This is Part 2 in a 3-Part Series. You can read Part 1 here: Planet vs. Profit.
Many corporate sustainability policies have strong economic drivers behind them—something that appears to be missed by many. Corporate policies such as performing energy audits on existing buildings, reducing waste, recycling materials, making new buildings LEED certified, or understanding their company’s water-energy nexus (water and energy usage relationship), all have sound economic reasoning associated with them. They don’t just help reduce pollution or waste, they also create valuable cost reductions for the company in the long run--a win-win.
Ernest and Young, along with the Greenbiz Group recently issued a study labeled “Six Growing Trends in Corporate Sustainability”. They analyzed over 272 respondents in over 24 separate industries at companies generating revenue greater than $1 billion. The study was developed to determine what trends drive sustainability. What they found offered some very enlightening results. When respondents were asked what drives sustainability initiatives at their company, 93% cited “energy costs” as a key driver. This was followed by “changes in customer demand” and “brand risk” at 87% of respondents. Most significantly, 86% cited that “increased stakeholder expectations” were driving their sustainability initiatives. 80% of those respondents also cited “new revenue opportunities” as a key driver (Ernst & Young, 2012). What this information tells us is that the top ranked factors driving these initiatives are economically focused.
“High” sustainable companies were more likely to award compensation bonuses linked to a function of environmental, social, and external perceptions on top of financial performance (Eccles et al., 2011). This demonstrates that companies are truly serious about sustainability initiatives and are not just pursuing “green-washing” tactics to embellish them. They find importance in discussing long term non-financial information such as that related to key stakeholders, including employees, customers, and suppliers. In keeping with this long-term approach, sustainable firms tend to disclose more non-financial data than others. This candidness is an important strategic dimension when determining the efficacy of execution, and it reduces the cost of obtaining and monitoring information necessary for investment decision making. It is argued that greater engagement with stakeholders is a source of competitive advantage for the participating firm, as it is thought to establish a strong trust-based relationship that produces higher switching costs to external stakeholders (Henisz et al., 2011).
eBay’s (EBAY) strong emphasis on the management of energy usage provides an excellent example of the ambitions and economics of sustainability at work. The company has undertaken a massive effort to improve the efficiency of its data centers responsible for processing auction transactions. Their Topaz data center in South Jordan, Utah achieved LEED Gold status and was awarded “Environmental Project of the Year” in 2011 by Green IT Magazine (Lescroart, 2011). Most impressive is that through these initiatives the company has been able to reduce its net energy usage by 55% per transaction. With plans to facilitate over $300 billion in global commerce by 2015—an increase of $125 billion over that of 2012 (Barr, 2012), this savings becomes even more significant. It is clear why management of energy usage is playing an increasingly integral role in sustaining the company’s competitive position in the growing e-commerce world.
Linking financial success to sustainability initiatives shows that companies provide not only a benefit to the environment but to the bottom line as well, exactly what investors like. I believe that investors and analysts would be wise to consider the merit of sustainability initiatives because they can provide material benefits to a company’s operations.
Barr, A. (2013). Ebay sets aggressive 2015 targets, shares climb. Reuters. Retrieved from http://www.reuters.com/article/2013/03/28/net-us-ebay-ceo-idUSBRE92R0LO20130328
Eccles, R., Ioannou, I., & Serafeim, G. (2011). The impact of corporate culture of sustainability on corporate behavior and performance. Harvard Business School. Retrieved from http://hbswk.hbs.edu/item/6865.html
Ernst and Young, (2012). Six growing trends in corporate sustainability. Retrieved from http://www.ey.com/Publication/vwLUAssets/Six_growing/$FILE/SixTrends.pdf
Henisz, W. J., Dorobantu, S., & Nartey, L. (2011). Spinning Gold: The Financial Returns to External Stakeholder Engagement. The Wharton School, University of Pennsylvania. Retrieved from http://www-management.wharton.upenn.edu/henisz/hdn.pdf
Lescroart, A. (2011). Building a greener company. Ebay green. Retrieved from http://green.ebay.com/greenteam/ebay/blog/Building-a-Greener-Company/26#