on the social and ethical performance of enterprises. By renewing efforts to promote CSR now, the Commission aims to create conditions favourable to sustainable growth, responsible business behaviour and durable employment generation in the medium and long term.’

Here we see the scope of CSR significantly expanded. This is no longer about paying lip service, or making a few public donations to charity. It’s about delivering growth for future generations – whether business owners and employees, or consumers in the community they serve. So, sustainable business challenges traditional CSR, taking a longer-term, more holistic view.

Reaping the benefits

No matter what size your company is, the benefits of embracing this holistic approach to corporate sustainability are numerous. They include:

  • Improved company or brand image.

    Consumers are becoming more demanding and expect corporations to act ethically and responsibly. In return, a reputation for integrity and respect can help to build customer loyalty, based on these values. In fact, a 2011 survey by Green is Universal (the sustainability division of US media and entertainment company NBC) found that 68% of consumers believe it is worth paying more for a green product or service if it is a brand they trust.

  • Enhanced risk management.

    Many businesses decide to embrace sustainability as a means of recovering from bad press, or mitigating reputational risk – see this month’s Risk Management article on page 34 for more details. Sustainability also offers companies an enhanced way of looking at risk – one that is broader than traditional enterprise risk management, going beyond economic, strategic and operational factors to consider emerging external risks as well.

  • Cost savings.

    These may come in a number of forms, ranging from process efficiencies (eg electronification of paper-based processes) through to more careful monitoring of resource consumption, such as water usage. Elsewhere, experts argue that by minimising certain business risks, sustainability can help to reduce the costs of regulatory non-compliance and litigation, for example.

  • Reduced cost of capital.

    A study conducted by the Canadian non-profit Network for Business Sustainability confirmed that companies that ‘implement an environmental risk management strategy reduce their weighted average cost of capital.’ Higher levels of environmental risk management, the study found, can lead to:

    • Greater willingness of debt markets to provide debt financing.
    • Higher tax benefits that partially offset the cost of debt capital.
    • Reduced cost of equity capital from a decrease in systematic risk.
    • Reduced cost of equity capital from an increased dispersion of shares.
  • Supply chain stability.

    By acting responsibly towards suppliers, companies are better placed to secure consistent, long-term access to the raw materials and products that they need. Contrary to popular belief, sustainable procurement can actually work out to be cheaper than traditional routes – largely through more transparent relationships.

  • Competitive advantage.

    Sustainability enables “enterprises to better anticipate and take advantage of fast changing societal expectations and operating conditions. It can therefore drive the development of new markets and create opportunities for growth,” says the EC. When looking at strategies for becoming sustainable, companies also often take stock of their current business model and examine how they can become more innovative, or gain an edge over their peers.

  • Improved employee satisfaction, morale or retention.

    According to a survey released by non-profit community Net Impact in May 2012, employees who have a job that enables them to make a “social or environmental impact on the world are more satisfied with their job by a 2:1 ratio”. And when employees are happier, they are more productive.

What is more, many reputable reports show a strong correlation between a company’s sustainability credentials and its financial and stock market performance. ‘Companies that are considered leaders in environmental, social and governance (ESG) policies also lead the pack in stock performance – by an average of 25%,’ according to a 2007 Goldman Sachs report, which it released alongside the launch of a sustainable investment focus list, GS Sustain.

Best practice implementation

With the benefits outlined, how does a company put a workable sustainability programme in place? The following five-step process provides a good outline of the stages required, although somewhat simplified:

  1. Envision.
  2. Engage.
  3. Map.
  4. Perform.
  5. Measure.

The most difficult of these five steps for the majority of businesses is engagement. With a well-researched business case behind it, sustainability should be a no-brainer for the C-suite. But while buy-in from top-level management is essential, so too is buy-in across the business. Securing this will depend to a large extent on how robust the company’s proposed sustainability policy and framework is. This is where specialist consulting firms can add real value.

