Finance & Investment
Future Value, Submerged Value, 'ROP' & Other Facets of the ROI of Sustainability

Last week at Sustainable Brands’ New Metrics ’18 conference in Philadelphia, PA, over 300 delegates from brands, NGOs, strategists and practitioners across sectors gathered to share the newest credible tools and solutions for assessing the ROI of Sustainable Business. The densely packed program dug deep into topics ranging from Operational Metrics to Strategy and Stakeholder Engagement — and several sessions provided pertinent insights from practitioners on the evolution of Finance & Investment.

A better world through better business: Monetizing the ROI of sustainability

by Alissa Stevens

Key to improving the uptake and performance of sustainability business practices is companies’ ability to measure the strategies’ return on investment. Leaders across industries came together at New Metrics ‘18 to discover expanded methods for identifying and measuring new forms of value, as well as smart new metrics to measure them. Kicking off the conference was NYU Stern Center for Sustainable Business (CSB) Director Tensie Whelan, who broke down the Center’s new Sustainability Monetization Framework tool for unlocking growth opportunities.

The correlation between ESG and financial performance has been demonstrated: A 2016 Arabesque Partners and Oxford University meta-analysis of 200 academic studies showed that good ESG performance results in lower cost of capital (90 percent), better operational performance (88 percent) and better stock performance (80 percent). But as Whelan pointed out, ESG/sustainability issues are mostly intangibles, so we need to measure their value, risk and benefits. In creating the Monetization Framework and implementing it across sectors, the Stern team has found that when a company embeds sustainability in its strategy and practice, it improves customer loyalty, employee relations, innovation, media coverage, operational efficiency, risk management, sales and marketing, supplier relations and stakeholder engagement. This drives greater profitability, higher corporate valuation and lower cost of capital, delivering short- and long-term value for both shareholders and society.

CSB used the new framework to monetize deforestation-free supply chain commitments in the ranching, slaughterhouse and retail sectors. Referring to SASB, they first identified material ESG issues for each sector, and related sustainability strategy and initiatives. From there, they identified 19 sustainability benefits in five categories (e.g. higher land productivity, new revenue streams, GHG emissions reduction, talent retention) and finally, quantified and monetized them.

When intervening in the Novo Campo and Fazenda Sao Marcelo cattle ranches in Brazil, CSB saw substantial results after five initiatives were taken to disrupt the norms:

• Kill the subsidies that don’t support clear policy goals and don’t meet subsidy criteria (sunset all of them after a certain number of years).
• Charge or internalize the externalities.
• Adopt producer responsibility.
• Provide generative feedback.
• Demand reality-based accounting.

Whelan emphasized how important engaging the ranchers was to opening up new possibilities, many of which are interrelated. For example, in taking more control and improving management practices, such as lower use of fertilizers, they saw better cost management. Innovating agricultural techniques with things such as pasture rotation and fencing leads to cost reduction. And when those techniques increase land productivity, ranchers don’t need to rent out land additional land to support their own holdings; they can produce on their own.

CSB used cost calculations to compare financial performance before and after the above interventions (i.e. major input costs, production costs, etc), and the monetary benefits included zero to 70 percent high-quality beef, 2.3 times increase in productivity, 7 times increase in profitability, and $1.4-4.8 million and $16.6-29.2 million net profits, respectively, over 10 years.

In order to effectively manage sustainability practices and work toward goals, the practices must be measured. The CSB Sustainability Monetization Framework is a useful tool for grounding intangibles in metrics, creating expected forecasts and ultimately shaping a better world through better business.

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Submerged Value: Surfacing the True Benefits of Sustainability

by Max Pinnola

Much like an iceberg, the majority of the value of sustainability is below the surface and not immediately apparent to the untrained eye. Therefore, the true value is often vastly underestimated. Valutus founder Daniel Aronson explained the reasons why this value is so often unaccounted for, as well as the major barriers to and strategies for unlocking the submerged value of sustainability:

Barriers

Authority: Sustainability personnel often don't have the authority to require the changes they want to see; they have to persuade others instead. For example, how many sustainability practitioners could require procurement to only purchase sustainable products from sustainable suppliers?

Periphery: Sustainability practitioners are all too often considered on the periphery of the business, not at the core. Look at your own company's website: In the section where it lists top corporate executives, you'll find the CEO, CFO, often the CMO, Chief Counsel and others — is the CSO listed?

