Introduction to Creating a Sustainable Organization: Approaches for Enhancing Corporate Value Through Sustainability
- Jan 11, 2012
Over the last ten years or so, a number of books and other published works on the topic of corporate sustainability have appeared. Early on, much focus was placed on the “triple bottom line” construct developed and promoted by John Elkington in his book Cannibals with Forks, published in late 1999. Following a bit of a lull in the ensuing years, “greening” and more general notions of corporate sustainability have again recently come into vogue. This is in part due to increasing concerns about climate change and other global-scale environmental issues, but also because a number of large U.S. multinational corporations have mounted highly publicized campaigns to “green” their operations. Today, it seems that “green business” is a bandwagon that many people and organizations are seeking to drive or at least jump onto. Attracting less fanfare but still reflecting important developments and thinking, several recent books have addressed emerging realities in the financial world. In particular, the continued evolution of socially responsible investing (SRI) and the increasing interest in corporate sustainability shown by a number of major financial institutions and quasi-public organizations have attracted significant commentary. Few, if any, authors have sought to link these two trends and to draw out the implications for those who work on corporate sustainability issues or want to. With this book, I intend to fill this important gap.
In an attempt to address organizational sustainability as they perceive it, financial community actors, led by SRI investors, have developed the construct of environmental (and related health and safety), social, and governance (ES&G) posture and performance. This construct defines a set of behaviors that they believe is meaningful and around which investment strategies can be defined and implemented. Although it’s not identical, the ES&G framework is very similar and closely related to the triple bottom line and another concept commonly used in U.S. corporations, corporate social responsibility (CSR). These terms and what they represent are still somewhat vague to many observers, but it is clear that each attempts to define a standard of behavior that is socially acceptable, accounts for all important factors (financial and nonfinancial), and, in the case of ES&G, allows a third party to make an informed judgment about the investment potential of a particular company or industry. This book attempts to bring some clarity to these different concepts and to show how and under what conditions they are most suitable for use by companies and their many stakeholders.
Professionals working in the environment, health, and safety (EHS)/sustainability field and in the financial sector perform different activities; have different perspectives, academic training, and priorities; and rarely cross paths in any regular or organized fashion. Yet increasingly they are working on different dimensions of the same issue: how the EHS and broader sustainability posture and performance of corporations affect these firms’ financial performance and investment potential. A few thought leaders have noted that more integrative and complete thinking across disciplines and these discrete, disconnected “communities of practice” must occur if sustainability thinking is to be translated into action on a broad scale. What is needed, however, is a much broader and more meaningful dialog involving all the relevant actors, and a set of organizing principles and facts to both explain why greater cross-pollination is necessary and form the basis for the early conversations.
In particular, EHS and sustainability professionals, and professionals working in other functions and disciplines who have an interest in corporate sustainability, must develop a more complete understanding of how the financial community operates, what its members value, what motivates their behavior, and the basis of their growing interest in corporate sustainability. At the same time, to take advantage of the opportunities presented by corporate sustainability, financial sector actors, particularly investors and investment analysts, must develop a broader and deeper understanding of how sustainability issues affect companies’ financial posture, performance, and future prospects; what types of corporate practices create the conditions required for sustainable value creation to occur; and what types of indicators may be useful in predicting which firms will benefit (and which will suffer) from evolving sustainability trends. In other words, a bridge must be built between the disparate worlds of the EHS/ sustainability professional and the investor/analyst. This book begins to build this bridge.
In taking a professional path that has traversed many different sectors and disciplines, I have found it possible to take a step or two back to view the broader landscape. It is clear to me that the increasing bodies of knowledge being brought to bear in both the EHS/sustainability and financial communities, each on their separate paths, are about to converge. This will represent a major paradigm shift that I believe is already under way. To reflect and, in my own small way, help promote this shift, I have compiled, in this book, descriptions of the following:
- How sustainability issues affect the business enterprise
- The important stakeholders who influence corporate behavior, particularly as it pertains to EHS and social equity issues
- How sustainability issues can and should be managed in an organization
- What financial markets are and how they work, with particular emphasis on sustainability issues
- The ways in which investors and other financial market actors evaluate sustainability posture and performance
- The evidence showing how skillful management of EHS and broader sustainability issues can create new corporate financial value and positive investment returns
- What performance measures are most important from all important stakeholder perspectives, and how current measures could be improved
- How those interested in contributing to organizational (and global) sustainability can become more effective and influential
This book outlines a coming “sea change” and discusses its implications for professionals in the relevant fields, for corporate leaders, and, in due course, for policymakers, regulators, and the educated general public. The book will have particular import for those who would lead internal sustainability or CSR efforts—including senior managers who have recently adopted the Chief Sustainability Officer (CSO) title—and those who would provide expert services to support these individuals and their organizations. In particular, I believe that these professionals will need to expand their existing, separate paradigms and broaden (and, in some cases, deepen) their skill sets. I believe that there is ample justification for reaching this judgment.
I have seen the broad outlines of a new way of viewing corporate sustainability issues taking shape for a considerable period. Since the mid-1990s, I have pioneered some new thinking about the relationship between environmental management and corporate performance, especially in linking environmental management improvements to financial value (such as to stock price changes and durable competitive advantage). As shown in this book, the additional leverage brought about by the growing and active involvement of financial market players is moving the world of investment into alignment with many of the goals of corporate sustainability. This alignment is taking shape and gathering force more quickly than many realize. As it becomes more prominent, it will bring many changes and challenges, and this book shows both the progress to date and my thoughts on the path forward.
