Ideas
Dr. Kaushik Sridhar

Sustainability meets the bottom line: a closer look at corporations

Burgess COMMENTARY

Peter Burgess

A Sustainable Dialogue

You can never have an impact on society if you have not changed yourself - Nelson Mandela

Large publicly traded companies, some worth more than entire countries, are often demonised for their impact on society and the planet. Critics point out that corporations are beholden to the Gods of ever-increasing profits and higher dividends, pushing sustainability to the sidelines. But it's clear that their participation is critical to the success of sustainability. Corporations' business structures might just provide them with the potential to implement social and environmental solutions that could rival or exceed those of governments and the non-profit sector.

Great power, great responsibility

First of all, there is their size, resources and often global reach, both to suppliers and customers around the globe, which can position them to spur change in a big way. HP, for example, plans to help its global suppliers reduce the intensity of their greenhouse gas emissions by 20% by 2020, and that's on top of already saving an estimated 190,000 tons of greenhouse gas emissions since 2008.

In China, the company is helping its suppliers meet the government's five-year regulatory goal as part of its work towards the 2020 target, says Zoe McMahon, HP's director of global social and environmental responsibility. One of the challenges was that its Chinese manufacturers are located far away from seaports, and aeroplane transportation is carbon intensive. But rail transport accounts for one out of 30 parts of the carbon footprint of air, McMahon explained. So HP built an 11,000km freight railway line from Chongqing, China, to Western Europe to reduce its suppliers' energy use and help connect them to consumers. That's something that would be harder for a smaller company to do.

Of course, large private companies have the same scale advantage as corporations, and some public companies aren't as big as the largest private ones. It could be argued that Walmart, the world's largest company, has single-handedly changed the global rules of operation with its sustainability index, which evaluates suppliers on sustainability measures. But the truth is, in general, most of the world's largest companies are public. Nine of the top 10 Fortune 500 companies are public, with Walmart being the notable exception in the first spot.

An open book

Being public, in and of itself, is another factor that can play a significant role in corporate sustainability. It comes with a directive to be transparent and to disclose everything 'material' to investors. It also frequently opens companies up to a higher level of public scrutiny. That can be a challenge when it comes to shareholders looking for short-term gains, but it can also help make a business case for sustainability. Several companies have turned their reputations around with sustainability initiatives after public protests and negative attention. Nike, infamous for its sweatshops in the 1990's, has taken a leadership role in sustainability reporting, supply chain transparency, sustainable design and even childhood obesity. And Siemens, which faced corruption charges from US and German authorities leading to a $1.3 bn settlement in 2008, has been calling for international collaboration against corruption.

Bottom-line pressure

That said, the corporate structure also comes with multiple challenges in integrating sustainability. The core business model, which arose after World War II to help repair the world economy, has led to increased standardised global production and, as a result, a higher percentage of costs have moved outside of the company. 'Core businesses targeted only one product or service, and everything else became an abstraction,' says Gunter Pauli, author and initiator of the Blue Economy. 'This led to huge external costs. These ever larger factories produced ever more and had an ever bigger impact on the health of people and the ecosystem.' Add to this the pressure to grow profits and dividends. Cornell Law School professor Lynn Stout asserts that it's a myth that corporations are legally required to pay out profits and maximise shareholder value in her book, The Shareholder Value Myth. 'This [myth] is misleading and dangerous, because it has led to changes in corporate practice and laws that make it easier for shareholders to unlock capital, causing corporations to be run on a shortened time frame – months instead of years,' Stout says.

Quarterly earnings reports and short term investment practices like activist hedge funds can impede corporations' progress on sustainability. 'Most investors are focused on value, not values,' says Cary Krosinsky, executive officer of the Network for Sustainable Financial Markets. He says that investors make buy and sell decisions in the short term, or in a series of short terms. 'There is no such thing as a long-term investor,' Krosinsky claims. Many also assume that corporate law requires high dividends. 'Contract law, not corporate law, rewards maximisation goals,' explains Robert A Katz, professor at Indiana University McKinney School of Law. 'In some cases, the director's or CEO's contracts are structured in a way to reward him or her for increasing shareholder value.'

New measurements

All this had led some companies to change the way they measure profit and report earnings. In one of the most extreme changes, Unilever CEO Paul Polmaneliminated quarterly earnings guidance and profit reports in 2010. The point was to keep the focus on the long term as part of its comprehensive Sustainable Living Plan, which aims to cut environmental impact in half, even as revenue doubles, by 2020.

One growing trend is integrated reporting, in which sustainability metrics are included in annual financial reports. The International Integrated Reporting Council is scheduled to publish its international framework for integrated reporting in December. Earlier this year, German software company SAP released its first integrated report, which combined its annual and sustainability reports. The integrated report shows the interconnectedness of the company's financial performance and its management of human and natural resources.

'An integrated report isn't just a matter of reporting metrics for both areas side-by-side,' SAP's chief sustainability officer Peter Graf told me. 'It takes years of consensus building at the highest levels of the company about what matters to your business and how you measure the company's performance. It's opened our executives' eyes to the financial impact sustainability can have when placed at the core of our business.' Graf estimates SAP's sustainability initiatives have cumulatively saved the company €240m.

Other companies that publish integrated reports include Southwest Airlines, Clorox, Pfizer, Dow Chemical, Eaton, Ingersoll Rand and American Electric Power, according to a report released earlier this year (PDF). Meanwhile, a group of companies is taking all this a step further by signing up to become B Corps, a new legal status available in some states, that requires companies to consider (and report on) social and environmental impacts, in addition to financial ones, when making decisions.

Speaking the language of money

If the language of dollars and cents makes the most sense to boards and directors, sustainability initiatives are learning to speak that language through increasingly sophisticated metrics and valuation methods. There's the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB), Savings on Investment (SOI) and the Shared Value Initiative among others.

It all comes down to quantifying what was previously considered unquantifiable, said Heidi Welsh, founding executive director of the Sustainable Investments Institute. Some corporations are developing new valuation methods of their own. This manifests in supply chain ranking systems, for instance. HP evaluates suppliers' greenhouse gas emissions as part of the procurement process. Meanwhile, Siemens has created methods for evaluating the environmental impact of its products (as in product design standards for efficiency) and plans to expand on them, said Alison Taylor, Siemens' chief sustainability officer for the Americas.

While corporations have a long way to go and plenty of challenges to overcome, the ultimate proof that the structure can enable sustainability is that it's already happening. According to Krosinsky: 'Corporations in general are ahead of other organisational groups when it comes to sustainability, because they want to be around in 20 years, and they can see what's coming' - article attributed to Rachael Post (The Guardian), November 22, 2013.

For more on the article please visit http://www.theguardian.com/sustainable-business/corporations-sustainable-business-structures

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