Five Ways to Achieve “Top Line” Business Value Through Sustainability

Note: This article also appears on GreenBiz.com at http://bit.ly/9kjYTV

In a comprehensive study released last week by the United Nations Global Compact and Accenture, a survey of 766 CEOs from around the globe indicate that despite the economic downturn, sustainability will be critical to the future success of their companies.  An amazing 93% of CEOs indicated that “a tipping point” could be reached that integrates sustainability with core business processes and systems, and its supply chains. http://bit.ly/cS93dR

So this suggests that ‘triple bottom line’ (TBL) practices and measurements will become commonplace in business…or will it.  Perhaps there is another way of looking at this trend  given the top-down commitments that CEO’s believe are necessary to create this massive shift in corporate behavior.  This point of view is called “triple top line”, but has generally been trumped by its “bottom line” twin.

Setting the Context

Top-Line Definition (Sustainability Dictionary http://bit.ly/aRPZh8)

The total revenues an organization reports on their income statement. While many activities within an organization are focused on reducing costs, initiatives such as innovative product and service development focus on creating more valuable and desirable offerings that increase revenues. Attention to human and natural capital (as well as financial capital) can often increase revenue by differentiating a company and its offerings in a beneficial way to the market. When this is done poorly however, it can be seen as green-washing and results in the opposite effect.

In contrast, bottom-line refers to Net Income (top line revenues – expense).  Bottom-line activities typically focus on cutting expenses in order to improve income.  William McDonough also coined this term from a design perspective in his landmark book Cradle to Cradle: Remaking the Way We Make Things (2002, North Point Press)

Triple Top Line Definition (Sustainability Dictionary http://bit.ly/9emKPX)

The effect that attention to sustainable management of natural, financial, and human capital has to an organization by increasing revenues (by offering more desirable products and services) and reducing costs and expenses throughout operations (through more streamlined operations. While many of these benefits are measured in terms of triple bottom line accounting, even more valuable are their effects to a company’s top-line financial performance because they require less capital investment and reduce the cost of capital.

In the UN/Accenture report, CEOs cited several barriers to achieving their sustainability goals, including ‘organizational silos’, competing priorities and lack of ‘value recognition’ by investors.  To counteract these barriers, several steps were needed, including CEO leadership to create real, value-added and long term change.  Specifically, five key areas were mentioned:

• Shaping consumer preferences for sustainable products.
• Training, training, training on sustainability issues- not only for the rank and file but managers too.
• Improved investor communications with investors to create a better value proposition about sustainability.
• Improved TBL metrics and communication of the value of business in society.
• Partnering with governments to shape policy and regulation and create a level playing field.

A "Triple Top-Line" Strategy Yields Enhanced Business Growth

In sustainable terms, both a top-line and bottom-line focus is important. However, many recent efforts to slash expenses in the short-term can actually hurt long-term sustainable value.  Like the UN/Accenture study suggests, a focus on increasing top-line value through innovation, lean thinking, and smarter brand enhancement can lead to more sustainable and profitable growth.  I offer a simple framework to start down the path of sustainability from a top line perspective that recognizes human and natural capital as well as financial aspects of business.

1. Understand the current situation.

Gain awareness of the context in which environmental top line value can be realized.

• Take stock of the organization’s core business strengths / strategies.
• Identify the environmental aspects of the organization’s processes and services in each link of the organization’s value chain.
• Identify customer environmental challenges and how the processes and services relate to customer needs.
• Develop a business case for moving forward.

2. Develop a strategy.

Decide upon a strategy for creating environmental top line value that supports the organizations business strategy and takes advantage of the organization’s strengths.

• Develop a top line strategy that will be a best fit for the organization.
• Consider how the strategy will address sustainable business practices.
• Determine whether any changes are needed to the existing business model or strategic plan to realize the strategy.
• Develop an action plan to implement the strategy.

3. Choose initiatives and measure progress.

Develop and implement initiatives that will bring the strategy to life.

• Consider how the organization’s existing processes and services can be positioned to address the chosen strategy, using the case studies for inspiration.