Major Themes and Messages in This Book
As I show in the following chapters, the past 20 years or so have witnessed the development of a substantial body of work about and understanding of how best to manage environment, health, and safety (EHS) issues. For the most part, EHS management practices and methods are well developed and widely understood within the EHS profession. The landscape, however, continues to evolve. The array of issues that are in the purview of EHS people has been expanding at an accelerating rate in recent years. In a parallel and related development, the number, diversity, and sophistication of the stakeholders having an interest in EHS management behavior and performance continues to grow. It now includes many people and entities that until recently had expressed little interest in matters involving the environment or worker health and safety, much less sustainability. These changes necessarily place new demands and expectations on the EHS/sustainability professional.
In particular, a strong and growing impetus for corporate sustainability is emerging from an unexpected source. Influential actors in the financial sector are becoming increasingly interested in corporate environmental/EHS, social, and governance performance and in the management practices that improve it. Indeed, investments (both equity and fixed income) in firms made at least in part on the basis of EHS, social, and/or governance criteria are growing far more rapidly than their conventional, “mainstream” counterparts. Increasingly, investors and the information providers that supply them are posing a greater number of more sophisticated questions regarding not only conventional indicators of performance (such as compliance record) but also the degree of senior management involvement, the presence and effectiveness of internal systems and processes, and whether and how existing businesses may be affected by significant EHS issues (such as climate change). As I will show, these expectations are too numerous, persistent, and important for firms to ignore. I also provide evidence that these demands and, more generally, the involvement of the financial sector in corporate management of ES&G issues are very likely to increase during the coming years.
Supporting and fueling this trend is the rapidly increasing availability of information and the public scrutiny of corporate ES&G performance it enables. In the Internet age, information (and sometimes misinformation) is everywhere and available more or less instantaneously. Complicating matters is a diverse array of stakeholder values, preexisting beliefs, priorities, educational levels, and technical sophistication. Stakeholders do not, as a general rule, speak with one voice, and embracing their respective agendas may lead in divergent, even diametrically opposed, directions.
Among the types of stakeholders demanding more and higher quality EHS information are major customers, who are rightly considered “first among equals” within many companies. We are now witnessing a spate of new supply chain initiatives focused on the life cycle EHS impacts of an array of products and services. Most of the action and public attention seem to be focused on the high-profile efforts addressing consumer products sponsored/driven by major retailers (such as Walmart), although other prominent efforts are under way as well. Most of these initiatives have an explicit transparency component (they require public reporting of product/service environmental aspects), including upstream (production and transport of raw materials and components) and downstream (in-use and post-use) life cycle stages. The resulting data will make it increasingly easy for a wide array of stakeholders to identify the leadership companies (as they perceive them) and to distinguish them from the laggards, in any industry or economic sector.
Some of these major trends have been observed by other prominent participants in the EHS/sustainability field. The following sidebar describes a particularly insightful example.
These and other trends make it increasingly important for those involved in sustainability issues from any angle to apply a multidisciplinary perspective and methods. It is clear that continuing to view the issues through the lens of any one professional discipline—whether EHS management, manufacturing, marketing, supply chain management/logistics, or public or investor relations—will be inadequate to fully understand how the dynamic is changing and what to do in response. From the standpoint of some of the important stakeholder groups, it seems equally clear that far more interchange of expertise, perspective, and talents will be required. As this book discusses, most investors, and even many of their specialist ESG analysts and data providers, are poorly equipped to really understand how EHS, social, and governance issues work in a corporation, how they can most effectively be managed, and how and to what extent improved practices and performance are and can be expressed in terms that are relevant to security valuation. Similarly, in the context of understanding/promoting corporate sustainability, public-sector institutions, labor unions, and even the NGO community are in many cases organized to respond to an operating environment that in large measure no longer exists, or at the least is undergoing rapid and significant change.
Unfortunately, many of the communities of practice involved with different aspects of environmental policy, EHS/sustainability management, SRI, and investment analysis/management have often worked in isolation and sometimes in conflict with one another. There are many reasons for this—some structural, some cultural, and some contextual. Regardless of the root cause(s) that apply in any particular case, I believe that the status quo will need to change for us to advance the practice of sustainability as far and as fast as external conditions require.
This book suggests some ways in which bridges can be built across these communities so that companies are encouraged by all important stakeholders to take appropriate measures to improve their ES&G performance in ways that create new financial and broader societal value. This can and should occur through implementing improved management practices; providing consistent and timely information that is relevant and actionable to financial and other stakeholders; and receiving, understanding, and acting on appropriate feedback provided by market participants.
To make this happen, two key conditions will need to be met. One is that more frequent, extensive, and meaningful dialog will take place, leading to shared understanding. The diverse constituencies and people who need to be involved in the discussion must interact and develop a much deeper and more meaningful understanding of one another’s perspectives, needs, and talents than is typically the case now.
In parallel, and for this deep understanding to fully take shape, the second condition is that many of those involved will need to expand their perspective and, in many cases, their skill sets. Remaining solely within one’s professional discipline or official role will be increasingly untenable for anyone who wants to meaningfully contribute to the sustainability of his or her own organization, and certainly for anyone seeking to catalyze sustainability thinking or practice in other organizations.
This book not only describes the conditions, trends, and root causes that have brought us to this point, but also provides some suggested answers. For corporate organizations and the people who lead and serve them, I recommend a number of long-term objectives and strategy elements that, if adopted, can place a company on the path toward a more sustainable future. I also recommend both immediate and short-term actions to define the direction and contours of this path, and some early stepping-stones. For those working outside the organization, whether in a consulting or other stakeholder role, I suggest a number of approaches, techniques, and tools that can be used to help focus the attention and efforts of clients and others they seek to influence on the issues and endpoints that are most important, the techniques and messages that are most effective, and, in general, how they can improve the effectiveness and impact of their work in promoting organizational sustainability.