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Integrating Environmental Sustainability into the Company's strategy

A study of contributing factors to overcome barriers between sustainability and shareholder demands

Master's Thesis 2009 131 Pages

Business economics - Business Ethics, Corporate Ethics

Excerpt

Table of Contents

Executive Summary

Table of Contents

List of abbreviations

List of figures and tables

1. Introduction
1.1 Problem description: Situation of competing strategic priorities
1.1.1 Relevance of sustainability issues
1.1.2 Current implementation rate for sustainability practices
1.1.3 Barriers for an engagement in sustainability issues
1.2 Objectives of the research
1.2.1 Measures and guidelines linking environmental issues with financial performance
1.2.2 Sustainability practices and reporting standards meeting stakeholder’s expectations

1.3 Research hypotheses
1.4 Research methodology

2. Sustainability strategies and standards
2.1 Sustainability perspectives
2.1.1 Corporate Sustainability
2.1.2 Sustainability indicators
2.1.3 Environmental sustainability as a risk management perspective
2.1.3.1 Physical risks
2.1.3.2 Regulatory and liability risks
2.1.3.3 Competitive risks
2.1.4 Business opportunities resulting from environmental changes
2.1.5 Business strategies and environmental strategy
2.2 Environmental accounting and reporting
2.2.1 Triple bottom line of sustainability
2.2.2 Accounting frameworks
2.2.2.1 Approach of shareholder value concept
2.2.2.2 Models for the financial analysis of environmental issues
2.2.2.3 Methods of measuring environmental benefits and costs
2.2.2.4 Relationship between environmental and economic performance
2.2.3 Reporting frameworks
2.2.3.1 Linking environmental accounting and reporting
2.2.3.2 Reporting categories and characteristics
2.2.3.3 Current reporting guidelines and standards
2.2.4 External stakeholders’ perspectives
2.2.4.1 Growing interest on sustainability reporting
2.2.4.2 Sustainability research and rating organizations
2.2.4.3 The impact on investment decisions

3. Theoretical Framework and Hypotheses
3.1 Research design
3.2 Testing hypotheses with initiatives from a case study company
3.2.1 Environmental accounting practices
3.2.1.1 Methods for evaluating economic performance
3.2.1.2 Accounting costs and benefits
3.2.1.3 Factors for the discount rate
3.2.2 Reporting standards
3.2.3 Stakeholder’s perception
3.3 Method of collecting data
3.4 Analyzing the Hypotheses statements

4. Developing the Business Case
4.1 Situation of sustainability implementation
4.2.1 Environmental Management Programs
4.2.2 Corporate Sustainability Reporting
4.2.3 Management of Stakeholder’s demands

5. Testing hypotheses for integrating sustainability into business strategies
5.1 Hypothesis I: Environmental and financial performance are generally positively related to meet shareholder value demands
5.1.1 Environmental initiatives have a significant impact on company’s value
5.1.2 Cost avoidance arise from environmental practices which are not capital- intensive
5.1.3 The cost of equity is decreasing with the improvements in environmental performance
5.2 Hypotheses II: Metrics in sustainability reports have potential to be used as universal reporting standards
5.2.1 Reporting standards allow communicating comprehensive and accurate information to stakeholders
5.2.2 Reporting standards are harmonized with other prominent guidelines
5.2.3 Reporting quality and format are helping investors to value the company while showing an effect on financial performance
5.3 Hypotheses III: Pressure from a wide range of individual stakeholders driving sustainable business practices
5.3.1 Sustainability practices are addressing customer expectations
5.3.2 Analysts and investors are influencing environmental reporting
5.3.3 Regulatory authorities are influencing environmental reporting
5.3.4 Higher employee satisfaction is gained with sustainability practices

6. Discussion and Conclusions
6.1 Literature Research
6.2 Research Hypothesis I
6.3 Research Hypothesis II
6.4 Research Hypothesis III
6.5 Conclusions

7. Recommendation

Appendix I
Appendix II
Appendix III
Appendix IV
Appendix V
Appendix VI
Appendix VII

Bibliography

ITM Checklist – 360°Analysis

Executive Summary

“If we do not focus on sustainability, then we will not be able to sell products in the future. We will not have a supply or customers may not buy from us.”

Andrew Hewett, Global Sourcing Development Manager The findings of this research are most useful for those (e.g. executives, environmental managers) who view environmental sustainability as a vital issue for business and intend to develop a corporate strategy that responds to stakeholder’s expectations while ensuring long-term performance.

The aim of this research is to verify that shareholder is exactly the right focus for pursuing an environmental related strategy, and that key stakeholders are expecting firms are taking ownership on environmental issues.

While integrating environmental sustainability, the research explores the positive relationship between the organisation and key stakeholder’s which turns into an increased company value.

Central to the research question are identified barriers preventing companies from pursuing an environmental strategy. According to various surveys among executives, they regard environmental issues as strategically important, however relatively few companies appear to be translating the importance they place on these constraints into corporate action.

The methodology of this study is to test hypotheses during an explanatory case study. Before testing the hypotheses, a descriptive literature research provides basic information, describing the topic as well as common practices and results from empiric studies. Then a case study serves as a research strategy to collect and analyze data for testing the constructed hypotheses. It explains the relationship between variables within the arguments which are environmental initiatives and the financial performance, reporting standards and effectiveness of communication to stakeholders, and meeting stakeholder’s expectations with corporate practices.

In the final analysis of this research, sufficient evidence facts are collected to conclude with the existence of a wide range of practices to overcome perceived barriers between environmental sustainability and shareholder demands. The literature research explores numerous meta-study findings and stakeholder’s and analyst’s opinions, all referring to an increased environmental awareness among stakeholders. These stakeholders who are concerned about environmental issues are driving the development of practices, guidelines and other practices.

