The Business Case for Sustainability- Issues Affecting the Maximization of Benefits for ALL of Society

1
The Business Case for Sustainability-Issues
Affecting the Maximization of Benefits for ALL
of Society

• 8 February 2006 Environmental Science Policy
  Seminar
• New Jersey Institute of Technology

John L. Cusack
johnlcusack_at_att.net Executive Director,
NJ Higher Education Partnership for Sustainablity
www.njheps.org President, Gifford Park
Associates
www.giffordpark.net
2
In the 19th century, we were making money with
money, in the 21st century, I believe and hope
that we will use values to create value -
Oliver Le Grand , Chairman of the Board of
Cortal (a subsidiary of BNP Paribas)
3
No Place To Hide for the Irresponsible
Business - Headline, Financial Times, 29
September 2003
4
A Word From Our SponsorNew Jersey Higher
Education Partnership for Sustainability (NJHEPS)

• NJHEPS is
• A consortium of 40 NJ Colleges Universities
• an organization developing, promoting and
  implementing sustainability among higher
  education institutions, businesses,
  municipalities and citizens in NJ, the region and
  nationally
• Founded in 1998, hosted at NJIT
• Focused on energy efficiency, renewable energy,
  sustainable campus and building design (issued
  guidelines, BPU support)
• Now an additional new focus on integrating
  social, economic and environmental (I.e.,
  sustainability) issues into curriculum
• Also targeting partnerships of higher education
  institutions with their communities and with
  similar higher ed sustainability groups in
  Northeast, Mid-Atlantic, nationally globally

5
A Changing World for Senior Corporate Decision
Makers
Company Image

• Directors Officers Liability/Management
  Responsibility

Balance Sheet Management
Erosion of Public Trust
Social and Environmental Disclosures
Legislation and Regulation
Shareholder Value
Market Demands
6
Question How Can Business Be Sustainable,
and thus Create Environmental, Social and
Economic Benefits/Profits?

• Many Components to the Issue
• Accounting/Measuring Performance
• Taxes
• Education
• Scientific Understanding
• Disclosure/Transparency
• Accountability/Responsibility
• Corporate Ethics (is that an oxymoron?)
• Risk Assessment
• Corporate Governance

7
Accounting/Measurement Present Systems Far From
Perfect...

• Social Environmental issues dont fit well in
  our 400 year-old economic accounting systems
• Traditionally, if an item could not be
  quantified, it was ignored (e.g., intangible
  assets, patents)
• We need better ways of integrating sustainability
  issues into the business measurement system
• That which gets measured, gets managed
• But, how do you measure Corporate Sustainability?
• Some rating systems are being used by investors

8
Sustainability Rating Providers for InvestorsA
variety of sources...
Three Largest, (Best?) Most Global

• Innovest Strategic Value Advisors (ISVA)
• Sustainable Asset Management (SAM)
• Trucost Limited

Others (many are national in scope)

• Kinder, Lytenberg, Domini (KLD) Oekom EIRIS
  Arese Ethibel IRRC Light Green Advisors ISS
  Core Ratings Avanza etc. over 90 rating groups
  identified in a recent study done by GPA for a
  major multinational company
• Note traditional rating agencies starting to
  look at this field (e.g.,Moodys now does
  governance ratings)

9
Innovest Rating Sample Results Steel Sector- 3
Years
10
Innovest Ratings Sample Results Telecom Sector
11
SAM/Dow Jones Sustainability Index Performance
DJSGI World Index(December 1993 March 2000, US
Dollar, Price Index)
DJSGI
DJGI
12
Taxes Giving People The Wrong Incentives...

