Quantifying the value of your sustainability investments
March 30, 2011 at 12:22 pm 3 comments
Celia Spence
We heard at the 2010 EHS Management Forum about how Bloomberg is now posting environmental, social and governance (ESG) performance data on the terminals its 300,000 customers use to make investment decisions every day.
Bloomberg went live with this data in July 2009 and it is reported in the April issue of Fast Company magazine that “in the second half of 2010, 5,000 unique customers in 29 countries accessed more than 50 million ESG indicators via Bloomberg’s screens.” This is a 29% increase over first half of last year.
According to the article and Bloomberg’s sustainability director, Curtis Ravenel, they expect that trend to continue. Investors are finally waking up to the idea that good performance in these areas can impact shareholder value. Bloomberg gleans this data from many different sources and provides it to their clients as just one more subject area to be used to evaluate investment decisions. Ravenel states that “ESG ought to be in SEC-required company filings, and until it is, it won’t be viewed as material by a lot of people.
“Of course, a lot of the financial data in there now aren’t material either.”
While performance data may provide important bits of information for investors, what is really needed to determine whether they are material is to analyze how the ESG initiatives impact the cash flow of the company. Full valuation audits of ESG initiatives could answer that question. Understanding how ESG initiatives can impact shareholder value provides information that is critical for strategic planning and gives environmental, health and safety (EHS), and sustainability leaders the evidence they need to push projects forward in a meaningful manner.
Does your company have any idea of how your initiatives are impacting shareholder value? Do you just do a simple payback analysis and leave it at that?
Showing the link to the price of the stock is going to be critical for fully integrating sustainability in our corporations. Because, let’s face it, a company that is not producing value for its shareholders is not sustainable.
Entry filed under: Corporate Social Responsibility, Emerging Issues, Sustainability, Uncategorized, Wall Street. Tags: Environmental metrics, esg, ESG ratings, esg surveys, metrics, Metrics that Matter, Sustainability Metrics, sustainability performance analytics, Sustainability rankings, Sustainability Reporting.
1.
lmheim | March 30, 2011 at 5:40 pm
Before making the leap directly to stock price impacts, it makes more sense in general to begin looking at the operational expense reductions and possibly new revenue associated with sustainability measures.
Operational cost reductions can sometimes be very easy to quantify with standard ROI methods – such as with energy and fuel savings programs. Beyond that, you can look at the reductions achieved in “contingent costs” – or put another way, risk reduction. There are metrics that measure the financial value of EHS risk reduction (such as ROIa) that can demonstrate the economic value of sustainability at the operational, business unit or overall corporate level.
Revenues generated from sustainability programs may seem easy to identify, but in practice, it can be more difficult than first anticipated. The reason why reflects a potential conundrum for EHS/sustainability professionals.
Let’s take LED lighting as an easy example. If I am a manufacturer of lighting equipment, I could expand my LED product line (and see resulting revenue increases), then claim the resulting success as either (a) smart business, responding to an emergent trend in customer demands, or (b) clear economic results of my company’s sustainability strategy. This analogy can be easily applied across an enormous range or products or services. In that way, sustainability professionals gain a feeling of victory in being tied so close to business strategy and outcome.
But if there is a sense that the same revenues stem from smart business moves that would have occurred even in the absence of a corporate sustainability program (and the related cost), that could undermine the sustainability program – or at least its perception. GE struggled with this problem at the beginning of their ecomagination campaign as they were criticized for claiming “sustainability successes” for a business direction they had already laid out previously.
Conversely, companies can be excluded from major business opportunities based on EHS/sustainability factors. Where the absence of those programs directly costs companies such opportunities, the value of EHS/sustainability is clear – but is only obvious in hindsight and in the context of a loss. It can be more difficult to specifically quantify the value of sustainability as the “price of the ticket for entry” and show ROI once you are past the entrance gate.
Obviously, there is no requirement to choose one designation or the other. But perceptions – both internal and external – about the role of a sustainability program in expanding revenues can be important. Especially in the context of attempting to correlate sustainability successes to stock price.
2.
Jim Nail | April 1, 2011 at 10:40 am
Stock price is certainly one good measure, and there are a couple of good studies out. Elevating the conversation to this level and getting out of the trap of having to justify every initiative on its cost reduction ROI is essential to really moving the sustainability agenda forward.
But it is also important to look at brand value and protecting profit margins. I reference some key studies on all of these points in this post on my blog, Speaking Sustainability: http://bit.ly/BeyondSimplePayback
3. Measurement and Reporting: The latest dMASS newsletter — dMASS | May 19, 2011 at 11:02 am
[...] Celia Spence of Verdant Value asserts that fully incorporating sustainability into businesses will require a better understanding and accounting of how ESG initiatives impact shareholder value. [...]