Developing Ideas Digest May/June 1998
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LitScan TrendWatch

4.

Sustainability-Profit Link

There's little mystery about why sustainability practices go hand-in-hand with increased profits for business. Reducing material and energy inputs and avoiding toxic clean-ups and the associated fines can significantly lower a company's costs; while the brand loyalty and increased marketing opportunities that come with a 'green' tag often equate with increased revenue. But while it's logical that these advantages should be taken into account when the financial markets examine the value of compa-nies, businesses taking a sustainability approach routinely find themselves running into the 'Green Wall' -- that perceptual barrier where market analysts continue to view sustainability issues as a liability or, at best, as irrelevant to financial questions. One factor that keeps this situation in place is the lack of a standardized means of measuring the impact of green policies on the bottom line. The Global Reporting Initiative of the Coalition for Environmentally Responsible Economies (CERES) is seeking to remedy this by working on a set of metrics, applicable across companies, to chart the relationship of sustainability initiatives to profitability. In the meantime, however, green policies and greenbacks are rarely thought of together. A study by the Yale Center for Environmental Law and Policy for UNDP, for example, found that when market analysts think 'environment or sustainability' they overwhelmingly focus on the costs of clean-ups, litigation, and compliance with government regulation, while remaining unaware of the value-added potential of a 'beyond compliance' approach. (Wall Street analysts were less inclined to view sustainability as a strictly moral/ethical matter than their counterparts in the City of London, but the positive response in the U.S. was still low).

Financial/environmental experts Linda Descano and Bradford S. Gentry believe that -- while waiting for the new metrics -- companies can offset the markets' myopia by improving communication. Within companies, they believe, the people responsible for producing the environmental (sustainability reports are still rare - see Trendwatch) and financial reports work in discreet units with separate mandates, with the ultimate result that senior executives within the company are rarely informed of any positive relationship between sustainability and finance. In turn, market analysts -- who rely heavily upon companies' own data when they assess corporate value -- remain in the dark about the 'sustainability- profit link' since executives fail to raise the issue. Descano and Gentry have some advice for companies that want to talk to market analysts about sustainability: don't damage your credibility by making exaggerated claims or by peddling 'greenwash'; and focus your discussion on the concrete financial impacts of sustainability policies and practices.

Meanwhile, the 'sustainability-profit link' is slowly attracting more attention in the institutional sphere. Groups such as the World Business Council for Sustainable Development, the United Nations Services Initiative on the Environment, the New York Society of Securities Analysts and the Aspen Institute have all sponsored forums on the financial impacts of sustainability. As well, some investment houses have recognized the 'upside' of sustainability by offering diversified investment funds that feature the stocks of environmentally-friendly companies. The Environmental Value Fund and the Clean Environment Equity Fund are two examples that have produced above-average earnings. Their success tends to lend credence to an idea that many pioneers of green business have been advancing for some time: that getting sustainable is not an imposition but an opportunity. [sending the right signals to market analysts]

greenwash n. strategy by corporations to preserve and expand markets while posing as good environmental and community citizens.

United Nations Environment Programme Financial Services Initiative. The Environment and Financial Performance : UNEP's Third International Round-table Meeting on Finance and the Environment. New York, NY: UNEP-FSI 1997. 118 p.

Gentry, Bradford S. and Lisa O. Fernandez. Valuing the Environment: How Fortune 500 CFOs and Analysts Measure Corporate Performance. New York, NY: UNDP, 1997.

Virtual Ideas

Investor Responsibility Research Center http://www.irrc.org

Investors Choosing 'Green' Companies Need Not Sacrifice Returns http://www-2.realaudio.com/CEP/1195news/investor.htm

GreenMoney On-Line Guide http://www.greenmoney.com