The findings from the second research phase, the real-life case study, are basically supporting the findings from the literature research. By expressing eco-efficient practices in financial terms, a significant impact to the estimated cash flow and return rate (ROI) generated by opportunity benefits was identified. Also, the case study company reports on environmental aspects, which is compiled according to a universal guideline. The corporate reports appear powerful in communicating to investors, customers and other stakeholders.

Various practices were discovered to prove that smart companies focusing on the right accounting and reporting tools seize competitive advantage through strategic management of environmental challenges.

List of abbreviations

illustration not visible in this excerpt

List of figures and tables

Figure 1: General business risks and opportunities resulting from climate change impacts

Figure 2: Barriers to CEO engagement

Figure 3: Systematisation of environmental indicators

Figure 4: RPA sustainability performance

Figure 5: The Risk Spectrum

Figure 6: Value drivers to long-term shareholder value

Figure 7: Constituent elements of the financial statements

Figure 8: An integrated model of the financial analysis of sustainability

Figure 9: Dimensions and process steps of common sustainability reporting standards

Figure 10: External Cost Figures for Electricity in the EU for existing Technologies

Figure 11: Firm’s environmental risk management performance

Figure 12: Firm’s ratings on Stakeholder Capital

Table 1: The Global Reporting Initiative (GRI) Sustainability Guidelines

Table 2: The AA1000 Assurance Standard

Table 3: ISO 14001

Table 4: The Dow Jones Sustainability Index (DJSI)

Table 5: Potential value creation when realizing the opportunity option

Table 6: Return On Investment estimated on discounted benefits and cost

Table 7: Discounted Payback for a Shut-It-Off Program

Table 8: Discounted Payback for a Heating System Modification

Table 9: Peer Group Comparison on Beta-Factor and Institutional Owned Ratio

1. Introduction

1.1 Problem description: Situation of competing strategic priorities

1.1.1 Relevance of sustainability issues

Global warming, water scarcity, extinction of species (or loss of ‘biodeversity’), growing signs of toxic chemicals in humans and animals – these issues and many others increasingly affect companies and society functions.1 Those companies who best meet and find solutions to these challenges will lead the competitive pack. Esty and Winston are claiming that behind the ‘Green Wave’ lies two interlocking sources of pressure. First, the limits of the natural world could constrain business operations, realign markets, perhaps even threaten the planet’s well being. Second, companies face a growing spectrum of stakeholders who are concerned about the environment.

Poritt and Tang are examining the relevance of environmental sustainability issues from a more society evolution side, they claim that at the start of the 21st century our lives are bound by two very different and potentially irreconcilable imperatives: a biological imperative which is an absolute one since that is determined by the laws of nature and, hence, is non-negotiable, and a political imperative which is about aspiring to improve our material standard of living year on year.2 The need to find some reconciliation between these imperatives has never been more urgent. A combination of rapid population growth and massively increased economic activity has transformed the world completely over the last 60 years while exacting a continuing toll on the physical environment.

Singleton and Arup are stressing the need for a move towards sustainability, they are claiming that making business sustainable is making a profit, and developing a business without blighting the world for future generations is becoming a business necessity based in cold, hard facts.3 Problems caused scarce resources and climate change are here to stay and will probably get worse. Good business are spotting those problems, managing them like any other risk and then benefiting from the opportunities they throw up.

Senior management of companies must foresee both continuous and discontinuous change and then develop strategies to steer around looming problems. Sustainability is rooted in long-term worldwide trends and science, it can make strategic planning more tangible and urgent.4 According to PricewaterhouseCoopers’ sixth annual survey of 1,000 chief executive officers (CEOs) from 43 countries, 79 per cent of these executives agreed that ‘sustainability is vital to the profitability of any company’, 71 per cent said they would consider sacrificing short-term profitability, if needed, in exchange for long­term shareholder value when implementing a sustainability programme. Most were driven by a desire to enhance their brand, attract employees and provide improved shareholder value.

The World Business Council for Sustainable Development (WBCSD) is drawing the picture on the need for sustainability from a risk management perspective. In an issue brief to business, the WBCSD is pointing out several repercussions created by climate changes on how business operates. The magnitude and frequency of impacts are uncertain, but consequences with negative effects on business could include:5

- Higher temperatures, which could affect the location, design, efficiency, operation and marketing of business infrastructure, products and services
- Water scarcity, which could stymie business operations, particularly those of water-reliant industries
- Increased frequency of extreme weather events, which could damage business infrastructure, disrupts logistics, and affects business continuity and costs

The WBCSD is further claiming that climate change impacts could also affect business through its impacts on key stakeholders beyond the businesses’ ‘fenceline’ and ‘horizon’ as illustrated in figure 1.6

- Customers affected by climate-related stress, losses, costs and damages may have less disposable income to spend on conventional goods and services
- Investment analysts, who are already asking for disclosure of climate risks and demonstration of an effective risk management strategy, may demand even greater disclosure
- Investors, who may shift away from business perceived to be at high risk from or of contributing to climate change
- Regulators, who are likely to implement new measures requiring new business processes and skills for compliance management which is likely to increase costs.

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Figure 1: General business risks and opportunities resulting from climate change impacts. Adapted from Dell, Jan in “Business Working on Water: Beyond the Fenceline”.7

1.1.2 Current implementation rate for sustainability practices

Sixty percent of global executives regard climate change as strategically important, a survey in 2007 conducted by McKinsey finds, and a majority consider it important to product development, investment planning, and brand management. However, relatively few companies appear to be translating the importance they place on climate change into corporate action.8 According to this survey of 2,192 global executives, thirty-six percent report their companies seldom or never consider climate change in corporate strategy. About four in ten say their companies seldom or never account for climate change when developing new products, planning investments, developing a regulatory strategy, or in purchasing.

