How do you demonstrate a 'sustainability premium' to investors?
<p>There's a growing disconnect between the importance of sustainability to many corporate strategies and its lack of relevance to mainstream investors.</p>
More companies are translating their sustainability efforts into revenue and productivity. But for the most part, investors don't understand or even know about the shareholder value that sustainability initiatives can create.
Part of the problem is that sustainability reporting, up until now, primarily has been targeted at the "value" investor, those actively seeking certain social responsibility standards. As a result, the indicators that could illuminate how sustainability affects business drivers do not really exist for today's investors.
The reporting problem
In the recent MIT Sloan Management Review article "Bridging the Sustainability Gap," authors David A. Lubin and Daniel C. Esty examine the gap that exists in sustainability reporting. On the one hand, executives are reluctant to develop more sustainability metrics, while on the other, investors stand back, waiting for better gauges of sustainability's financial impact.
Lubin and Esty argue persuasively that now is the time to address that gap.
"Given that the expected steady increases in the impacts of climate change, regulatory pressures and evolving consumer attitudes are likely to make sustainability strategy even more important going forward, we believe mainstream investors will reward companies that demonstrate business gains from sustainability — provided investors can easily spot the sustainability winners," they wrote.
"The greatest opportunity for such a 'sustainability premium' is during the early stages of a comparatively new phenomenon such as the emerging sustainability imperative. That's when superior performance creates the best chance for differentiation from competitors."
DuPont's sustainability-based revenue uptick
The authors use DuPont as an example of how to develop sustainability data for investors that is built around the drivers they understand: revenue growth, productivity and risk.
On the revenue front, one of DuPont's key sustainability-driven revenue growth metrics for the 2007-2012 period is as follows: "Revenue from products based on nondepletable resources doubled, from $5.9 billion on a 2007 revenue base of $29.4 billion to $11.8 billion on a 2012 revenue base of $35 billion."
Put another way, DuPont's revenue from products based on nondepletable resources increased 100 percent over the six-year period — compared to revenue growth of about 18 percent for the company as a whole during that time. So the ratio of revenue growth from products based on nondepletable resources to the company's overall revenue growth was more than 5:1.
This kind of figure enables investors to easily see the role being played by sustainability-advantaged products, which in turn helps them to understand the sustainability strategy and the competitive advantage that DuPont will gain from investments in its sustainable solutions.
In terms of productivity gains from sustainability, DuPont reported $6 billion in aggregate cost avoidance from energy-saving efforts between 1990 and 2010. That level of savings suggests a material impact during that period on DuPont's net income, which was $3 billion in 2010.
And in risk management, DuPont has highlighted six key areas of potential future exposure, including: absolute levels of greenhouse gas emissions, water use, water use in water-stressed locations, air carcinogen emissions and manufacturing plant certifications.
DuPont reports that "water consumption in water-scarce or -stressed locations," declined from 6 billion to 5 billion gallons between 2007 and 2012. The authors compute a stressed water intensity percentage-of-revenue figure that relates water use to revenue growth and find a 30 percent decrease from 0.20 to 0.14 gallons/dollar of revenue for DuPont for this period — a significant shift.
Where to start?
For companies eager to highlight the business drivers behind their sustainability strategy, the authors suggest beginning with reporting metrics related to revenue growth. And if your company tracks top-line revenue impacts from sustainability-designated products and services, consider creating a sustainability-driven growth metric (S/G). Such a metric should be included in your primary business performance reporting on at least an annual basis.
If, on the other hand, your company hasn't yet begun to identify the growth, productivity and risk metrics from your sustainability efforts, it's worth starting right now. There is a learning curve, but there are many excellent models, and the results will be worth it. Say the authors, "Investors seeking to capitalize on [the forces driving sustainability strategies] must be able to distinguish companies that are pursuing carefully structured and successfully implemented sustainability strategies that deliver actual material business advantages from those with less well-designed or well-executed strategies."
Top image of hands with sprout by Sergey Nivens via Shutterstock. This article first appeared at MIT SMR Management Report.