[Editor's Note: This is the final segment of a three-part article on how to pinpoint the business case for sustainability by David Bent of Forum for the Future. Here are Part 1 and Part 2.]
Good environmental management has saved telecom group BT more than $700 million. It used clear-eyed analysis and fundamental financial tools to identify the business case for sustainability. Here are the steps you can apply yourself.
Finding the business case is the "holy grail" of sustainability professionals, a goal which sometimes seems impossibly hard, and yet there are actually many different business cases for sustainability projects, change programs and initiatives.
In previous posts I gave "Six Lessons on Finding the Business Case for Sustainability Initiatives" and "Four Tips on Getting Buy-In from Finance." This final post goes into the technical part -- seven steps to investigate the business case.
I'll illustrate with the work Forum for the Future did with BT, which helped the telecoms group save $720 million (£442 million) in operating costs over five years:
1. Identify what you're investigating and why.
Obvious, but you'll be surprised how poorly people define boundaries. Are you looking at the sustainability drivers for the whole organization or only a particular project or initiative? Are you looking at the worth of an entire change program, or do you want to add sustainability-related criteria into a decision-making process like capital expenditure budgeting? Make sure you know your scope.
You should also be clear why you are investigating. How will you use the results? What is the change you're trying to stimulate?
BT was interested in identifying the financial benefits of good environmental practice for reporting and marketing. Crucially, they narrowed that down further to some particulars: transport, energy and teleconference working practices.
2. Prioritize value drivers.
Shareholder value -- the value of the company to its owners -- is driven by certain factors: turnover growth; margin growth; reduced capital expenditure; risk reduction; duration of competitive advantage; reduced tax rate and reduced cost of capital. Identify which of these is key to your investigation. (Different writers have slightly different lists. This is from "In Search of Shareholder Value: Managing the Drivers of Performance").
For BT the value driver was clear: margin growth.
3. Identify the relevant business cases.
Each value driver may have a number of different possible business cases -- we've compiled a list of 17 pathways from sustainability to shareholder value (see here). Do get in touch if we've missed out any.
The crucial thing is to identify the causality: How does A lead to B lead to C, and so on to an ultimate financial impact? It is this assumed pathway that you will be testing.
BT found that each piece of environmental good practice creates a different causal chain creating value.
For instance, increasing the number of home-workers has two key effects: Firstly, less office use cuts office costs; secondly, people who work at home use some of the time they're not traveling to do more work, effectively improving productivity. Both outcomes also reduced net greenhouse gas emissions.
4. Choose the financial technique.
Each type of business case will need an appropriate financial technique (more on this at the end). The key is to find a technique that is credible to your internal audience, usually the finance function. Wherever possible, use the same method they do.
In the BT example, measuring cost savings is a management accounting question. The issue is how long can you claim them? We assumed changes five years previously had become normal practice, and so have a five-year rolling gap (i.e. effectively we compared the costs in 2008 with 2003).
5. Do the financial analysis.
With luck you'll get the finance function to do it for you. BT identified total savings of £442 million ($720 million) from the five years to 2009. You can see more here.
6. Use your findings in the business.
You identified why you were investigating in step one. Now you have the results, use them.
BT has used its results in different ways. It has disclosed them, as part of communicating to stakeholders and shareholders the value of sustainability. It has used them to build awareness of the business case for sustainability across the business.
Most importantly, they have been a powerful tool in marketing BT services such as teleworking. The results say: we do this ourselves, and this is how much we've saved.
7. Learn and embed.
Finally, what have you learnt about investigating this business case? How will you do it differently next time? Do you need to set up an information management system to collect the data automatically? How can you embed the results in regular decision-making? What do the results mean for sustainability in the company more generally?
These three posts have come from Forum's work on Better Decisions, Real Value. We've nearly finished piloting various techniques with our partners. By the end of April we hope to have a tool which takes people through the steps above, including directing them to the appropriate financial technique. If you are interested in seeing a draft, or have suggestions please do get in touch with me.
David Bent is head of Business Strategies at Forum for the Future, a nonprofit sustainable development organization based in the United Kingdom.
Image by sxc user penywise.