• Examine each link of the product value chain to identify potential initiatives, such as reuse of recycled materials, resource optimization, reduced energy or water consumption, all of which can create top line value.
• Measure your efforts by establishing meaningful and measurable key environmental, social and financial performance indicators
• Be realistic about how process changes that can have direct environmental benefits fit into the overall set of differentiating features and benefits of the process. Do not assume that consumers will be willing to pay a price premium or accept performance or quality trade-offs.
• Examine customers’ value chains to identify top line opportunities to meet customer expectations and support their sustainability initiatives.
• Identify potential partnerships with stakeholders that will lead to top line value by promoting collaborative supply chain management.

4. Gain internal alignment.

The process of aligning an organization around the importance of taking action begins at the time an organization first develops an awareness of the context in which environmental top line value can be realized, and carries all the way through implementation of the top line strategy.

• Gain buy-in from top management.
• Communicate the business case for moving forward.
• Identify internal champions within the organization who will move the top line initiative forward.
• Start with pilot efforts to test the waters and generate early successes.
• Communicate early successes.

5. Maintain the momentum.

Develop processes for maintaining the momentum of the top line initiatives.

• Create a “change management” process to build environmental factors into new or modified processes or activities.
• Develop business-based metrics of environmental and management and top line success.
• Develop an award and recognition program for ideas or projects that result in environmental and/or management top line value.
• Integrate environmental stewardship and associated activities with all operations.
• Raise the capabilities of the customer service function to probe for and address customer-specific environmental or social responsibility issues/ concerns.

By following this simple ‘plan-do-check-act’ process, companies (large and small) can create upstream supplier alignment, downstream value for their customers and maintain a more secure competitive financial position in the global marketplace.

I believe the distinction between a good company and a great one is this: A good company delivers excellent products and services; a great one delivers excellent products and services and strives to make the world a better place. —William Clay Ford Jr.

‘Rebound’- Linking Bad Backs, the Gulf Spill, and the Economy Through Sustainability

So, it’s official.  I have a “bad” back.  A very competent neurosurgeon told me the other day that “you have structural issues”.  Indeed I do.  This all started after I went hiking with my family in late 2009 and experienced a burning pain in my legs, followed by numbness and teeth-gnashing lower back pain.  A series of tests ruled out circulatory problems (thank goodness) and other internal stuff.  “How bad is it, Doc?” I asked.  Well, an MRI revealed a bulging disc, mild spinal stenosis and a synovial cyst.  I guess I am not a spring chicken anymore, after all.

The center that I went to get this great news had a great name too-Rebound– and it got me to thinking.  In mulling over the state of our economy and the ongoing oil spill disaster in the Gulf of Mexico, I suggest that those situations are representative of “structural issues” that require therapy of sorts.   The economy appears to slowly be on the “rebound”, while the prognosis for the other (the Gulf spill) will still require more study to determine the full extent of the damage.  Common among these two situations and my back is a call for change, to think more sustainably.  In other words, considering the economy and the environment as linked systems requires a deeper, holistic, de-siloed way of thinking.

By taking a triple bottom line perspective, the “people, planet and profit” elements that constitute sustainability will be better served and long term value realized.  This post is about hope, about renewal and rejuvenation- please read on.

People

The spine is not only the foundation for our entire physical structure but also house the nerves that radiate to each organ and every minute part of the body.  Spinal nerves especially control the functional processes of all our bodily tissues and structures.   My back problems are not so bad that surgery will be involved.  But the experience will require making some adjustments in my exercise routine, losing weight (again!) and stretching more.

The key to back health is in strengthening the “core” muscles- and having the “mojo” necessary to keep on plan and stay motivated, even when things look really, really bad.   If I follow my plan, I expect to “rebound” from my injuries stronger than before.

Profit

In the case of the economy, I have just completed reading “The Great Reset” by Dr. Richard Florida, Professor of Public Policy at George Mason University.  In The Great Reset (http://bit.ly/cDbWWG), Dr. Florida explores the parallels of the current Great Recession to the Long Depression of the 1870’s and the Great Depression of the late 1920’s and 1930’s.  Florida argues that ‘these periods of “creative destruction” have been some of the most fertile, in terms of innovation, invention and energetic risk-taking in history, and this is what sets the stage for full-scale recovery.’  Florida argues that great crises are opportunities to remake or “rebound” our economy and society and generate whole new epochs of even greater economic growth and prosperity.  Among these new forces and energies will be:

• new consumption patterns
• new forms of infrastructure that speed the movement of people, goods and ideas
• ‘mega-regions’ that will drive the development of new industries, jobs and a locally based way of life.
  

