Monday, May 20, 2013

Innovation Needed for Corporate Sustainability Success

Many companies have sustainability programs nowadays. But often with limited success, both for their sustainability targets and also for their financial performance. Investors can be really harsh towards companies taking nice initiatives, but fail to realize shareholder value with them. According to Robert G. Eccles and George Serafeim in their article "Innovating for a Sustainable Strategy" (HBR May 2013), companies need to address the interests of all stakeholders while creating a sustainable strategy. Such a strategy goes beyond just cutting emissions, reducing waste etc. and requires a strategic focus on the Environmental, Social and Governance (ESG) issues that are most relevant to creating shareholder value. In this way firms can boost both their ESG and financial performance at the same time. Eccles and Serafeim provide 4 steps for corporations to achieve this: 1. Identify the most critical ESG issues in your type of business. 2. Quantify the financial impact of ESG improvements (one can use the SASB Materiality Maps for this, which distinguishes 43 potential impact issues in 5 main categories: Environment, Social Capital, Human Capital, Business Model and Innovation, Leadership and Governance). 3. Undertake MAJOR innovation in products, processes and business models to achieve the improvements under 2. 4. Communicate with stakeholders about these innovations. For example by integrating ERG information in the annual report. Pitfalls to avoid are: - Short term-oriented incentive systems - Short-term investor pressure - Shortage of strategic ESG know-how - Failing to account in the proper way for environmental and social value in the capital budgeting process.