Undertaken on behalf of 315 institutional investors, representing over USD 42 trillion of assets under management, the fifth iteration of the Carbon Disclosure Project (CDP) in 2007 provides with an analysis of how the world’s largest companies are responding to climate change. This report finds out that the gap between climate awareness and action continues to narrow. The analysis of FT500 (ranking of world’s largest companies) responses reveals that in sum 76% (n=286) of responding companies reported implementing a GHG emissions reduction initiative compared to 48% in the 2006 survey. Overall, the 2007 year’s responses indicate a greater understanding of, and attention to, the complex issues surrounding climate change.9 Despite the increased awareness, only 64% of responding carbon-intensive companies have allocated senior management responsibility for climate change. This indicates that improved climate awareness does not mean that climate change has been given the necessary management attention in carbon-intensive companies.

1.1.3 Barriers for an engagement in sustainability issues

Although the findings of both academic and empirical research suggest that investment in environmental management lead to a substantial reduction in the perceived risk of a firm with an accompanying increase in its stock price, Kind and Lenox found out that business still doubt whether pollution reduction enhances financial performance, or whether higher financial performance allows involvement in pollution reduction.10

Gray et al are arguing in their study, contrary to any ‘green literature’, managers will never proceed to implement environmental investments that may aggravate accounting measures, unless they are convinced that financial gains, sooner or later, will be credited to them.11

One of the main hurdles in the process of integrating environmental sustainability into traditional financial analysis has been the absence of an adequate approach that links both financial and sustainability objectives in terms of profitability and risk, which are the terms best understood by firms and financial markets.12 When incorporating sustainability, it is essential to support the application of the language, knowledge and tools of financial theory.

The Environmental Protection Agency (EPA) has identified some barriers that explain why the financial implications of environmental strategies are not better reflected in financial analysis. Three of them are worth of mention for the purpose of this work:13

- An imprecise terminology for describing environmental performance
- Lack of information exchange and common language for describing environmental strategies
- Lack of technical skills to understand how environmental strategies affect financial outcomes

In this context, Corinne Proske from the International Federation of Accountants’ (IFAC) points out “...I want more accountants in this field (sustainability issues)”, she says. “I worry we forget about what we are trying to achieve. “We get tied in by the feel-good factor but sustainability needs to be driven by business and it needs to talk business language...”14

Leading companies have recognised that sustainability principles are important for long-term corporate profitability. However, understanding the contribution of various investments in sustainability initiatives to improve shareholder value and identifying which projects provide the greatest net benefits to both the company and society is certainly a major challenge for managers formulating a sustainability strategy.15 Companies are faced with an enormous challenge of quantifying the link between corporate actions and environmental, social and financial performance. Further, the lack of a detailed business case creates additional barriers for sustainability managers and environmental managers trying to get support for social and environmental projects.

Financial performance information should be part of providing stakeholders with information, the sustainability reporting.16 Herzig and Schaltegger examined specific challenges in sustainability reporting and found out that corporate sustainability reporting is confronted with sustainability-specific challenges to company external communication such as:17

- Information about the sustainability of a company is not simple for stakeholders to access directly and they can often do this only with difficulty. This leads to information asymmetry between the company and its stakeholders.
- Companies, on the other hand, do not always have sufficient knowledge about the information needs of stakeholders. As a result current sustainability reports do not always meet stakeholder’s information needs.
- Currently, most sustainability reports are non-specific, aiming at a diffuse and excessively wide group of potential readers. This creates a risk of information overload and to an additive and separate treatment of ecological, social and economic matters.

According to a McKinsey research report issued in 2007 more than 9 out of 10 corporate leaders are doing more than they did 5 years ago to incorporate environmental, social, and political issues into their firms’ core strategies.18 This research paper is based on a survey of approximately 400 CEOs of companies participating in the UN Global Compact. The survey report is suggesting that despite the willingness to engage their firms in social activities, CEO’s today face implementation issues for several reasons: there are no established global guidelines or strong investor incentives for social, environmental and governance work, it is incredibly complex, and it is typically not a core skill. CEOs explain that they feel a series of tensions in implementing an integrated and strategic company­wide approach as illustrated in figure 2.19

CEOs responding to the survey face a first barrier of competing strategic priorities such as their shareholders’ demands for solid short-term performance. This conflict is exacerbated by the longer-term nature of sustainability investments, the absence of universal reporting metrics, and the conflicting interests of a wide range of individual stakeholders. CEOs are arguing that with no clear and consistent investor measures of sustainability issues that relate or correlate with financial returns it will less likely that sustainability will be considered when valuing a company.

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Figure 2: Barriers to CEO engagement. Adopted from McKinsey’s survey of 391 UN Global Compact participants, February 2007.

1.2 Objectives of the research

Some studies suggest that the remedy is not to shift the focus away from shareholder value, but to reaffirm shareholder value as the central focus of company’s engagement in environmental sustainability.20

The present research aims at verifying that shareholder value is exactly the right focus for pursuing an environmental related strategy, if it is defined and assessed in a manner considering all effects of environmental sustainability investments. Secondly, this work aims to verify that key stakeholders are expecting firms are taking ownership on environmental issues, and while integrating environmental sustainability into a firm’s strategy and building a thorough communication infrastructure it impacts positively on the firm’s relationship with internal and external stakeholders.

1.2.1 Measures and guidelines linking environmental issues with financial performance

“Short-term distortions in earnings to prop up stock price only serve the worst kind of speculation or the most self-serving executives”, Lazlo argues.21 “Sustainable value means value that is based on real, sustained performance, not on accounting sleight of hand”. This work will investigate for arguments and examples justifying the thesis that incorporating an environmental sustainability strategy is contributing to delivering shareholder value reliably, and that investments in sustainability is not in conflict with financial responsibility to shareholders. Even for the thesis that environmental sustainable activities contributes to short-term shareholder value this work will investigate. The research’s objective on the accounting side is to demonstrate that the assumption that pursuing sustainability will end up costing mores is a misconception.

