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ROI and Sustainability Reporting


At Addison, we work with many companies that are just beginning to address sustainability as a core business issue. The question that often comes up is, “Will producing a sustainability or corporate social responsibility (CSR) report increase our stock price or drive revenues?”

The answer: Not necessarily. The notion that addressing environmental and social challenges will give a boost to sales or stock prices may be putting the cart a bit before the horse.

Many companies that are focusing on sustainability and CSR challenges for the first time are looking for the silver bullet that will answer all their problems. They mistakenly believe that putting solar panels on the roof of their headquarters, donating an extra million dollars to charity, producing a sustainability report, and/or offering reusable bags to shoppers will automatically lead to the public perceiving them as a responsible company, with accompanying increases in sales and stock value as a result.

This is simply not the case. Companies must take the initiative in addressing sustainability issues directly within their operations, supply chain, and product offerings, in order to generate the credible data that make up the heart of a CSR report. A CSR program and corresponding report without these metrics usually isn’t worth the paper it’s printed on.

That said, a 2008 study by IBM found that 68% of business leaders are focusing on CSR activities to create new revenue streams, and the same study showed that 54% believe their company’s CSR activities are already giving them an advantage over top competitors. Companies that are pursuing sustainability initiatives, capturing material performance indicators and communicating these publicly in the form of a report, realize the benefits in terms of reputational protection, recruiting and retention, and a higher number of business-to-business contracts rather than the direct boost to the metrics those in the C-suite love to see. While these efforts may not translate directly to sales, they certainly have financial implications.

Reputation

A strong environmental reputation can protect companies against negative media coverage, at least for a short while. As we all know, reputations can turn on a dime. A weak or damaged reputation can lead to a devaluation of stock, a shorting of the stock by investors, or both.

As Nike found out a few years ago, a problem within a company’s supply chain can have disastrous effects on reputation and revenue. The very public lawsuit was focused on the working conditions in Nike’s suppliers’ factories around the globe, which were notorious for being sweatshops.

Following the barrage of negative media stories, the company worked with the investor group Ceres to produce an award-winning and transparent report that clearly laid out where its factories were located, and the working conditions at each. This was the first-ever disclosure of a company’s contract factory base in the industry, and because of the company’s engagement with stakeholders, the report set the standard for best practice disclosure in the apparel industry. While problems still remain, organizations and individuals using Nike’s products can be assured that the company remains vigilant about the transparency of this critical link in its production.

Bottom line: Investors, NGOs, potential employees and regulators are all looking to companies to be responsible actors in their efforts to increase shareholder value. But these efforts are meaningless if companies aren’t keeping tabs on their environmental footprint, strengthening their social programs around the globe, and improving their governance systems, which drive these activities from the top down.

Producing a sustainability report is the first line of defense, as it sends a message to interested parties that the company is serious about improving the lives of those in the communities in which it operates. A good reputation is difficult to create, yet very easy to destroy. According to the National Policy Association, CEOs often cite reputation as their “most valuable intangible asset.” Protecting and enhancing it should be their highest priority.

Recruitment, Retention and Employee Satisfaction

Running a responsible business enables companies to attract the best and the brightest candidates and reduce turnover rates, which in turn lowers training costs, minimizes “brain drain,” and leads to increased customer satisfaction. All of the above contribute to the bottom line, if not directly to sales.

A study of MBA graduates by Stanford University found that students ranked “employer’s reputation for ethical conduct and caring policies toward employees” a close third behind “intellectual challenge” and “money and location” when assessing potential employers. Another report by Business for Social Responsibility (BSR) discovered that companies offering community service programs develop employees with a “variety of competencies, including teamwork, planning and implementation, communication, project management, listening skills and customer focus.”

The reality is that employees want to work for companies that are making a positive difference in society, particularly Millennials (a.k.a., Generation Y and Echo Boomers). About 69% of those surveyed by Cone for their Cause Evolution Study said that a company’s commitment to social and environmental issues influences a potential employee’s decision to work at a company; that figure rises to 87% for those aged 18 to 24. Essentially, younger employees want to be able to feel good about their answer when asked, “So what do you do for a living?” As many workers have found, saying that they work at Arthur Anderson, RJ Reynolds, or ExxonMobil produces a far more negative response than the likes of Dell, Timberland or GE.

One of the factors linking the latter group of companies is that they all produce best-in-class sustainability/CSR reports, enable their employees to learn about activities in other divisions of the business, and share these successes with family, friends, and colleagues at other companies. Given the siloed nature of modern workplaces, the opportunity to share a CSR report with colleagues provides employees with an opportunity to feel pride in where they work, and gain a greater understanding of the company’s overall impact on the world.

