Making sustainability pay

Last year’s WWF publication To Whose Profit? [see EBM 68] was a huge success — distributed to over 1,500 organisations and downloaded from the internet over 20,000 times. Having succeeded in presenting a business case for sustainability in business, To Whose Profit? (ii): Evolution — Building Sustainable Corporate Strategy takes the drive towards sustainable business further, building on a company’s initial progress towards a joined-up strategy which reaches from the boardroom to the investor interface.

The primary target of To Whose Profit? (ii) — which will be published in October — is still the manager with responsibility for CSR and environmental issues, and is intended to provide the tools to convince the board and investor relations officers that sustainability has value, leading to sustainability attracting mainstream investment funds.

Joss Tantram of WWF’s Business Education Unit says: “Most investment decisions are based upon an analysis of company strategy plus discussions with company leadership. If sustainability doesn’t feature either in the strategy or the discussions then it won’t be a driver for competitive advantage or value creation.”

He believes there is a “glass ceiling” at which sustainability issues fail to break through to the boardroom, and that businesses are failing to cash in on the potential of their environmental activities to attract investment.

Changing attitudes

Tantram and his colleague Alasdair Stark’s approach is a pragmatic one. NGOs pressure companies to change their behaviour, but changing economic conditions are bringing other drivers into play — drivers which can help bring about WWF’s environmental objectives without the need for traditional NGO campaigning techniques.

Primary among them is the changing attitude of mainstream investment funds.

In October 2002, Hermes Pension Management published The Hermes Principles, setting out the company’s “expectations” of investors as company owners, which it sent to the boards of all UK-listed businesses. As well as calling for companies to “behave ethically and have regard for the environment and society as a whole”, the Principles call on companies to “minimise the externalisation of costs to the detriment of society at large”.

For Tantram, this admission that shareholder profit over societal interest is damaging to the economy as a whole is a crucial justification for sustainable development, and is an area where even the businesses with the most commitment to sustainability are foundering.

There is a lot of work remaining — even for companies with quite well developed policies on sustainability,” Tantram says. “This reflects the lack of a strategic response. Businesses are happy to respond to operational issues, often by increasing the environmental efficiency of products and processes.”

Mismatch in focus

Research for To Whose Profit? (ii) has identified two main reasons that a purely operational response is insufficient. There is a mismatch between the focus of companies’ efforts on the environment and the main areas of impact arising from their activities. Secondly, ethical and environmental rating agencies tend to judge a company’s performance by precisely the impacts they are failing to address.

“Companies are going to have to start to understand how they can influence their reliance on primary resources, and start to unlock product stewardship and customer-related issues,” Tantram says. “We are saying that companies don’t think enough about these externalities — and this being reflected and resonated by the investment community too.”

Understanding risk

An example would be the changes required to meet the government’s long-term targets to reduce carbon dioxide emissions by 60%. Companies that don’t understand the implications stand to suffer costs and won’t stay competitive.

Mainstream investors are beginning to recognise the nature of these risks, and this creates an opportunity. Tantram says: “If Investor Relations isn’t able to reflect a strategic response to sustainability, they will lose investment.

“But lessons are not being learnt as high up as they should be. The SRI funds are worth no more than 5% of total investment, so companies have to understand how their sustainability responses are meaningful to the mainstream investment community.”