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June 10, 2011

ROI and Sustainability Reporting

by Tim Woodall
Strategist, Sustainability Communications

At Addison, we work with many companies that are just beginning to address sustainability as a core business issue who often ask, “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 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 being perceived as a responsible company, with sales increasing and stock prices rocketing as a result.

This is simply not the case. Companies must address sustainability issues directly, within their own 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 percent of business leaders are focusing on CSR activities to create new revenue streams, and the same study showed that 54 percent believe their companies’ CSR activities are already giving them an advantage over top competitors. Companies that pursue sustainability initiatives, track their impact and publish their results realize the benefits in terms of reputation, recruiting and retention, as well as in a higher number of business-to-business contracts, rather than in the direct boost to the metrics those in the C-suite love to see. While CSR 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. A very public lawsuit was focused on the working conditions in Nike’s suppliers’ factories around the globe, which were notorious sweatshops.

Following the barrage of negative media stories, the company worked with the investor group Ceres to produce an award-winning and transparent CSR report that clearly laid out the locations of and working conditions at all its factories. This was the first-ever disclosure of a company’s contract factory base in the industry, and 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.

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. Producing a sustainability report is the first line of defense, as it sends the message that a company is serious about improving the lives of those in the communities in which it operates.

Recruitment, Retention and Employee Satisfaction
Responsible companies can attract the best and the brightest candidates and reduce turnover rates, lowering training costs, minimizing “brain drain” and ultimately increasing customer satisfaction. All of which contributes 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.”

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 percent of those surveyed by Cone for its 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 percent for those aged 18 to 24. Essentially, younger employees want 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 when the answer is Dell, Timberland or GE, for instance.

One of the factors linking the latter companies is that they all produce best-in-class sustainability/CSR reports that inform their employees about activities in other divisions of the business and give them an opportunity to 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 helps employees feel proud of 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 he or she strives 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. These practices go beyond the standard facility audit or requirement that suppliers sign a company’s code of conduct.

Companies these days are trying to learn whether their suppliers really see sustainability and corporate social responsibility as core business practices, or if they are simply paying them lip service.

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. As the saying goes, what’s measured is managed; 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 its 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’ 10 Minutes 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 careful examination of a company’s own impact and that of its suppliers, as well as CSR reports that share the 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
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 footprint.

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

Producing a sustainability report is critical for companies that want to tell their sustainability stories. Reports should include specific challenges to overcome, opportunities to be captured, and ways a 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 the challenges and success stories of each will be different. Though companies can release a CSR report without these elements, it simply won’t be compelling.

As a senior portfolio manager at Ernst & Young commented 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. Nonfinancial 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 than an annual report alone, as well as a clearer sense of its environmental and social footprint. As we’ve seen time and 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 a sustainability/CSR report are manifold, for readers and reporters alike. These 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 emissions reduction goals, the ratio of pay between male and female staff, human rights policies for transnational companies, or how a company is reducing the amount of natural resources used in its 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 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 enhancing each of these areas. The 79 percent of Fortune 250 companies already doing so can attest to this, and the rest will be doing so very soon.