ROI: Some people focus on ROI, and it’s their prime motivator. For some it's not their only focus, but they need it to outweigh costs/difficulty as part of balance with other factors. For some, it's a required gate: They need to see ROI exceed the hurdle rate before they’ll act.

Some people don’t understand sustainability language, or think it’s not the language of work; they need to hear us speak in ROI language. Even some champions are uncomfortable advocating without also having standard business ideas like ROI on their side. And, fundamentally, some people won’t trust or have confidence in sustainability practitioners while we don’t talk their talk and walk their walk.

So, what if there were a roadmap to unlocking submerged value? Aronson proposed …

P.L.A.C.E.

Physics: Look at the physics of the system. For example, waste: If you ask people the value of reducing waste, by far the most common answer is ‘we don’t have to pay someone to dispose of it.’ That’s true — but it’s not a lot of money; often around 5-10¢/lb. And sometimes people will point out that you don't have to buy it to begin with. Also true. But there's more: You also don't have to move it, store it, process it, insure it and incur over a dozen other costs. These are tangible costs — but missed because they're submerged.

Lenses: Put on different lenses — those of suppliers, customers, millennials, top performers, etc. For example, over the last half-dozen years, Aronson has presented a case study about a company that is not subject to European regulations (and won't be in the future) but learns that one of its raw material inputs will be restricted. No one has seen the substantial effect this will have on the company's supply costs — not because they aren't smart, dedicated or experienced, but because seeing the reason for the cost increase requires seeing things as suppliers do.

Actions: — and reactions — also help surface submerged value. For example, suppose an experienced employee leaves and a new employee joins the company. We know they’ll be less productive at the beginning, as they learn. But what Actions will they take? They’ll call IT, ask their coworkers how to fill out their timesheets or where the bathroom is or how things really work around here. And that will lower their coworkers’ productivity. That’s another submerged cost of that attrition.

Catalysts: An action can encourage others to act — increasing their motivation or reducing the barriers they face (e.g. Stitcher bans InfoWars … Apple, Twitter and Facebook follow suit).

Effort: When we look at where others are putting their efforts, we often see sustainability bringing value. For example, one well-known manufacturing company spent a lot of effort trying to break into accounts that were loyal to its competitors. It was time- and resource-intensive, and the success rate was low. By chance, they discovered that leading with their most sustainable offerings made a huge difference — it got them in the door and converted some previously untouchable accounts to customers — even when they didn’t end up buying the sustainable product that had started the conversation.

"People feel as if there is a wall that is a barrier to progress — the ROI is a large brick in that wall,” Aronson said. “To be a catalyst, start with whose behavior you wish to change, understand the wall they are running into; and help them get around, over or through it."

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The evolution of social and human capital management and disclosure

by Cindy Mehallow

Sustainability reports often contain the claim that people are their organization’s most valuable resource, but that isn’t easy to quantify. Now, with rising investor demand for standard, consistent and decision-useful data, unsubstantiated claims won’t cut it. The pressure is on to establish measurement approaches for social and human capital, and this Monday morning panel shared a number of evolving standards that can meet this demand.

Session moderator Mike Wallace, Partner at BrownFlynn, kicked off the session by looking back at how many of the sustainability-related standards in use today were first introduced and then gradually accepted. His point: All standards were once new.

Wallace, who is also Interim Executive Director of the Social & Human Capital Coalition, pointed participants to a new tool being developed by the World Business Council for Sustainable Development: The Social and Human Capital Protocol.

Libby Bernick, Managing Director and Global Head of Corporate Business with Trucost, recounted Trucost’s work in developing the Natural Capital Protocol. In response to investors’ “intense hunger” for simpler, streamlined reporting of environmental and social issues, her firm has created a Sustainable Development Goals (SDGs) model and analysis including about 25 metrics that quantify social performance. Watch for those to be launched in early November.

Industry-specific metrics

SASB’s industry-specific standards also provide a set of human capital metrics, stated SASB’s Director of Research David Post. He stated that after years of work, SASB will soon release the last of its 79 industry-specific standards. Human capital metrics are the second most prevalent topic in those standards.