Placing sustainability representatives throughout the organisation can also be invaluable in ensuring enterprise-wide engagement. Alliance Boots, for example, has a ‘champion’ in most businesses with responsibility for defining and delivering local CSR priorities and targets in line with the group’s overall objectives. All champions are supported by the company’s CSR Director and Co-ordinator, who provide guidance and additional expertise on working within the group’s CSR framework. Colleagues from a number of departments including, human resources (HR), communications and finance also support the work of the champions.

Sustainability metrics

Measuring the company’s progress against its sustainability goals is often the second most challenging step. While every company will have different requirements for sustainability metrics that ensure compliance with the stated goals of its programme, examples of indicators that could be easily and effectively monitored are (in no particular order):

  • Customer satisfaction and loyalty levels.
  • The number of customer complaints.
  • The social impact of the company’s core product or services.
  • Energy and water consumption.
  • Waste sent to landfill.
  • Carbon footprint.
  • Environmental impact of the company’s supply chain.
  • Workforce diversity.
  • Number of staff grievances.
  • Level of staff turnover.
  • The percentage of suppliers and partners screened for human rights compliance.
  • The percentage of suppliers and partners meeting sustainability requirements.

Not only does having metrics in place allow companies to measure their progress, the process of defining the correct metrics can actually help to cement the organisation’s sustainability goals and priorities. Moreover metrics can assist in reinforcing personal and organisational accountability, as well as improving internal and external communication around the success of the company’s sustainability drive.

Case study

Marks & Spencer: learning from the best

Launched in January 2007, Plan A is UK retailer Marks & Spencer’s sustainability drive. The company originally set out 100 commitments to achieve in five years. That has now been extended to 180 commitments to achieve by 2015, with the ultimate goal of becoming the world’s most sustainable major retailer. Through Plan A, the company is working with its customers and suppliers to combat climate change, reduce waste, use sustainable raw materials, trade ethically, and help customers to lead healthier lifestyles.

In 2012, Marks & Spencer (M&S) sent zero waste to landfill. It is also now a carbon neutral company. Since April 2012, M&S has stopped selling confectionery designed to appeal to children. These are just three examples of how the company is making a real difference.

“Plan A is how we do business at M&S – it involves our customers, our employees, our suppliers and our suppliers’ suppliers. We are fully committed to it,” says Marc Bolland, CEO, Marks & Spencer. The initiative is called Plan A “because we believe it’s now the only way to do business. There is no Plan B.”

M&S was named Responsible Retailer of the Year in the 2012 World Retail Awards.

Global leaders in sustainability

The best practice steps outlined above are designed to bring sustainability laggards into the 21st Century. Going the extra mile and becoming a sustainability leader requires something extra special: genuine, deep-rooted commitment. The case study above illustrates the difference.

Being a sustainability leader isn’t just about the accolades though. In a world where companies increasingly have to compete for resources, corporate sustainability will – sooner rather than later – become the ‘new normal’. And now is the time to get ready, because sustainable business models aren’t put in place overnight.

World’s top 20 sustainable companies

Company Rank Country
Novo Nordisk A/S 1 Denmark
Natura Cosmeticos S.A. 2 Brazil
Statoil ASA 3 Norway
Novozymes A/S 4 Denmark
ASML Holding NV 5 Netherlands
BG Group plc 6 UK
Westpac Banking Corporation 7 Australia
Vivendi S.A. 8 France
Umicore S.A./N.V. 9 Belgium
Norsk Hydro ASA 10 Norway
Atlas Copco AB 11 Sweden
Sims Metal Management Limited 12 Australia
Koninklijke Philips Electronics NV 13 Netherlands
TeliaSonera AB 14 Sweden
Life Technologies Corporation 15 US
Crédit Agricole S.A. 16 France
Henkel AG & Co. KGaA 17 Germany
Intel Corporation 18 US
Neste Oil Oyj 19 Finland
Swisscom AG 20 Switzerland

Source: Corporate Knights

The next article in this series will appear in March. It will examine sustainability within the treasury department, from what initiatives can be put in place, to treasury’s role in upholding and driving the company’s sustainability aspirations.

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