1.2.2 Sustainability practices and reporting standards meeting stakeholder’s expectations

Corporate sustainability management is challenged not only to manage the economic, ecological and social effects of corporate activities systematically, but also to provide stakeholders with information about sustainability-relevant issues and how the company is dealing with them.22 The research’s second main objective aims at the sustainability reporting and at the expectations from internal and external stakeholders. There are several national and international bodies that promote sustainability reporting, enough substance to proof the existence of guidelines to communicate sustainability metrics consistently and effectively to stakeholders. These reporting guidelines can serve as universal standards addressing firm’s performance on sustainability while providing stakeholders with a direct access to desired information and helping investors to value the company. This work tries to justify the thesis that increased pressure from a wide range of stakeholders has motivated managers to engage with environmental issues, with strategic measures specified to stakeholder’s concerns and expectations. Hence companies pursuing the way of environmental sustainability are addressing customer needs and are benefiting from gaining competitive advantage.

1.3 Research hypotheses

In the deductive reasoning of the main research structure following generic hypotheses will be specified:

- Hypothesis I: Environmental performance and corporate financial performance are generally positively related to meet shareholder value demands
- Hypotheses II: Metrics in sustainability reports have potential to be used as universal reporting standards
- Hypotheses III: Pressure from a wide range of individual stakeholders driving sustainable business practices

The specified hypotheses are a predication that corporate sustainability business wise ‘pay’s off’ and contribute to the company value when it is systematically incorporated into a firm’s strategy. The described hypotheses are stemming from previous observations in the practice field and from literature research. All generic and sub-hypotheses are testable and will be verified during a case study research.

1.4 Research methodology

Research can be classified in terms of their purpose. Accordingly, Saunders, Lewis and Thornhil mentioned that they are most often classified exploratory, descriptive or explanatory23 while Cooper and Schindler categorized in descriptive and causal.24. If the research is concerned with finding out who, what, where, when, or how much, then the study is descriptive. Nardi is claiming that a typical goal of exploratory is to provide basic information describing the topic and respondents involved.25

Exploratory research is useful when the research questions are vague or when there is little theory available to guide predictions. Exploratory research is usually used to assess the opportunities for undertaking a study, to try out various methods for collecting information for a proposed larger study later on.

Studies that establish causal relationship between variables may be termed explanatory studies. In a causal study, a relationship among variables is being explained. The emphasis here is on studying a situation or a problem in order to explain the relationship between variables.26 Explanatory research is designed to answer the ‘why’ or ‘how’ question.

The purpose of this work is to test hypotheses during an explanatory case study research presenting a comprehensive account for cause-effect relationships of events under study. Before testing the hypotheses a descriptive literature research provides basic information, describing the topic as well as common practices and results from empiric studies on the issue under review.

In the second step of this work, selected variables and events are tested in constructed hypotheses. These variables and events tested are related among one another and address the following issues: environmental initiatives and the financial performance, reporting standards and effectiveness of communication to stakeholders, sustainability practices and stakeholder’s expectations.

A case study serves as a research strategy to collect data and analyze data for testing the constructed hypotheses. A ‘real-life’ case study has been chosen for this research since there are few prior theoretical literature sources and these sources are to a certain extent contradictory. The present case study seeks to illuminate different decision-making contexts in a multinational company which are related to environmental issues, and to analyze ways meeting expectations from external stakeholders.

2. Sustainability strategies and standards

2.1 Sustainability perspectives

In a more generic sense, Howes is defining sustainability as the ‘capacity for continuance into long-term future’, as the end goal, or desired destination, for human species as much as for any other species. Whereas sustainable development is the process by which we move towards sustainability.27

There have been many attempts to define sustainable development, the most widely used of which is the definition that first appeared in the Brundtland Report back in 1987: “Development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”28 Mercer’s Investment Consulting business has adopted this definition by adding “... it encompasses social welfare, protection of the environment, efficient use of natural resources and economic well-being.”29

The Brundtland definition fails to convey the idea that there are biophysical limits within which society must operate, Howes is claiming. Therefore he suggests using the ‘Forum for the Future’s’ definition: “Sustainable development is a dynamic process which enables all people to realise their potential and to improve their quality of life in ways which simultaneously protect and enhance the Earth’s life support systems.”

2.1.1 Corporate Sustainability

From an entrepreneurial point of view sustainability can be defined according to Lane and Carrington’s interpretation: “Corporate sustainability is based upon the holistic understanding of business success as simultaneous performance of economical, ecological and societal criteria implying the connection of economic efficiency with ecologic production and social responsibility.”30

Interviewees for a project on the role of financial accountants in sustainability effects offered a similar view on corporate sustainability.31 “We don’t view sustainability as a business add-on or hype,” agrees Corinee Proske of National Australia Bank. “For me, sustainability has evolved over time. Initially I concentrated on the environmental side. Now I see it as balanced decision making, factoring in non-financial values, primarily the social and environmental impact on performance.” Separating sustainability from hype was important. Andrew Jackson, CEO of the U.K. Atomic Energy Authority says he has seen sustainability used in the ‘politically correct’ sense. “In the business sense, sustainability is about optimizing long-term objectives, not maximizing the short-term,” he adds.

For Laszlo the foundation for corporate sustainability is a worldview that recognizes the interdependence of business and its stakeholders and the systematic nature of that interdependence.32 It starts with the belief that we are part of larger system – a business ecology – and extends to a willingness to examine the larger socioeconomic system and how we impact it at the individual, community, and organizational levels.

Schaltegger and Burritt are emphasizing the importance for a company which is striving towards corporate sustainability to distinguish between the target state and the process of sustainable development.33 The term corporate sustainable development is meant as the processes which are implemented in order to reduce negative impacts and to increase the positive effects of corporations towards attaining a sustainable economy, environment and society, whilst corporate sustainability represents the desired outcome of such process.