• Taxes are often used to create incentives, not
  just to raise revenues (I.e., gas oil drilling
  tax credits)
• People agree that Profit, Jobs and Health Care
  are good, but we tax profits, jobs and health
  care!
• We say Pollution is bad, but we dont tax
  pollution!
• Result Management has an incentive to hide
  profit, and cut jobs health care, but pollution
  is free- what is wrong with this picture?
  (Polish example)
• Need political will and understanding to set
  better revenue-neutral incentives for corporate
  managers

13
Education Why Dont People Know What They Dont
Know?

• Business schools just starting to teach social
  and environmental issues to future business
  leaders
• Examples
• - Aspen Institute study of business schools
• - HP funding of CSR Chair at York University
• - FDU Institute of Sustainable Enterprise
• - Programs at UNC, Yale, Cornell, Michigan,
  Oregon, U. of California, etc. and in Europe
• Need to integrate business and sustainability
  issues and education across all higher education

14
Scientific Understanding When must one act
without certainty in all the facts?

• Dont have to be a weatherman to know which way
  the wind blows- Bob Dylan
• Business executives operate in uncertainty all
  the time
• Examples
• - 2/3rds of investors still use active investment
  managers despite evidence that index funds
  outperform them.
• - White House says we need more facts on climate
  change, when number of global extreme weather
  events has risen from 150 in 1950 to 1600 in 2001
• Most European governments and citizens believe in
  the precautionary principle, which means test
  new products, medicines or chemicals BEFORE
  putting on the market, as opposed to recalling
  them AFTER damage is done

15
Disclosure/Transparency Investors cant use
information they dont have...

• Existing SEC and FASB rules cover some social and
  environmental issues, but have been ignored
• Proposal before SEC to increase environmental
  disclosure is a start, but SEC moving slowly
• Europe taking the lead, with countries like
  France requiring major corporations to report on
  their social and environmental impacts
• Problem is standardization of reporting- GRI and
  SA-8000 are a start, but far from perfect

16
Accountability/Responsibility Post-Enron,
Worldcom, Putnam, etc., whos in charge?

• Definition of Fiduciary Responsibility changing
• Roles of Corporate Boards changing
• Investor Pressure- both Mainstream SRI
• Supply Chain Issues increasing
• Who should be held responsible? As the famous
  philosopher Pogo said, we have met the enemy,
  and he is us
• We all have to do something- as investors,
  educators, consumers, managers, voters...

17
Ethics What is a responsible corporation or
institution?

• Still a problem with the entity that never dies-
  the corporation- (hard to fear hell if you never
  die)
• However, corporations dont hurt society or the
  environment, people do
• Ethics and values are human issues set by society
• Cultural values do differ by country, region and
  continent (look at Denmark the current
  cartoon issue)
• Will the global society help or hurt?

18
Risk Assessment Firms need to do a better job of
assessing sustainability risks

• As companies decentralize and expand, strategic
  inter-disciplinary risks (like sustainability)
  sometimes fall between the cracks of corporate
  management structures
• As investors demand better disclosure of
  social/environmental liabilities more corporate
  understanding of sustainability risks is required
• Thus, companies need to have a comprehensive
  system to identify, assess and mitigate social,
  environmental and economic risks and understand
  their potential impacts
• Senior executives just starting to do this (BP,
  AIG, etc.)
• National Association of Corporate Directors
  (NACD) suggested board risk committees as a best
  practice in a December 2002 report

19
Corporate Governance -The rules that govern how
management manages...

• Definition- Enhancing the Return on Capital
• through Increased Accountability.
• Good corporate governance requires
• More accountability of directors, CEOs, officers
  and managers of corporations.
• More accountability of fund managers, trustees
  and investor shareholders.
• Boards of Directors are like sub-atomic
  particles- they behave differently when observed
  - Nell Minow

20
Example Climate Pollution- Its REAL, Its HERE,
It Will Have MAJOR Financial Impacts

• Climate Pollution will have a variety of
  financial impacts
• Health Insurance- Climate change will lead to a
  resurgence in infectious disease unseen since the
  19th century- Paul Epstein, Harvard Medical
  School
• Property Insurance- World-wide economic losses
  due to natural disasters appear to be doubling
  every ten years, have reached 1trillion over
  the past 15 years - Munich Re
• Impact on profits- Companies will incur
  significant, differing, material increases in
  operating costs due to increases in energy prices
  and GHG effects on suppliers - Martin Whittaker,
  Swiss Re
• 7 of 10 most expensive US disasters occurred in
  last 4 years, 6 of 10 most expensive US
  hurricanes in 2004/2005
• New Jersey has 5th highest amount of insured
  property at risk from hurricanes storms
  (gt505b, as of 2004)

21
Corporate Governance Climate PollutionWhy Do
Investors Care?- It affects the Bottom Lineand
the long term survival prospects of a company!