Reporters can also refer to the Global Reporting Initiative (GRI)’s newly updated Occupational Health and Safety standards released in June of this year. Allison Genovese, Director of North America at GRI, noted that users will see a shift in how some metrics are presented, as well as improved language and terminology.

The value of a human life

After describing his company’s robust work in developing a natural capital protocol, Christopher Earl — Safety, Security, Health and Environmental Manager at Roche — conceded that it is more difficult to measure social impacts than environmental impacts. Citing worker fatalities as an example, he mused “What is a human life worth?” Nonetheless, all companies within Roche worldwide are now working to identify social capital parameters — such as absences, living wage, employment, disease and even economic impact through secondary job creation in communities. Earl speculated that many conference participants are probably measuring some areas of social impact and should “Take a step back, look at it and evolve on it.”

Beyond measuring the social and human capital impact and performance of an organization’s core activities, other companies are looking for ways to measure community involvement initiatives. Manuela Werner, Strategic Lead of Starting Ventures at BASF, shared the challenges of finding meaningful measures for a new initiative to fund employee-driven programs that empower low-income people. The challenge is heightened when limiting the search to those measures that can be gathered with a reasonable effort.

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Carbon pricing, and other ways to stay ahead of the ESG curve

by Max Pinnola

On Tuesday afternoon, Bernick began her spirited lunchtime presentation with some great news (unless, of course, you aren’t properly managing ESG): ESG is moving from a niche to a mainstream issue for businesses and investors. The transition to a low-carbon economy is inevitable, and Bernick drew an interesting comparison of this inevitability to falling off a motorcycle: “It’s not if, but when … and you better be prepared.”

From the margins to the mainstream

• $23 trillion of assets under management consider sustainable investment issues
• 26 percent of global assets under management consider sustainable investment issues
• 12 percent annual growth rate of sustainable investment assets from 2014-2016 (versus 5 percent industrial average)
• $24 trillion in assets expected to come under the control of values-driven millennials by 2020, prompting the largest intergenerational wealth transfer ever seen

Low-carbon benchmarks outperform — signs of change

• Japan’s Government Pension Investment Fund (GPIF) will invest $10 billion in carbon-friendly indices
• In the past 2 years, environmental and climate concerns have affected 717 (10 percent) corporate ratings
• Large banks (e.g. ING) are steering portfolios towards ESG performance
• Sustainability has been linked to lower costs of capital and increased access to funding

Forward-looking ESG metrics: Carbon pricing

The writing is clearly on the wall and companies will have to integrate ESG to remain competitive. Traditional practices such as carbon footprinting will no longer suffice, as this is not necessarily the best indicator of value at risk: Future carbon pricing risk can now be quantified. Carbon prices are going to rise as countries implement pricing mechanisms. Trucost has models to estimate and forecast carbon pricing and the S&P DJI recently launched its S&P Dow Jones Carbon Price Risk Adjusted Index Series with a weighted scheme based on estimated company market valuation at risk from predicted 2030 carbon prices.

Based on the market signals and new valuation tools, Bernick predicts that large and rapid market shifts are imminent: "Everything in life happens gradually… then all of a sudden. The point is that things happen slowly at first, then they have a compounding effect; so, too, will all our hard work towards a more sustainable economy.”

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Imagine Finance as an ESG ally, not an opponent

By Alissa Stevens

Getting the attention and approval of a Treasury Lead or CFO for sustainability initiatives can be tough. And despite there being helpful case studies and tools, this is new territory for most businesses — and those trying to navigate it — that can induce anxiety. Iron Mountain, a global leader in storage and information management services, asserts that sustainability and finance can be powerful allies and create win-win results when they combine forces in an effective way.

Iron Mountain provides solutions for data backup and recovery, records management, data centers and shredding, acting as the guardian for more than 680 million cubic feet of customer records with technology that is 99.9 percent accurate. The company stores and protects important corporate information and audio recordings, and as such is focused on “responsibility business.” As SVP of Finance Rachel Wilson said during her presentation, “Our business is based on trust. … We’re committed to transparency and accountability.” Part of that responsibility is sustainability and corporate social responsibility efforts in accordance with GRI.

A 2016 Iron Mountain greenhouse gas report showed that electricity made up almost half of its GHG emissions, since continuous power is required to maintain its servers and other technology. In diving further, the company found that renewable energy offered a distinct advantage with price stability, and it committed to switching from fossil fuels to 100 percent renewable energy. The goal was to lock in low-cost power while meeting the priorities of the finance department, thus challenging the chief financial and sustainability officers to work together.