  Image Credit: ProgressOhio

I am also am reading Plentitude, by former Harvard University economist and current Boston College sociology professor Juliet Schor.  Dr. Schors book (http://bit.ly/cnbG8n) argues that society needs to make some big changes from the “business as usual” model of economics.  In a world economy traditionally valued based on gross domestic product (GDP), Dr.  Schor explores the economics and sociology of ecological scarcity (food, water) and rising costs of goods and services (energy, transport).  In addition, she explores the factors that have led to the scarcity in incomes, jobs, and credit.  Plenitude puts sustainability at its core.  The book presents a vision that suggests finding  new sources of wealth, implementing green technologies, and strengthening locally based economies, all of which can lead to a more economically secure, ecologically sensitive and sustainable world.

Both books offer promise that a redirected focus on community-based, environmentally-centric and technological efficiency and innovation can (and must) be the “rebound” catalysts that drive economic prosperity.

Planet

The current, devastating Deepwater Horizon oil spill and ecological crisis in the Gulf of Mexico presents a great set of uncertainties and human-induced risks not realized before in terms of scope and magnitude.  My earlier posts on the Gulf spill spoke to the issue of risk management and contingency planning and how such scenarios can be managed better (Risky Business: Why Better Risk Management Can Protect Lives & the Environment- Part 1 http://bit.ly/aRDeJj).   But this discussion focuses on ecological damage and on resiliency of natural environments.

The 1979, spill from Mexico’s Ixtoc 1 offshore well in the Gulf of Campeche is proof that the environment has a “stunning capacity to heal itself from manmade insults” (http://bit.ly/djoDkO).   This huge spill surprised marine biologists and ecologists in terms of the speedy recovery of the heavily impacted Bay of Campeche ecosystem spreading into south Texas.  However, there are major differences in the depth and location of the Ixtoc and Deepwater Horizon spills, and other natural phenomena that aided in the Ixtoc spill recovery rate.  These differences may not bode well for the Louisiana coast.  Case in point- the Exxon Valdez spill in 1989.  Studies in the mid 2000’s showed that 15 years after the Exxon Valdez oil spill, “some fish and wildlife species injured by the spill have not fully recovered” (http://bit.ly/d2VEaZ).   Researchers noted some uncertainty of what role oil plays in the inability of some populations to bounce back.

Ecosystems are dynamic and ever-changing.  This changing dynamic flow continues its natural cycles and fluctuations at the same time that it continues to recovery from impacts of spilled oil.  As time passes, separating natural changes from oil spill related impacts becomes harder to distinguish.  So time will tell, and after the well is finally plugged (and it will be plugged) and the last drop of oil spills, the long term ecological “rebound” will begin.

Like the distressed economy and like the gulf coast mess, my back will “rebound” to a healthy point that is hopefully sustainable.  Mark my words.  It’s said that “good health is not an event, it’s a lifestyle”.  This holds true whether we are talking about our bodies, the economy or our planet.

Sustainability that You Can ‘Bank’ On: Value-Added Steps to ‘Green’ Financial Institutions

This past week, the Financial Times and IFC (World Bank Group) announced the winners of the 2010 Sustainable Banking Awards (http://bit.ly/ZNISO).  The annual awards recognize banks and other financial institutions that have shown leadership and innovation in integrating social, environmental and corporate governance considerations into their operations.  Short of two funds, American banks were absent from the list.  Let’s face it, with the global economic collapse of the past two years, and the banking industry’s corporate social responsibility reputation in the tank, Wall Street firms and the banking industry in general is under pressure to “do good”  (http://bit.ly/a5D7r4).  But all is not lost and it’s not too late for banks to regain consumer confidence while improving their operations and bottom line.

Unfortunately, the current economic downturn and lending issues faced by the banking sector has created a threat to “triple-bottom-line” focused sustainability i.e. green programs that are meant to manage banking risk being neglected or moved to the bottom of the “to do” list.  I am not talking about the ‘low hanging fruit’ like lighting retrofits or e-statements or recycling programs (all good starts by the way).   My focus is on seeing banks implement deeper initiatives focused on governance, sustainability focused risk, reputational management, and value-added community benefit.