PricewaterhouseCooper’s Luis Perera says about Corporate Sustainability “...it is about understanding each other better”.34 Philips’ Henk de Bruin concludes in his view “Sustainability allows you to get a sense of a mission in what companies are doing.” He adds, “...if you understand sustainability, you understand that on the hand sustainability is about risk and reputations and on the hand it is about business opportunities”. Also Hitchcock and Willard are seeing corporate sustainability as a framework for revealing threats and opportunities while examining relationships between issues and accurately forecasting what may occur in the future.35 It forces you to see relationships between social, economic and environmental trends.

2.1.2 Sustainability indicators

General speaking, Henriques and Laerke-Engelschmidt are arguing that an indicator offers a particular value of a target, here for target within the corporate sustainability field.36 However, a company has to distinguish between ‘process’ and ‘substantive’ indicators. At its simplest, a substantive indicator is one that directly captures an impact, and a process element is one that describes how something is managed. In order to generate measures of performance, indicators need to cover both process (i.e. management) and substantive (i.e. achievement) aspects of performance.

Schaltegger and Burritt are defining process indicators as ‘environmental impact added (EIA)’ and substantive ones as ‘performance ecological indicators’,37 whereas EIA’s are of interest mainly to upper-level management for strategic management issues.

Currently, the majority of publications dealing with environmental indicators discuss various possible ratios between inputs of material and energy. However, as shown in figure 3 a variety of other environmental indicators related to infrastructure, environmental management systems, education and training and the state of the environment are possible.

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Figure 3: Systematisation of environmental indicators. Adopted from the frameworks BMU and UBA 1997:5.38

The following list provides guidance for selecting environmental performance indicators, derived from a list of aspects across all three dimensions of sustainability i.e. social, economic and environmental. It should be borne in mind that, in general, all indicators of an organization’s performance should be confirmed by the organization’s stakeholders.39

- Energy use
- Total
- Analysis by energy source
- Analysis by key uses

- Material use
- Total use
- Analysis by recycling
- Analysis of packaging
- Analysis of hazardous materials

- Water
- Total use
- Impact on water source

- Emissions, effluent and waste:
- Tonnes of greenhouse gas emitted in carbon dioxide equivalents
- Ozone-depleting emissions
- Total waste
- Analysis of waste returned to market
- Analysis of waste to land, effluent to water and emissions to air

- Product transport analysis

- Product impacts

- Land use
- Analysis of land held tenure type and ecosystem
- Analysis of habitat changes as a result of land use

- Analysis of compliance with local, national and international laws and regulations

In summary, one approach to dealing with sustainability performance evaluation is to make and report upon measures of aspects of sustainability development in the form of indicators. Indicators can take many forms and, in reality, will depend both on the availability of data as well as a belief on behalf of those who develop them on an ability to affect the indicator of choice.40 In addition, indicators ideally should not be ‘innocent’, in that a change in the indicator should of mapping their overall performance along a series of indicator categories. These categories should include economic, social and environmental aspects as evident from the ends of lines in figure 4. These indicators displayed in figure 4 have been ranked by stakeholders from Risk & Policy Analysts Limited (RPA) as being the most to the least important; with financial performance as being ranked most important.

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Figure 4: RPA sustainability performance. Adopted from Risk and Policy Analysts (2002), http://www.rpaltd.co.uk

2.1.3 Environmental sustainability as a risk management perspective

The Sustainability Benchmarks and indicators are only valuable as a management tool to the extent that they help creating a strategic ‘inflection point’ in the organisation. Managers have to understand the underlying worldview, operating targets and externalities (social and environmental) before they can effectively apply the measures of sustainability.41

Various literature sources are suggesting risk management systems as a tool to manage effectively corporate environmental sustainability. For example, Reinhardt is arguing in the Harvard Business Review on Green Business Strategy that for many businesspeople managing environmental problems means risk management.42 Their primary objective is to avoid the costs that are associated with an industrial accident, a consumer boycott, or an environmental lawsuit. The Guidelines from World Resources Institute for Identifying Business Risks and Opportunities are describing a structured methodology that helps managers proactively develop strategies to manage business risks and opportunities arising from their company’s dependence and impact on ecosystems. The methodology can complement and augment the environmental due diligence tools companies already use.43 Singleton and Arup come in their study to the conclusion that best approach to dealing with environmental problems representing a significant business challenge is to manage it like any other risk. When companies look to advocate a sustainable business approach, it is possible to take a risk management view that is very aligned with a sustainability agenda.44

Tang from Oxbridge Climate Capital claims that companies vulnerable to direct physical risks and those with significant Green House Gases (GHG) emissions need to assess their exposure from new regulations and develop strategies for mitigating those risks. Emblemsvag and Bras are pointing to the management system according to ISO 14000 that has many companies, large and small, now thinking about the environment like they have not done before. ISO 14000 makes companies think beyond merely complying with the law, but becoming proactive rather than reactive to environmental concerns.45

Within this risk management perspective, corporate environmental sustainability challenges can be viewed as stemming from a global risk dimensions. Organisational risks posing corporate initiatives are according to figure 5 a subset of various global risks interrelated with other key risks, from storms and environmental degradation to regulation and the future of long-term energy prices.46

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Figure 5: The Risk Spectrum. Adopted from H.F. Kloman, ‘Rethinking Risk Management’.47

Tang from Oxbridge Climate Capital sees managing environmental risks as a threefold problem of direct physical risks, regulatory risk and competitive risk, risks which are further outlined in the following chapters.48

2.1.3.1 Physical risks

Businesses are at risk from the physical impacts of climate change, including the increased intensity and frequency of weather events, droughts, floods, storms and sea level rise. Changes in consumer habits that accompany changing weather patterns will also affect profitability in a number of sectors.49

Scientists are forecasting that the enhanced global warming effect will have three main secondary effects: sea level rise, hydrological cycle will intensify (producing more frequent and heavier rainfall events), and the rate of evaporation of moisture from earth’s surface will increase. The expected changes will have implications for health, life, property, business interruptions, crop, vehicle, flood, marine, and aviation insurance.50 It is now acknowledged that even if we succeed in reducing the level of GHG emissions in the future, the GHG emissions already in the atmosphere will continue to contribute to a rise in temperature, resulting in short-and long-term changes to climate.51 Relatively small average temperature rises are likely to result in an increase in the frequency and intensity of extreme weather events. The need for adaptation in the short-term is being driven by the increasingly high costs of extreme weather events that are being further compounded by rising population density, eroding natural protection systems and aging infrastructure.