Ultimately, Wilson’s team was able to work with the sustainability team to develop a business-positive solution that leverages renewable energy to help reduce expenses and business risks associated with fossil fuels. Getting to a “yes” can be uncharted territory or seem unlikely, but Wilson asserts that it can be done, so long as the teams understand each other’s goals.

“Understand the objectives internally, and have the data presented in an aligned fashion. There are no shortcuts to doing the homework,” she said.

Iron Mountain operated as a cross-divisional team with a cross-functional nature, forging a close partnership. The sustainability team put together a financial summary, highlighting the ROI. Providing information on approvals to be obtained (who and what dates) is key as well. And if the finance team comes back with a no, Wilson encourages sustainability teams to ask why. The leverage could be what costs are upfront versus phased, or the timing of the investment. Inquiring to discover missing information could inform a yes moving forward.

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How ‘purpose accounting’ is shaping a multicapitalist approach to management

by Dr. Aurora Dawn Benton

Naturally, a prominent theme at a metrics conference is the adoption of frameworks and tools that help decision-makers quantify impact and opportunities. This session opened with Mark McElroy, who co-created one such tool: the MultiCapital Scorecard (MCS) — a performance accounting methodology that enables measurement, assessment, and management of triple bottom line performance.

At previous New Metrics conferences, McElroy presented usage of this tool by the likes of Ben & Jerry’s, Cabot Creamery and EY. Today he introduced Griffith Foods as the newest example. What was particularly notable about this case study is who is driving the efforts: CFO Matt West (emphasis on the F!).

Flavor behind the flavor

Griffith Foods is one of those large food companies you’ve never heard of, because it makes the flavor behind the flavor. This 100-year-old, 4th-generation family business develops and manufactures custom spice blends and other products used by the brands you have heard of. With close to $1B in sales and numerous supply chains manufacturing in 20 countries, Griffith Foods’ impact is significant. West was keen to point out that the company’s purpose statement (“We blend care and creativity to nourish the world.”) won’t be seen on walls or business cards in the organization; rather, it is embodied in all employees and integrated into operations.

With this embedded purpose, Griffith Foods sees sustainable sourcing is an example of indirect impact necessary to address.

From sage to Scorecard

Albania is one of the world’s largest producers of sage and Griffith Foods is the largest global purchaser. West showed a photo of the team in Albania with mountains in the background. He quipped, “When you look at this picture, you may see four guys who think their shoes are pretty interesting.” Joking aside, his goal with the photo was to bring to life the significance of how sage has been historically sourced. Women, children and the elderly climbed mountains, gathered wild sage and sold it to brokers. Griffith has purchased many tons sourced in this way, leading to negative impacts on communities and the environment.

West noted the connection between quality and poor resource management. To address the spectrum of impacts, Griffith Foods was the first to work with Rainforest Alliance outside the coffee and cocoa sectors, and now sources 100 percent certified cultivated sage; Griffith made a similar effort with chili peppers in India. Rainforest Alliance provides the company with traceability, avoiding the common and difficult-to-detect practice of adding a carcinogenic red food coloring as a spice filler.

These stories set up a contrast that underscores the importance of a methodology such as the MCS. West explained, “You think it’s sufficient to be able to tell stories about sustainability? No. We can’t sit in front of a supplier like McDonald’s [that wants] to know our details on sustainability, and say ‘let me tell you about four guys with interesting shoes.’ … We have to have something specific.”

Meat on the bone

The MCS gave Griffith Foods structure for the level of specificity demanded by customers, and to gather data behind the story. West referred to it as “the meat on the bone” and “something we could be proud of.” West added that Griffith was looking for something rigorous, flexible, context-oriented and science-based — and found this in the MCS.

The tool helped Griffith Foods narrow the priority and scope of efforts in its People, Planet and Performance categories. For each area of impact, metrics and context are identified and accountability structures are established, such as employee engagement and linking metrics to compensation respectively. Most importantly, measures are tied to strategy. For example, the company plans to transform its business to a more health and nutrition focus, which can be tracked in specific ways under the Performance category.

