Opportunities in Corporate Sustainability
Written and compiled by Rachel Duran
The pressure has been turned up on Corporate America in regard to addressing sustainability issues in their strategic planning, for any number of reasons. Companies are responding and increasingly connecting the dots between risk management and sustainability; however, they are not adequately aligning the response to the scale of the challenge, according to a recent survey conducted by Ernst & Young LLP and the GreenBiz Group.
“Sustainability is not simply environmental, it is social and governance and the interconnectedness between those and the company’s ability to generate profits,” says Brendan LeBlanc, executive director of Ernst & Young’s Climate Change & Sustainability Services. He says sustainable strategies tackle issues such as:
*environmental, such as climate change or water scarcity
*social, such as human rights and working conditions in various parts of the world
*population shifts in the types of skilled workers and the locations where they happen to be
“We work with clients from wherever they are on the journey; from getting started and setting goals to understanding better how their strategy will be realized in a resource constrained world that has global megatrends that will impact their strategy,” LeBlanc says.
For one company, LeBlanc’s group is conducting a “stress test” on the company’s strategic plan to double its business by 2020, determining what sustainability related goals need to be reached in order to accomplish the increase. The efforts have created the opportunity for meaningful dialogue between corporate risk managers and the sustainability team.
“We are working with them to perform analysis on what types of specific goals and strategies should fall out in light of planetary limits and in light of demographic shifts,” LeBlanc says. “Here is the opportunity for the risk and financial analyst types to understand a different subject matter. It is nonfinancial today; it is not accounted for in the U.S. accounting system, these so called externalized costs.
“And there is also the chance for the sustainability person to become more business relevant,” LeBlanc continues.
So, what are the keys to achieving buy in from senior managers and shareholders, and actually implementing these strategies?
In the fall of 2012, E&Y conducted a survey of sustainability thought leaders to ascertain how companies are implementing strategies. The survey analyzed 282 respondents from 17 industry sectors, employed by companies generating revenues greater than $1 billion. Eighty-five percent of the survey’s respondents are located in the United States.
Global Corporate Xpansion: Your recent study outlines six growing trends in corporate sustainability (download at www.ey.com/us/sustainability). What did you learn?
LeBlanc: The survey tells us that companies’ responses and approaches to sustainability issues are influenced significantly by the “tone from the top” — how and how much senior management is engaged in the conversation.
1.We were able to slice the answers apart for who responded what way in light of how they answered the question of where they report to; the governance around sustainability. Those organizations where the CEO and board were both involved in sustainability had a much higher correlation between having sustainability risks aligned and accounted for in corporate strategy.
Those who had the highest scores in regard to the no alignment response were in a silo, filling out surveys and stuck in the corner.
2.The second trend found that governments and multilateral institutions aren’t playing a key role in corporate sustainability agendas. Who is answering the call for global environmental issues? There was a harsh response on the indictment of no faith in governance, and the multilateral organizations such as the UN. The highest respondents were in corporations, with non-governmental organizations really pushing the agenda.
3.The third trend focuses on how sustainability concerns now include increased risk and proximity of natural resource shortages. Climate change, beyond the political divisiveness, is still seen as something 20 years out; therefore, it is difficult to quantify that risk or make it real action we can take today.
Fifty-one percent of the respondents say in the next three years to five years there will be natural resource shortages that represent a real risk to their businesses. Not surprising, water was rated No. 1.
We asked how many of the respondents are including this fact in the company’s enterprise risk management framework. Initially, 80 percent of the respondents said they were doing this, which we found high and inconsistent in our experience in performing this type of work.
4. When we asked how many of the respondents were planning out different scenarios, such as comparing the availability of water to specific needs; that 80 percent dropped to 30 percent. There is a disconnect between sustainability and the risk management response. The response is not well paired to the issues.
The final two trends outlined in the survey are not connected to the first four, LeBlanc notes.
5. There is a tremendous amount of buzz around integrated reporting, reporting of nonfinancial material, along with financial information, to tell the holistic story, the value creation this story has.
It has been slow to take hold in the United States. Respondents indicated they had challenges with integrated reporting, including buy in, quality of data, and timing of the data. Let’s put this in perspective. The integrated reporting framework was released in April of this year; and our survey took place in the fall of 2012. This pilot program, by the International Integrated Reporting Council, is in the open comment period, which runs through mid-July.
6. The inquiries from investors and shareholders are on the rise. The survey found as the demands for disclosure on environmental and social impacts increase so do the number of surveys, questionnaires and queries. The questions come from diverse directions, with groups seeking different sets of data. The resulting tsunami has overwhelmed companies.
The growth of queries also mirrors the growth of shareholder proposals on social and environmental issues, which now account for 40 percent of all shareholder proposals, according to a 2012 E&Y report on the trends in shareholder resolutions. Environmental and social issues have been the No. 1 issue filed the past few years.
The real story is the amount of the positive votes for. According to our survey, when those resolutions are brought by the socially responsible investing groups, who are niche players, they enjoy a fair amount of support from the big institutions. When they are brought by institutions and unions, they are joined by mainstream money.
GCX: Were there any surprises resulting from the sustainability survey?
LeBlanc: In regard to the resolutions being brought forward by investors and shareholders, 17 percent of the survey’s respondents were not aware of the resolutions that dealt with sustainability that were brought before their companies.
What this means is investor relations and the sustainability person are not communicating.
To assist in keeping the lines of communication open, E&Y’s report offers suggestions to address these six emerging trends:
- Address vocabulary challenges head on, build multidisciplinary teams.
- Get sustainability, risk and investor relations together.
- Model scenarios of water shortages, climate change, and population growth for risk planning.
- Monitor shareholder resolutions across multiple industries to stay ahead of the curve.
- Monitor NGO activity as a precursor to regulation or market pressure.
To download the 2013 six growing trends in corporate sustainability, an Ernst & Young survey in cooperation with the GreenBiz Group, visit: www.ey.com/us/sustainability. The site also includes a webinar highlighting the survey’s results.
Illustration by patpitchaya at Free Digital Photos.net