Businesses that build environmental considerations into their basic business planning can increase their value through operating efficiencies, new or improved products or new markets.
Consequently, environmental opportunities will increasingly drive strategic business planning, according to a report released today by the Aspen Institute. The report, titled Uncovering Value: Integrating Environmental and Financial Performance, was prepared by a diverse group of corporate, financial, governmental and environmental officers who paid particular attention to how financial institutions value -- or fail to value -- corporations with integrated environmental planning.
As more firms incorporate environmental factors into their basic decisions, the report says, they also are developing more efficient processes and creating new products. One example: Concern about recycling aluminum prompted Anheuser-Busch to develop a can that's 33 percent lighter, and the company's overall recycling plan saves the company $200 million a year.
The report says many leading edge companies now see an opportunity to gain a competitive edge by integrating environmental factors into their core business strategies. As this trend grows, it will be a powerful new force for environmental improvement. Similarly, the report says, "Savvy analysts and investors, armed with this information, will have a new analytical tool and a potential competitive advantage over others who do not take this strategic information into account."
"Environmental issues such as global climate change, endocrine disruptors, biotechnology and others are resulting in profound structural change in some industries," said Linda Descano, a Senior Vice President at Salomon Smith Barney, a member of Citigroup. "Ignoring environmental drivers could mean missing an important element of competitive advantage, both in a company's planning and in its assessment by analysts and investors."
Corporate participants said they learned the importance of measuring environmental factors in financial terms and communicating their message effectively to the investment community. "What we are recommending requires overcoming some powerful traditions and communications barriers," said Dorothy P. Bowers, Vice President for Environmental Safety and Policy at Merck and Co. "Corporate environmental officers talk in terms of 'pounds of toxics' while financial managers -- inside and outside the company -- want to hear about 'earnings per share.'"
The report lists five recommendations for corporations to tell their environmental story effectively to financiers: effective internal measurement of the activities; relevance to the concerns of financial analysts; a consistent message from all corporate officials; credibility of information; and a standardized method of collecting and reporting data.
According to Donald J. Reed, a certified financial analyst and Senior Associate at the World Resources Institute, "Identifying strategic business value requires understanding the ways in which environmental considerations are integral to core business strategies, such as protecting the business franchise, changing processes to improve efficiency, developing new products, and creating and entering new markets."
In addition to the Anheuser-Busch experience with aluminum cans, the report lists other examples of corporations whose environmental management enhanced the company's bottom line:
DuPont developed a family of herbicides that dramatically reduced herbicide application per acre with no drop in crop yields. More than 200 million fewer pounds of chemicals are applied to the soil each year, which means 4 to 6 billion pounds less waste. That breakthrough enabled DuPont to jump from eighth to second in market share in the crop protection chemical industry.
Volvo increased its market share in one truck segment by 35 percent over three years by differentiating its trucks on environmental factors like fuel efficiency and lower emissions. As a result, Volvo's truck operations jumped from 30 percent to 56 percent of the company's operating income in a three-year period.
Investors and analysts can also profit from recognizing the business-environmental link, according to Descano of Salomon Smith Barney. "Paying attention to whether companies integrate their environmental policies with business strategies can give them a competitive edge over their peers. The context may be new, but the questions deal with familiar subjects such as quality of management, risk exposure, brand image, growth, operating efficiency and market access."
The report identifies financial institutions that are beginning to recognize and reward corporations that identify business-environmental linkages. Some insurance companies and lenders are also starting to selectively adjust their rates based on environmental factors.
In addition to a growing recognition by companies and analysts of the financial value of the environment, an evolving view of the fiduciary responsibilities of pension fund managers may begin to multiply these advantages, the report indicates. Pension funds have more than $6.5 trillion in assets and major ownership in some publicly held companies. Although some trustees see maximizing return for their beneficiaries as their only criterion, a recent Department of Labor ruling allows consideration of social factors.
The report stems from an Aspen "dialogue" in which participants met six times in New York City over 13 months beginning in 1997. The Aspen Institute is a neutral, not-for-profit educational organization dedicated to educating leaders and bringing diverse perspectives and values to bear on contemporary policy issues.
Written by: The Aspen Institute
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