2.1.3.2 Regulatory and liability risks

State, national, and international regulations are putting increasing pressure on companies with emissions from operations or products to invest in emissions controls, purchase carbon credits, or face clean-up costs.52 Companies in much of the world are already subject to the Kyoto Protocol, which aims to reduce carbon dioxide and other greenhouse gases by requiring developed countries to limit greenhouse gas (GHG) emissions.53 Regulatory uncertainty on GHG emissions will be high for the next few years. The European Commission is negotiating with members states about the design of the EU’s Emission Trading Scheme after 2012.54

The key driver legislation is always a ‘popular’ way for governments to force companies into becoming more environmentally friendly, e.g. European take-back legislation is forcing companies to recycle their products.55

Liability is beginning to extend from a company internal perspective to beyond the factory gates. More and more industries are surprised at how far their liability for toxins and other damaging substances extend. The current trend toward product stewardship or producer responsibility increasingly holds manufactures responsible for the impacts of their products for their entire life cycle.56

2.1.3.3 Competitive risks

Tightly linked to regulatory risk in the global and domestic marketplaces, climate risk preparedness will be a key driver in a company’s ability to compete. Environmental awareness is increasing among customers. Some customers will even pay more for a ‘green’ product, and industrial customers, e.g. OEMs, do not want environmental liability for a supplier’s product.57

Companies also face judgement in the court of public opinion, where they can be found guilty of selling or using products, processes, that have a negative impact on the climate. The potential for consumer backlash is particularly high in environmentally sensitive markets or in competitive sectors where brand loyalty is an important attribute of corporate value.58 Risks such as customers switching to other suppliers that offer products with lower ecosystem impacts are affecting company’s way of doing business.59

2.1.4 Business opportunities resulting from environmental changes

Weber has divided the benefits to businesses in her research report on the business case for corporate social responsibility (CSR) into the following categories: image and reputation, employee motivation and retention, cost savings, revenue increases from higher sales and market share, and risk reduction or management.60 Also Hitchcock and Willard are listing a wide range of benefits of pursuing sustainability. In total they are identifying nine benefits which are, except those that are already described by Weber, the followings: differentiating from competitors, forecasting future regulations, creating innovative new products and processes, open new markets, supporting communities in providing a higher quality of life.61 Similar to Hitchcock and Willard’s conclusions, the World Resources Institute is outlining their view on benefits in a business strategic manner. Sustainability can uncover sources of risk and opportunity that traditional strategy development processes miss. Thus sustainability yield new information that raises the profile of issues the company may have considered in the past but that are now worthy of greater attention. It also can help managers prepare for new government regulations and participate in the development of new public policies.62 Rheinhardt is in his study on green business strategy more emphasizing the advantage of companies differentiating their products and services with a clear environmental strategy and commanding higher prices for them.63

Beyond the listing of benefits, Weber clusters the benefits in monetary and non-monetary business benefits that can influence a company’s competitiveness and its economic success. Monetary benefits include revenue increases, cost decreases, risk reduction, and brand value increase. Non-monetary benefits include an improved access to capital and securing a company’s “license to operate” or its rights to exist.

The relation between sustainability and financial performance has been investigated in several theoretical and empirical studies by researchers on corporate social responsibility and sustainability. Researches have found mixed or inconclusive results, however in the conclusions of her meta-study, Weber reports some support for the existence of a business case for sustainability which seems to be dependent on the individual company strategy.64

Kuhn has reported that empirical analysis has established a positive correlation between stock value and environmental performance data in the short run as well as when this data is reported repeatedly.65 Likewise the participation of a firm in a voluntary programme has been found to raise its average excess value per unit sales, while the establishment of stringent internal management practices raises the firm’s ‘Tobin’s q’ (indicator for company’s reputation). Also a meta-study by Guenster and Derwall revealed a raise of Tobin’s q; however the research concludes that environmental leaders do not have a return on assets superior to that of the control group, but laggards display significant operational underperformance.66

Wit regard to an industry case study, petroleum refinery operations in Canada addressed this issue by controlling for critical profit-related variables in that segment of the oil and gas sector. This research finds that over the years 1993­2003, environmental performance and earnings are positively correlated. That is, emissions fell while profits were rising.67

There is also growing evidence that environmental investing may produce higher ‘riskadjusted’ portfolio returns. Managements that challenge environmental issues should be able to profit directly from environmentally driven industry and market trends. Innovest’s (a research firm) ratings on environmental efficiency was analyzed to determine whether they add value by identifying companies for which the market rewards superior management of environmental issues.68 In one test, a portfolio of Innovest’s highest rated companies was compared to its entire universe of companies. Since inception the top rated companies returned 12.37% annually versus 8.85% for the universe for a 353 basis point advantage. Another test distinguishes between the returns of their most favorably rated companies and their least favored while proving a yielding of an annualized advantage of 780 basis points.

One key driver for the financial success of a corporate environmental strategy is the cost saving. There are both costs and savings, but the cost of not having a good environmental plan in place however, can far outweigh the costs of implementation and compliance. Reducing energy usage can have the same impact on the bottom-line as increasing sales revenues. In addition, there are many energy savings projects that do not require capital funding; only an investment in education.69 McKinsey studies indicate that a lot of companies can reduce energy consumption and greenhouse gas emissions by 20 to 50 percent, and in some cases even more, while becoming more cost competitive to boot.70 A simple starting point for any company is to improve its internal energy efficiency, then to extend their efforts to cut cost throughout their supply chains, and finally to design products that are made from carbon-efficient raw materials and consume less energy.