Bottom line: It feels good to work for a company that is actively trying to make the world a better place. These employees are less likely to leave for greener pastures, are more productive in their jobs, and are more likely to recommend their friends and former colleagues for positions within their firms. In turn, these attributes decrease turnover, increase productivity, and reduce hiring costs. As any HR executive will tell you, these are metrics they strive to improve every day.

Business-to-Business Contracts

Lastly, many firms are beginning to monitor their supply chains for any risks, real or perceived. Many are even asking their suppliers to produce sustainability reports and provide data on key performance indicators, while others are including these requirements in their RFPs. This practice goes beyond the standard facility audit or requirement that suppliers sign their company’s code of conduct.

Companies these days are looking to gain a better sense of whether their suppliers see sustainability and corporate social responsibility as core business practices, or are simply paying lip service to these efforts. Producing sustainability reports (though the quality of these varies quite a bit) is a top-to-bottom effort that sets a benchmark for environmental and social performance going forward. As the saying goes, what’s measured is managed, and an increasing number of companies are finally beginning to manage their supply chains more effectively.

Adidas, for example, just announced in its latest sustainability report that it will now require each of its top 10 suppliers to produce a sustainability report starting next year. Another example of B2B pressure is at Levi Strauss. The company’s “Levi’s Certification” of their supply chain (focused on factories that have safe, healthy and compliant environments) has led these suppliers to use this certification to win contracts with other big-name clients.

The CEO of one prominent consumer apparel company told PricewaterhouseCoopers’ 10Minutes on Trust and Transparency, “As the Walmarts and Targets of the world become more powerful, they are demanding that they get what they ask for. They won’t accept our word, but need third-party verification.”

Bottom line: Though no sustainability report or auditing system is going to catch all the problems with a company’s suppliers, a high level of scrutiny and the sharing of results with potential business partners, can lead to increased business and satisfied stakeholders. These are quickly becoming a must-have for companies to secure new business, and requesting them should be mandatory for companies seeking to reduce risks in their supply chains.

Going Forward

In spite of the reasons above, producing a sustainability or CSR report won’t automatically drive a company to the top of a green rankings list. But to the question of whether it will help, the answer is, as with nearly all business decisions, “it depends.”

Addressing sustainability is a complex endeavor, and the path to doing so is very different for each sector, sometimes even for companies within the same industry.

Take, for example, the efforts of two companies in the IT sector that develop products for clients, and how they might differ in their approach to minimizing their environmental footprints.

One produces software, the other hardware. The software company, whose product is primarily downloaded online or managed from their data center, is going to be chiefly focused on their energy efficiency and their facilities’ environmental footprint. On the other hand, the hardware company which produces consumer products should be looking at its shipping and waste streams as the primary means of reducing impact.

This is why producing a sustainability report is critical for companies to begin to tell their sustainability story. These reports should include specific challenges to overcome, opportunities to be captured, and ways the company is including stakeholders in the reporting process. The resulting reports provide readers with a more complete story of how companies are positioning themselves for the years ahead. No two companies are alike, and each of their challenges and success stories will be different. Though companies can release a report without such stories, it simply won’t be compelling.

As a senior portfolio manager at Ernst & Young mentioned in the SAM 2009 Yearbook (which provides the analytics behind the Dow Jones Sustainability Index), “Financial performance tells me what a company has already done. Non-financial performance tells me what it is likely to do.” Sustainability reports give investors, employees and other stakeholders a much more complete picture of a company’s policies and practices, as well as a clearer sense of its environmental and social footprint. As we’ve seen time and time again, it’s not simply a quarterly snapshot of a corporation’s bottom line that predicts future success. Does anyone remember Enron Wind?

The benefits of producing such a report are manifold, for readers and reporters alike. Sustainability/CSR reports put down on paper, often for the first time, the measurable benchmarks against which the company will report going forward. These might include greenhouse gas reduction goals, the ratio of pay between men and women, human rights policies for transnational companies, or how a company is reducing the amount of natural resources used in their products and operations (water, paper, fossil fuels, etc.).

While the benefits of sustainability and CSR reporting may not immediately show up on a company’s balance sheet, they are still critical to the ongoing success of any firm. From maintaining a positive reputation with customers and other stakeholders, to attracting and retaining the best and brightest employees, to securing new business contracts, producing a sustainability/CSR report is an effective way of positively affecting each of these areas. The 79% of Fortune 250 companies already doing so can attest to this, and the rest will be doing so very soon.

Article by Tim Woodall, Strategist, Sustainability Communications at Addison, appearing courtesy 3BL Media.