The Environmental Minefield that Banks Walk Through

The banking sector generally perceives itself as environmentally neutral.  However, the regulatory landscape that large commercial and community banks often find themselves walking through is constantly changing and looks more like a minefield.  Although banks themselves do not largely impact the environment much through their own ‘internal’ operations like a large scale manufacturer or developer might, the ‘external’ impact on the environment can be substantial.  That is because banks like any other business may be potentially liable for environmental damage that their operations or fiduciary involvement may cause.  In banks cases, the concern is on derived environmental liability through debt and equity transactions.

The “Green” Question

Environmental and corporate social responsibility issues highlight both risks as well as opportunities to banks.  The banks and financial institutions that made the FT 2010 list are serious about greening their operations and financing sustainably-focused projects that put sustainable governance at the heart of decision-making.  Not only does this leverage a bank’s risk, but it’s value-added in the long run.  How?  Because substantial evidence is available that demonstrates how environmentally responsible investments and projects that ’give back’ to a local economy more than they “take’ are better investments in the long term.

There are no specific legislative drivers to encourage better performance in terms of sustainable lending or project finance.  However, several voluntary standards and sets of principles exist and are gaining steam in the business marketplace.  Examples include the Equator Principles (http://www.equator-principles.com) , World Bank IFC Guidelines, Global Reporting Initiative (GRI) Finance Sector Guidelines (http://bit.ly/aFmaYe), and even Securities and Exchange Commission federal reporting requirements.  Leading international finance and local banking institutions have signed on to many of these guidelines, which are rapidly becoming the “norm” in the banking industry.  Only a few U.S. financial institutions have stepped up to the plate so far, notably Citigroup, Wells Fargo, Bank of America and JP Morgan Chase.

The Risk Management Challenge

Environmental   issues present the banking sector with a daunting and often long term challenges. Banks can face financial risks from borrowers defaulting on the repayment of their loans because of fines imposed for poor environmental performance.  As I already noted, current environmental regulations in the U.S. can make banks liable for environmental damage caused by borrowers.  Banks, therefore, need to strive to minimize these risks with the introduction of measurable and verifiable environmental criteria into their credit policies and overall lending processes.  All too often, evaluations are often made on unverified business pro-formas, deficient appraisals, or on applicants environmental reports, often compiled on a voluntary basis.

However, the lack of environmental and other sustainability criteria in a loan-vetting process may prevent banks from estimating the full risk premium of investments and expose the bank to further short and long term risk. Therefore, banks might consider starting by reassessing their credit policies and loan screening processes to assure that sustainability is accounted for.

Solutions that Add Value and Real Sustainability

A growing body of quantitative and qualitative data demonstrates the bottom-line benefits of sustainability-focused credit risk management performance in the banking industry are evident in the market place. Some key benefits of such an approach, reported by over 85% of banks surveyed that have implemented similar programs) include:

• Improved Financial Performance
• Reduced Operating Costs
• Enhanced Brand Image and Reputation
• Increased Loan Originations and Customer Loyalty
• Increased Ability to Attract and Retain Employees.

To be and to stay on the leading edge of our new financial world, forward- thinking banks must consider developing robust, performance based lending policies and processes to ensure that 1) the organization not only offers competitive products to its customers and gives value back to the community in which loan assets are located, but 2) the organization protects its fiduciary position, environmental and reputational risk from servicing questionable projects.   So far here in the U.S., efforts by established banking institutions in the “deep-sustainability” space is scant, and I can only point to a few real, demonstrable leaders with a firm track record in this area.

My company’s approach to ‘green’ banking focuses not only on helping our clients find the obvious ‘low hanging fruit’ as I noted earlier, but get to the “core” risk management success factors that can make or break a bank:

• Sustainability focused operations procedures & policies;
• Value-added bank loan/credit risk management tools and sustainability scoring indices, leading to innovative customer products and enhanced profit streams.
• Working with compliance and regulatory agencies interacting with financial institutions.

How well banks handle social and environmental risks is increasingly important because, in today’s global economy with unrestricted information flows, such risks can affect a bank’s reputation and long-term business success.  Who knows- with a little guidance, innovation, determination and daring, more U.S. financial institutions may make the FT Sustainability Banking 2011 list.  I’ll be watching where my money goes- will you?