There is also the potential for additional revenue opportunities. This could stem from the introduction of new products or services directed at meeting an environmental need or from customers and suppliers who have decided to only conduct business with organizations that can proves their environmental status.71 Esty and Winston predict in their study that “...in the near future, no company will be positioned for industry leadership and sustained profitability without factoring environmental issues into its strategy.”72 Today the traditional points of competitive differentiation, i.e. lowering costs or differentiating products, are being squeezed on all sides. Environmental strategy offers an opportunity for breaking out of concentration. Careful use of the environmental perspective can help to drive upside gains, increasing revenues and the value of hard-to-measure but important intangibles such as reputation. Finding new market spaces, satisfying customer’s needs in new ways, and just plain doing the right thing – which many important stakeholders appreciate and reward – all have the potential to add value.

The feasibility of a using environmental differentiation as a vehicle for stifling competition has increased considerably since the collection and public documentation of environmental performance has been improved. An interpretation of environmental differentiation as a form of vertical differentiation relies on the assumption that consumers unanimously rank products according to their environmental friendliness with the ‘cleanest’ product attaining the top rank. This implies that environmental friendliness is an additive feature of a product when all other attributes are perceived as identical.73

2.1.5 Business strategies and environmental strategy

Brooker explores in his study the role companies can play in reducing greenhouse gas emissions and what is needed for changing corporate behaviour towards the issue of climate change. He suggests that aligning climate change strategy to stated company missions and vision statements will ensure credibility and allow a higher possibility of success in attaining valuable climate change impacts.74 Ideal behaviour, in corporate terms, sustainability is outlined in the mission and vision statements of a company. These statements can be incredibly specific and play a vital role in shaping the company for the future. Thus the mission-strategy statement is a critical part for the definition of the business. For the whole process of defining the business it is crucial to hang together from top to bottom several strategic elements. From the top by approaching with clarifying the vision which drives the mission, which in turn drives the objectives which creates strategic options which forces tactical to be taken.75

Karim and Rutledge are proposing in their guideline for environmental disclosure practices a number of possibilities to craft an environmental mission statement.76 However, they warn before attempting top compose an environmental mission statement that guides organizational strategy and promotes environmentally responsible activities, each company must first understand how its business operations, current and forecasted, affect the environment – now and into future generations. The beginning, for many companies, is an environmental mission statement that emphasizes strict and continuous legal compliance. Once a company embarks on the “green brick road” that company’s mission and strategy should increasingly raise the bar for environmental responsibilities. For the top-tier companies, environmental management started out as something they had to do. But they have evolved to the point where environmental management is second nature and their focus is now on “mining the gold in environmental strategy”.77 Within the scope of integrating the mission statement of sustainability into the activities of a firm, some criteria for a sustainable management can be derived. An enterprise is managed sustainable as its activities are78

- mostly orientated in a long term perspective,
- economically effective and efficient,
- ecologically justifiable in terms of conserving and cultivating resources.

In order to meet the objectives of both the economic and the ecological dimension, the relevant measurement of performance is economic-ecological efficiency, or ‘eco-efficiency’. Busch, Liedtke and Beucker are suggesting in their sustainability strategic concept to concentrate on eco-efficiency as a management tool in a proactive-rational sense, and therefore as ‘a management approach’ that allows enterprises to carry out environmental protection measures from a market-oriented point of view.79 To this end, eco-efficiency can be derived as a result of creating value by reducing costs, identifying new business opportunities, and initiating actions that make costly retrofits redundant.

In the same context of a market-oriented approach, Sharma and Aragon-Correa are describing in their research on corporate environmental strategy that a relationship between proactive environmental approach and competitive advantage plays a central role in the environmental strategy and developing a firm’s generic business strategies. The rationale of a proactive environmental approach is to continuously search for new technologies and markets through an entrepreneurial and engineering process.80

Laszlo is claiming in his study on sustainable value that only few firms have used stakeholder value creation based on an environmental strategy as a way to drive new markets. Many companies have made great strides in risk mitigation and process cost reduction, but relatively few have focused on top-line growth based on product or brand differentiation.81

In another strategic aspect in which the investment behaviour is explored, Laszlo et al are pointing on the importance of assessing ‘real options’ to create strategic value instead of just focusing on financial options.82 Real options represent strategic plans and research methods to position a company to take advantage of an opportunity through making additional investments at a future date. The company will make the additional investments on the exercise date if, at that time, it appears that the business will be profitable. The management team can use real options in a powerful way in pursuing the sustainability strategies through assessing and accounting for risks related to investment options.

Also for Epstein and Roy the estimation of investment impacts with sustainability plays an important role. They believe that systems to evaluate the impact of sustainability investments on financial performance assist corporate executives as they develop a sustainability strategy and make overall corporate resource allocations to support that strategy.83 The systems also assist managers as they evaluate the trade-offs and decide which sustainability projects provide the largest net benefit to both sustainability and financial performance. Hence, to implement their sustainability strategy, companies are faced with an enormous challenge: that of quantifying the link between corporate actions and environmental, social and financial performance.

2.2 Environmental accounting and reporting

The problem statement and the aim description for this research have shown how vital is the right reporting for the relationship with external stakeholders. Thus, this chapter explores the widely accepted procedures for accounting and reporting of environmental sustainability issues. The Sustainability Guidelines defines sustainability reporting as the practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development.84 The process of accounting is described by Schaltegger and Wagner as providing information for strategic management and for reporting purposes, thus sustainability accounting serves as an important link to reporting.85 With an inside-out approach, information requirements are deduced from strategic management, collected and analysed using sustainability accounting, and communicated externally through sustainability reporting.