• Fiduciary responsibilities of pension fund
  trustees, company board members and senior
  management regarding social environmental
  issues like climate change GHG emissions will
  continue to increase
• In absence of corporate trust, verification of
  environmental and social performance will become
  increasingly important, creating new corporate
  reporting requirements and a new auditing field
• Shareholders must be responsible too- (i.e., SEC
  says mutual funds voting proxies responsibly is
  the fund managers fiduciary responsibility, and
  is now required)

22
Value at Risk From Climate Change
Results of recent benchmarking exercise in the US
energy sector...
Source Value At Risk, CERES/Innovest, 2002
23
Corporate Governance Climate Change Liability
Disclosure

• Corporate governance pressures on companies for
  reporting environmental compliance and
  disclosure, to better identify quantify
  emerging risks (like climate change) are
  increasing Carbon Disclosure Project
• With recent studies indicating that 75 of CEOs
  think climate is a serious business issue but
  only 25 say their firm is doing something,
  investors are VERY worried
• Active and interested shareholders are submitting
  shareholder resolutions in increasing numbers on
  climate change issues (often attracting gt 25 of
  the vote)
• AIG says Directors Officers insurance will not
  cover lawsuits by shareholders due to pollution
  exclusion may cover if they disclose their
  climate risk management policy

24
Of Course, One Must Beware of Mere Superficial
Changes...
25
Climate Change and the Financial World-
Conclusions

• Climate Change is a long term financial problem
  and financial markets are worried that firms are
  managing it poorly
• Energy efficiency and GHG reduction costs are
  highly related to operating costs, and thus will
  directly affect financial results
• Investors want to see more disclosure of how
  firms plan to assess, manage mitigate potential
  climate change liabilities
• Alternative energy will take a very long time to
  have an impact
• Climate Change will present opportunities as well
  as problems
• There will be winners and losers within
  industries, and across sectors (distributed
  generation vs. transmission lines)

26
Examples How Poor Sustainability Management Can
Reduce Shareholder Value

• Aventis Starlink genetically-modified corn
• Union Carbide Bhopal chemical leak
• Exxon Valdez oil spill
• Sandoz Warehouse fire, pollution of the Rhine
• Royal Dutch/Shell Brent Spar, Nigeria
• Nike Sweatshops in Asia
• Monsanto Genetically modified foods
• ABB - Bakkun dam in Malaysia
• GE PCB in the Hudson Housatonic Rivers
• Elf Aquitaine Erika tanker wreck off Brittany
• Putnam Investments- allowing off-hours trading

27
Examples How Innovative Sustainability
Management Adds Shareholder Value

• IBM Recycles computers and computer parts for use
  in leasing business- added 2 billion in sales in
  less than 3 years at 50 profit margin
• French chemical company Rhodias stock went up
  20 in one day (12/05) after announcing CDM
  approval of GHG emission projects that will add
  300m/yr to profits
• DuPont invested 120m to reduce greenhouse gas
  emissions and added 240m/yr. to bottom line
• Patagonia and Timberland build businesses around
  clothing/apparel made by sustainable means.

28
In Summary- Companies can Materially Affect Their
Bottom Line and Society in a Positive Fashion

• However, major changes are needed in the ways we
  measure, assess, manage and assign responsibility
  for sustainability issues
• Sustainability issues do have direct material
  financial impact, and are being used now as
  indicators of good corporate management and
  future financial performance of companies by
  investors
• We are the ones responsible for making change
  happen!

29
A Final Thought-
Its about demonstrating that companies can do
the right thing while pursuing an economic
return. Thats a vital part of the business
schools mission, because if business schools
dont teach it, who will? - Dr. Steve Jones,
new dean of UNCs Kenan-Flagler Business School,
in interview with the FT, 11/10/03