West emphasized that sustainability is a journey and Griffith Foods’ leaders believe sustainability and performance go hand in hand, a fact supported by two record years in a row of performing above targets — a fact that does not go unnoticed by the CFO.

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Future Value: A visionary look into the future of accounting

by Mia Overall

Accounting might not be the first thing that the Sustainable Brands community thinks about. And yet, it has been evolving from traditional financial accounting to include things such as social impact metrics and environmental metrics such as Environmental Profit & Loss. So, how should it continue to evolve in the future?

With this question in mind, accountants convened an international working group of accounting experts called Reporting 3.0 (R3) to develop a blueprint for accounting in 20 years. Cornis van der Lugt, lead author of R3’s Accounting Blueprint, took the plenary stage to share the group’s forward-thinking work — it is exciting because, as van der Lugt put it, “what gets counted, counts.” In that sense, accounting is really about the foundational systems for preparing information and deciding “what counts.”

Currently, the discipline is fragmented. There is traditional financial accounting and management accounting. Sustainability accounting is the newest kid on the block, but it’s not yet recognized as a discipline in its own right. On top of that, systems of integrated metrics are emerging.

Building on the principles recommended by US Generally Accepted Accounting Principles (GAAP), the International Financial Reporting Standards and the Financial Accounting Standards Board, the group has developed a set of 12 Recognized Comprehensive Accounting Principles, and proposed introducing new elements to the income statement and balance sheet that account for externalities that are not currently included in financial statements.

For example, the proposed multi-layered income statement has a new section on “internalities” that include a stock taking of the gross value generated or distributed to society or the environment. Income statements would also include a third section that accounts for “externalities,” with reference to different kinds of capital such as direct or indirect costs or benefits to society or ecology.

The multilayered balance sheet recommends adding the value of intangible assets. This is done by listing the difference between book value and market value under Assets and listing the things that make up this difference such as human capital or natural capital under Liabilities.

Critically, the Blueprint pushes accounting boundaries in two directions. On the one hand, it begins covering externalities, which traditional accounting does not. On the other, it includes a forward-looking dimension, with a statement that estimates the value of assets and liabilities in 20 years and onwards. While some of the technicalities may have been lost on the non-accounting professionals in the room, the presentation was yet another example of how sustainability professionals are realizing the value of adopting financial language to partner more closely with financially focused professionals across companies.

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ProSocial Valuation: A new methodology for measuring social good through amount of social capital created

By Aishwarya Chaturvedi

In the early ‘80s, Lesa Ukman “started a company, that started an industry” — the world of sponsorships and cause advertising we are all familiar with today. 24 years later, in 2006, she sold the company, IEG, to the world’s largest advertising and communications agency, WPP.

Back then, Ukman believed that interrupting people with advertisements was a “fundamentally stupid way to market.” Instead, she recommended brands support things that their customers loved. She had a similar a-ha moment two years ago, which is the underlying idea behind her current venture: ProSocial Valuation (PSV).

“We have all these organizations, non-profits, people doing so much good — wanting to do even more good,” she said. “Yet, we have no way to measure good that is universal and relevant to everyone, which is also understandable and transparent.”

The current way to measure good stop at measuring inputs and outputs. For example, Ukman called into question the Better Business Bureau’s approach of rating nonprofits based on the money they have spent on pursuing their mission vs overhead; note that this has nothing to do with outcomes. On the other hand, there are government campaigns that almost exclusively laud their outputs (500 girls educated, hundreds of homeless lifted from the streets), with no clarity on its social impact. Certifications, self-assessments and reports give you a wealth of information but still don’t help you compare businesses and make a decision.

Ukman called CSR “basically BS” that only rewards compliance. Instead, she pointed to what she calls Corporate Social Opportunity (CSO): “CSO is the key — looking at people not as problems but as opportunities, because they have children who could be your customers, your employees, investors.”

PSV, then, measures social capital — a term used to refer to all types of positive outcomes for people and planet. It does so with a seven-step process.

Ukman next walked people through the first implementation of ProSocial Valuation’s methodology at the Homeless World Cup, organized in Glasgow in 2016 (read the full report here).

This analysis not only helped the Homeless World Cup Foundation benchmark its own performance to guide subsequent campaigns but also gave its patrons, sponsors and donors a strong reason to back those more strongly for their subsequent achievements.