Why are CEOs struggling to prove sustainability value to investors?

>> Dec 05, 2013

A recurring challenge faced by businesses looking to become more fundamentally sustainable is how to demonstrate the value of their initiatives to shareholders and investors.

This problem was highlighted by the triennial CEO study conducted by Accenture and the UN Global Compact (UNGC), which examined the views of more than 1,000 CEOs. In 2007, just 18 percent of CEOs reported a failure to link sustainability to business value. In 2010, this figure rose to 30 per cent. By 2013, 62 per cent of CEOs said they couldn't accurately quantify the business value of their sustainability initiatives.

makes it harder to answer crucial decision-making questions such as: What level of sustainability investment is appropriate? What is the return on investment from current programs and what are the priority areas? Is our profitability driven by more sustainable products and services?

Overcoming the quantification problem

To get a better grasp on value, the first step is to get the terms clear. We know there are many drivers of value creation and destruction. Sustainability is just a term that packages up a number of these drivers, but their magnitude will be different across places and sectors. To use an example, a brewery that takes water from a well that is running low will value water as a resource more critically than one in an area of plentiful water resources.

Luckily, important steps are being taken by some companies to get over the quantification problem and to apply shareholder value to the work they are doing. I argued recently that several factors are pushing companies ("high-performance" ones particularly) toward long-term sustainable business models, and that this was connected with their success. But how do investors know which steps are yielding the most value?

It's important to know how a particular sustainable initiative generates value, as this varies subtly. And you cannot measure value until you know where to look.

Broadly, there are three ways a sustainability initiative can generate return to investors: It can contribute to revenue, it can contribute to profits and losses through things such as cost reductions or greater employee productivity, or it can create an intangible impact through benefits such as boosting brand value, creating future demand or aiding competiveness by reducing exposure to risk.

Once you know which of these categories a sustainable initiate fits into, you can develop metrics to quantify the shareholder value it generates — and set key performance indicators to magnify it.

Examples of success

Focusing specifically on these three types, we might consider three sets of examples. The first, regarding contributions to revenue, involves Siemens and Marks & Spencer (M&S). Siemens's valuation approach specifically was designed to target and measure the revenue generated by its environmental portfolio. So, Siemens can tell you that in 2012, more than 40 per cent of its revenue came from products that "play a central role in environmental and climate protection." M&S, meanwhile, values the total benefit of its Plan-A sustainability program at £185m (or about $304m). Much of this, of course, is available for re-investment in the business.

The second way to translate return to investors – contributing to profits and losses through initiatives such as cost reductions – is embodied in the example of FedEx. The company was able to quantify that its new hybrid fleet of 170 trucks had lowered the company's fuel spend by 42 per cent, while reducing its total emissions by 30 per cent.

The third, and perhaps more challenging, measurement — the intangible benefits of things such as a bolstered brand identity – is evident in an example involving the Danish pharmaceuticals company Novo Nordisk. Novo developed a blueprint methodology that focused on quantifying the upsides to its business plan – in terms of business growth, and also for patients and society. Through Novo's Changing Diabetes program in China, it educated 280,000 patients, trained 55,000 physicians and grew its market share in the insulin market by 23 per cent, while at the same time contributing to an 80 per cent improvement in patient-life years.

The key here was to understand how these efforts had contributed to Novo's "license to operate" and, therefore, to its market penetration in a new (and challenging) market.

In the coming months, Accenture and the UNGC will be adding to the CEO study with an investor study, intended to develop further thoughts on how to bridge the divide between sustainable and business thinking.


Source: GreenBizz.com

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