Making Sustainability Work

Best Practices in Managing and Measuring Corporate Social, Environmental, and Economic Impacts

By Marc J. Epstein




Introduction

Improving Social and Financial Performance in Global Corporations

The issue of whether companies should consider their social responsibility or the impact of their activities on their stakeholders is no longer up for discussion. These issues, and many, many more like them, have become a central part of the creation of shareholder value and the management of both global and local enterprises.

The challenge has moved from “whether” to “how” to integrate corporate social, environmental, and economic impacts—corporate sustainability—into day-to-day management decisions when managers at all levels have significant incentive pressures to increase short-term earnings. It is now about how to be more socially responsible or sustainable and engage corporate stakeholders more effectively. It is about the specific actions that managers can take to effectively deal with the paradox of trying to simultaneously improve corporate social and financial performance.

Developing sustainability strategies is often an important challenge for senior executives, but implementation is usually the larger challenge. In most of the successful implementations, CEOs are involved and are the drivers of corporate concern to implement sustainability. But these senior managers are often challenged as to how to manage the paradox of simultaneously improving social, environmental, and financial performance, the three elements that make up sustainable performance. Business unit and facility managers are pressured to deliver profits and their performance is typically measured primarily on how successfully they deliver. So, there is often difficulty obtaining an alignment of strategy, structure, systems, performance measures, and rewards to facilitate effective implementations. It is also often difficult to obtain the resources to effectively manage the various drivers of social and environmental performance.

Sustainability has been defined as economic development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs. For businesses, this includes issues of corporate social responsibility and citizenship along with improved management of corporate social and environmental impacts and improved stakeholder engagement.

Leading companies have increasingly recognized the critical importance of managing and controlling corporate social and environmental performance. The impetus for implementing a corporate strategy to integrate social, environmental, and economic impacts may be driven by internal factors, such as a management commitment to sustainability as a core value or by management recognition that sustainability can create financial value for the corporation through enhanced revenues and lower costs. Often, however, the leading impetus for a sustainability strategy is from external pressures such as government regulation, marketplace demands, competitors’ actions, or pressure from NGOs (non-governmental organizations).

Managers have now recognized the importance of stakeholder input and engagement and the potential impact on long-term corporate profitability. The consequences for businesses when they do not effectively consider the impacts of their activities on society are often substantial. Thus, effective management of stakeholder impacts and relationships is critical. Some companies have not developed any coherent sustainability strategy or even any systematic way of thinking about or managing their social and environmental impacts. Negative social and environmental impacts have tarnished the reputation of many corporations. However, some have recognized the social and environmental effects of their actions, developed a corporate sustainability statement, and made progress toward defining a policy that confronts the problems. These companies have developed partial systems to deal with social and environmental problems and may have transferred technologies from other parts of the company to use in implementing sustainability.

They may have set up systems for improved costing, capital budgeting, performance evaluations, or product design but have not developed an integrated program that includes sustainability in day-to-day decision-making. Some companies have developed effective reactive systems to address these issues and others have been more aggressively proactive. It is unlikely that any company has fully integrated or achieved sustainability—this is a huge task—but numerous companies have taken important steps toward improving their sustainability performance and reducing their negative social and environmental impacts. Many of these companies are included in this book as exemplars of best practice. Rather than searching for one best company example to model, those companies and managers that want to improve their sustainability performance should instead look to adapt and adopt the various best practices of individual sustainability elements. Through the detailed model, measures, and guidance to implementation presented here and the extensive best-practice company examples from around the world, companies can select those practices that can be used to better implement sustainability in their own organizations to simultaneously improve corporate social, environmental, and financial performance.

Leading companies are examining the impacts of their products, services, processes, and other activities more broadly. They are looking at a more comprehensive set of social, environmental, and economic impacts on a broader set of stakeholders. Managers recognize that stakeholders have numerous impacts on company profits— employees in their desire to work for the company, customers in their desire to buy from the company, the community in its desire to permit the company a license to operate. But they have faced difficulty in managing competing stakeholder interests and simultaneously improving both corporate social, environmental, and financial performance. Business leaders who want to respond sensibly to activist calls for corporate responsibility should think about the issue in the same way they would any other business problem.

But stakeholder management has to be more than identifying the squeakiest wheels and greasing them. Sustainability cannot be managed as just a public relations strategy to pacify stakeholder concerns. Doing so can be quite risky as stakeholders expect actions and results to be consistent with rhetoric. Furthermore, it is only through the identification, measurement, and management of sustainability impacts that social and environmental and financial performance can be improved and value created. For sustainability to be valuable to both the organization and its stakeholders, it must be integrated into the way a company does business.

The size of corporate social and environmental expenditures is increasing rapidly and the necessity of improved identification and management of these impacts has become critical. Business leaders need to make an independent assessment of their social, economic, and environmental impacts to see where pressure is most likely to come and also to see where the company is providing un-priced social, environmental, and economic benefits for which it is not receiving credit. Firms should not underestimate their ability to turn corporate social responsibility into a competitive advantage.

Why it’s important

Here are the four main reasons why sustainability now demands our urgent attention:

• Regulations. Government regulations and industry codes of conduct require that companies must increasingly address sustainability. Noncompliance with regulations was (and still is) costly, as regulatory noncompliance costs to companies include: penalties and fines, legal costs, lost productivity due to additional inspections, potential closure of operations, and the related effects on corporate reputation.
• Community relations. The general public and activist NGOs are becoming increasingly aware of sustainability and the impacts that corporations have on society and the environment. Identifying the social and environmental issues that are important to key stakeholders and improving stakeholder relationships can foster loyalty and trust. Gaining a license to operate from governments, communities, and other stakeholders is of critical importance for corporations to be able to conduct business on an ongoing basis. Good performance on sustainability can garner a positive reputation with stakeholders and improve community relations and business performance. Alternatively, the consequences of mismanaging sustainability and stakeholder relationships can be significant and costly in terms of reputation damage and potential impacts on the bottom line.
• Cost and revenue imperatives. Sustainability can also create financial value for the corporation through enhanced revenues and lower costs. In other words, managing sustainability is just a good business decision. Revenues can be increased through increased sales due to improved corporate reputation. Costs can be lowered due to process improvements and a decrease in regulatory fines. Identifying the areas where good for the society, good for the environment, and good for the company intersects is key.
• Societal and moral obligations. Because of their impact on environment and society, companies have a responsibility to manage sustainability. A personal concern for social and environmental impacts and their social and moral obligations has led some executives and corporations to include sustainability in their strategies. Leadership organizations recognize the relationship between business and society and are redefining their economic, environmental, and social responsibilities around the concept of sustainability.