L. Hunter Lovins
This article has been submitted as part of the Natural Capital Coalition’s series of blogs on natural capital by Hunter Lovins, President, Natural Capitalism Solutions, Professor of Sustainable Management, Bard MBA and Time Magazine Millennium “Hero of the Planet”.
Today’s business leaders are running partially blind. The way in which they keep accounts is failing to deliver the complete information that they need to track assets and liabilities properly.
As more companies use the principles of sustainable management to guide strategy, they need more sophisticated approaches to inform them of the value of these investments and strategic choices. Centered in the CEO’s office, an authentic commitment to sustainability enhances financial performance, often significantly, by delivering energy and materials savings, productivity enhancements, waste elimination, and better management choices. The currently popular approaches in accounting cannot discern this value, help companies to capture it, or track its presence or loss.
Over twenty studies including those done by Deloitte, Goldman Sachs, and McKinsey show that companies that are leaders in environmental, social and good governance policies have stock value that is higher and growing faster, have higher market capitalization, and are better protected from value erosion, than their more conventional competitors. For example, in 2009, A.T. Kearney released the findings of their report, Green Winners, comparing the economic performance of companies with a commitment to sustainability to companies in the same industry without such a sustainability program. The report tracked the stock price performance of 99 firms on Dow Jones Sustainability Index and the Goldman Sachs list of green companies, over six months prior to November 2008. In 16 out of the 18 industries evaluated, businesses deemed “sustainability focused” outperformed industry peers over three- and six-month periods and were “well protected from value erosion,” even in the economic downturn. In the study period of three months the positive differential between the companies with and without a commitment to sustainability was ten percent and over six months 15 percent. “This performance differential,” the Report stated, “translates to an average of $650 million in market capitalization per company.”
However, few companies are tracking the value of such liabilities and assets in management accounting reports. For example, a company that may face liability for pollutants, legal expenses, costs, and damage to brand value from unsustainable behavior rarely tracks such risks in management accounting reports. These omissions represent a potentially significant under- or over-statement of future business performance.
Conversely, the asset value to a company of employee retention and ease in recruitment of talent due to its sustainable practices, or the proper valuation of a company’s contribution to enhancing ecosystem services conferred by a sincere, public commitment to sustainability are rarely included in most management reports.
The field of accounting has helped drive change in business since the beginning of written history. As Gary Giroux, business professor at Texas A & M has written, “Accountants invented writing, participated in the development of money and banking, invented double entry bookkeeping that fueled the Italian Renaissance, saved many Industrial Revolution inventors and entrepreneurs from bankruptcy, helped develop the confidence in capital markets necessary for western capitalism, and are central to the information revolution that is transforming the global economy.” As we enter the 21st Century, accounting continues to influence fundamental economic concept.
Some companies have adopted the phrase, “Triple Bottom Line,” (TBL) coined by John Elkington in 1994, to describe their approach to sustainability. Elkington now agrees that, as a framework, Triple Bottom Line is neither complete nor accurate. The TBL approach as practiced tends to lead a company to consider programs to enhance people and protect the planet as expenses, bolted on to profit as a cost-center-driven approach to sustainability. This leads management to view sustainability as a liability, reducing returns. This cost-centered perspective blinds executives to a significant amount of business value that sustainability-oriented practices confer on the better-managed companies.
Natural Capitalism Solutions helps companies reframe their approach to designing and implementing sustainability programs, using an approach we call the Integrated Bottom Line. This approach provides more accurate analyses of business performance. The Integrated Bottom Line approach enables managers to use more sustainable practices to build core business value, integrating sustainability into every aspect of enhancing shareholder value. This Integrated Bottom Line approach:
- Quantifies how improvements in efficiency drive profitability,
- Clarifies the ROI on innovation,
- Calculates the ROI of sustainability initiatives more accurately,
- Quantifies how sustainability measures translate into enhanced productivity,
- Establishes the value of reduced recruitment and retention costs, and increased creativity,
- Enables management to assess and manage risk more accurately,
- Improves access to capital,
- Quantifies the value of increased market share,
- Prepares management to deal proactively with over-the-horizon (“black swan”) issues,
- Enables managers to identify increases in earnings related to and caused by sustainability-oriented practices,
- Improves decision makers’ ability to transform qualitative stories into quantitative data,
- Integrates sustainability into primary business decision-making tools, e.g. financial and management accounting.
Natural Capitalism is working with a small group of hand picked companies to expand the Integrated Bottom Line from a management framework into a world-class accounting and strategy tool. This process identifies previously unaccounted for assets and liabilities and incorporates them into corporate accounts in clear, compelling terms that highlight strategic choices.
Using a team of internationally recognized sustainability leaders Natural Capitalism is developing credible, replicable, transparent methodologies to monetize key sustainability metrics and import these Integrated Bottom Line account codes into traditional management reports.
The value sustainability brings to a business is missed by current accounting practices. For example, talented “millennials” desire to work at companies that reflect their values. The value to a company of reduced employee recruiting and retention costs is not zero. Businesses that invest in green building improvements reap very attractive ROIs both in decreased operating costs and more importantly enhanced labor productivity averaging six to sixteen percentage. The impact on brand reputation can mean live and death to a company. Reduced costs and increased access to socially responsible investment capital is significant. The total of these sustainability assets and liabilities together make up what should be called “sustainability retained value”. This line item tangibly increases or decreases the value of an enterprise.
Integrated Bottom Line accounting will enable managers to track the reasons and factors contributing to the enhanced value, and provide executives with a more accurate tool for quantifying and managing sustainable business performance.
Development of cogent, integrated bottom line metrics is not just a “nice to have.” Companies endanger success if decision makers are forced to work with incomplete or inaccurate information. To guide a company successfully, managers and directors need accurate, insightful and timely data. At present, financial and sustainability reporting are kept entirely separate, leaving managers in the dark about the impact of programs now recognized as critical to competitive advantage.
Natural Capitalism Solutions is available to work with your company to help you gain the systems and knowledge to enable you to manage today’s complexity and profit.
i Mahler, Daniel, Jeremy Barker, Louis Besland, and Otto Schulz, “Green Winners,” online article for A.T. Kearney. 2009. http://www.atkearney.com/shared_res/pdf/Green_Winners.pdf.
ii Green Winners, A.T. Kearney, http://www.atkearney.com/.
iii Elkington, John, “Towards the sustainable corporation: Win-win-win business strategies for sustainable development.” California Management Review 36, no. 2: 90-100, 1994
iv The phrase was coined by Theo Ferguson, but fleshed out by Hunter Lovins shortly thereafter in “Sustainable Executives,” Effective Executive, by L. Hunter Lovins, May 2006, https://www.natcapsolutions.org/publications_files/2006/MAY06_India_EffectiveExecutive.pdf