2.2.1 Triple bottom line of sustainability

The overarching goal of environmental accounting and reporting is to provide a first step in measuring, making transparent and thereby making accountable the movement of company owners in sustainable development towards a sustainable society. Business interpretation of this process is being made in the context of social, economic and ecological ‘bottom line’.86 Practically widely accepted and used, the ‘triple bottom line’ accounting means expanding the traditional reporting framework to take into account environmental and social performance in addition to financial performance. Fiksel concludes in his research that the efforts to evaluate each aspect of the ‘triple bottom line’ of sustainability have progressed somewhat independently and have reached different levels of sophistication.87 Corporate financial reporting has been providing information on economic performance since the beginning of the 20th century, while corporate environmental accounting has been practices for less than a decade. Corporate social reporting was first attempted in the 1970s and has recently been revived. Corporate sustainability reporting, which combines elements of all three aspects of the triple bottom line, has been attempted only in the past few years and is still in an exploratory phase.

2.2.2 Accounting frameworks

Current literature defines sustainability accounting as a subset of accounting that deals with the activities, methods and systems that are required in order to record, analyse and report: firstly, environmentally and socially induced economic impacts; secondly, a company’s ecological and social impacts, production site, etc.; and thirdly, and perhaps the most important, measurement of the interactions and links between the social, environmental and economic issues.88

The term environmental accounting can bee considered as being part of sustainability accounting. According to the United States Environmental Protection Agency (EPA) the term environmental accounting can support national income accounting, financial accounting, or internal business managerial accounting.89 National income accounting is a macro-economic measure with the context to environmental accounting through the Gross Domestic Product GDP which serves as a measure for the flow of goods and services reflecting also the national well­being. Financial accounting enables companies to prepare financial reports for use by investors, lenders, and others, usually through company’s quarterly and annual reports. Environmental accounting in this context refers to the estimation and public reporting of environmental liabilities and financially material environmental costs. Management accounting is the process of identifying, collecting, and analyzing information principally for internal purposes. A key purpose of management accounting is to inform management decisions and activities such as planning and budgeting, ensuring efficient use of resources, performance measurement and formulation of business policy and strategy.90

[...]


1 Esty and Winston, p. 8

2 Poritt and Tang (2007), p.3

3 Singleton and Arup (2007)

4 Hitchcock and Willard (2006), p. 119

5 WBCSD (2008)

6 WBCSD (2008)

7 WBCSD (2008)

8 Enkvist and Vanthournout (2008)

9 Innovest (2007)

10 King and Lenox (2001)

11 Karatzoglou (2006)

12 Pineiro-Chousa and Romero-Castro (2006)

13 EPA (2000)

14 Proske (2008)

15 Epstein and Roy (2003)

16 Herzig and Schaltegger (2006)

17 Herzig and Schaltegger (2006)

18 Oppenheim et al. (2007)

19 McKinsey survey of 391 UN Global Compact participant CEOs, Feb 2007

20 Laszlo, Sherman, Whalen (2002)

21 Laszlo, Sherman, Whalen (2002)

22 Herzig and Schaltegger (2006)

23 Saunders, Lewis and Thornhil (2003)

24 Cooper and Schindler (2003)

25 Nardi (2003), p. 9

26 Saunders, Lewis and Thornhil (2003)

27 Howes (2002), p. 69

28 Emblemsvag and Bras (2000), p.6

29 UNEP FI and Mercer (2007)

30 Lane and Carrington (2002)

31 Proske (2008)

32 Laszlo (2003), p. 46

33 Schaltegger and Burritt (2005)

34 Proske (2008)

35 Hitchcock and Willard (2006), p. 5

36 Henriques and Laerke-Engelschmidt (2007), p. 134

37 Schaltegger and Burritt (2000), p. 297

38 Schaltegger and Burritt (2000), p. 297

39 Henriques and Laerke-Engelschmidt (2007), p. 138

40 Bebbington (2007), p. 22

41 Laszlo (2002)

42 Reinhardt (2007), p. 52

43 World Resources Institute (2008)

44 Singleton and Arup (2007)

45 Emblemsvag and Bras (2000), p.6

46 Yeoh (2007)

47 Yeoh (2007)

48 Tang (2007)

49 Tang (2007)

50 Labatt, White (2002), p. 194

51 WBCSD (2008)

52 Tang (2007)

53 Reinhardt (2007), p. 130

54 Enkvist, Naucler, Oppenheim (2008)

55 Emblemsvag and Bras (2000), p.6

56 Hitchcock and Willard (2006), p. 6

57 Emblemsvag and Bras (2000), p.6

58 Reinhardt (2007), p. 136

59 World Resources Institute (2008)

60 Weber (2008)

61 Hitchcock and Willard (2006), p. 4

62 World Resources Institute (2008)

63 Reinhardt (2007), p. 43

64 Weber (2008)

65 Kuhn (2005), p. 8

66 Guenster and Derwall (2005)

67 Magness (2007)

68 Blank and Daniel (2002)

69 Brown (2008)

70 Enkvist, Naucler, Oppenheim (2008)

71 Brown (2008)

72 Esty and Winston (2006), p. 283

73 Kuhn (2005), p. 9

74 Brooker (2007)

75 12Manage (2008)

76 Karim and Rutledge (2004), p. 71

77 Esty and Winston (2006), p. 22

78 Rabbe, Schulz und Welge (2006)

79 Busch, Liedtke and Beucker (2006)

80 Sharma and Aragon-Correa (2005), p. 8

81 Laszlo (2008), p. 155

82 Laszlo, Sherman, Whalen (2002)

83 Epstein and Roy (2003)

84 GRI (2006)

85 Herzig and Schaltegger (2006)

86 Schaltegger and Burritt (2000), p. 48

87 Fiksel (2001), p. 166

88 Herzig and Schaltegger (2006)

89 EPA (2005)

90 IFAC (2005)

Details

Pages
131
Year
2009
ISBN (eBook)
9783640296651
ISBN (Book)
9783640302178
File size
1.4 MB
Language
English
Catalog Number
v124314
Institution / College
University of Applied Sciences Essen
Grade
1,3
Tags
Integrating Environmental Sustainability Company

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Title: Integrating Environmental Sustainability into the Company's strategy