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Studies Prove Business $en$e From Proactive Environmental Management Initiatives & Certifications

31 Mar

I always find it rewarding when a study comes out that underscores the business value of sustainability, especially when backed up with statistics and hard dollars.  Such is the case with a 2008 study by researchers from the Georgia Institute of Technology (GIT).  The research study, entitled An Empirical Investigation of Environmental Performance and the Market Value of the Firm, was authored by Brian W. Jacobs, Vinod R. Singhal, and Ravi Subramanian.  The study analyzed the shareholder value effects of environmental performance by measuring the stock market reaction associated with announcements of environmental performance.

The study focused on how markets react to Corporate Environmental Initiatives (CEI) and Environmental Awards and Certifications (EAC).  The results of the study provided compelling data that suggested that “announcements of philanthropic gifts to environmental causes are associated with significant positive market reaction, voluntary emission reductions are associated with significant negative market reaction, and ISO 14001 certifications are associated with significant positive market reaction”.  For me this report validates my devotion over the past 15 years working with small to large manufacturers and public agencies in designing, implementing and maintaining ISO 14001 certifications and in making the argument that “proactive environmental management makes business sense”.  I’m not some crazed environmentalist after all (although my passion occasionally borders on the “evangelical” side)!

The research study focused on reviewing the “market value impacts of specific events (such as use environmental announcements) as a “proxy for the difficult-to-measure construct of environmental performance”.   The study found a statistically significant market reaction to the hundreds of environmental performance announcements evaluated, suggesting a causal link between environmental performance and financial performance.   Specific to ISO 14001 announcements, the market was seen as reacting positively (on a statistical basis) to announcements of ISO 14001 certifications. Years of literature and case studies have offered volumes of data that support the positive impact of environmental management systems in general as well as direct evidence that ISO 14001 certification improves company performance over long periods of time. The authors of the GIT believe that they are the “first to provide empirical evidence of the impact of ISO 14001 certification on market value”.

Body of Evidence

Forays into proactive environmental management and attainment of internationally recognized certifications like ISO 14001, RC 14001 or LEED are not always “window dressing’ to demonstrate commitment to sustainability, as some may believe.  These efforts are more often than not the real deal when it comes to demonstrating value-added savings and long-term return on investment and access to new market.  While the skeptics continue to throw cold water on CEI’s and EAC’s the evidence continues to stack up in favor of long-term benefits.

The results were based on analysis of 811 announcements (430 CEI announcements and 381 EAC announcements) that appeared in the daily business press during the period 2004-2006.  Now, you may pause and say “well that was a long time ago…what about post recession?” A recent article by Phil Covington in Triple Pundit asked that same question. Covington cites a recent Fast Company’s recent article concerning Bloomberg’s business of measuring companies “Environmental, Social and Governance” (ESG) performance, which found that “the number of investors accessing ESG data is up by 29% comparing the first half of 2010 with the second. Investors use it to identify smart practices – for example, companies who operate in a socially responsible manner may be viewed as forward thinking and well-managed.” While this report suggests that there is increased attention being paid to companies that “do good” or that implement proactive ESG practices, the results are still not statistically treated like the GIT study.  But either way, as Covington concludes “This surely portends that markets will inevitably respond favorably to sustainability efforts, especially when the data shows improved governance and profits result directly, and in the long run, from sustainability”.

Since the 2006 study period cited in the GIT study, there have been more studies that provide compelling proof of the market value of environmental initiatives or certification.  Here are a couple of stand-out examples.  First, a study entitled Which Competitive Advantages can Firms Really Obtain from ISO 14001 Certification? demonstrate statistically that there is a significant difference between firms with ISO 14001 certification and firms without ISO14001 certification.  Internal efficiency benefits are considered significantly higher for firms with ISO 14001 certification.  Therefore managers’ expectations of improving internal efficiency might be the real reason that encourages firms to make the voluntary decision of investing in ISO 14001 certification.

Another study, by the Arava Institute for Environmental Studies entitled Comparative Advantage: The Impact of ISO 14001 Environmental Certification on Exports, suggested that EMS certification appears to imply a supplier who is managing its business well and is showing ethical responsibility. The fact that a supplier was awarded the ISO 14001 or EMAS certification by an independent entity enhances perceived reliability. Importers evaluated felt more confident engaging a new supplier, saving time and effort associated with clarification and research prior to placing a purchase order.  The survey results, as well as other available literature, corroborate the view that ISO 14001 accreditation confers economic benefits and greater “market value”. These include a standard of worldwide recognition, organizational efficiency, better waste management resulting in costs reduction, marketing advantages, and competitiveness by reducing risk and exposure to costly litigation.

What Are You Waiting For?

As of 2008, when the GIT study was published, more than 188,000 organizations worldwide had become ISO 14001 certified in 155 countries and economies. Worldwide, ISO 14001 certifications grew by more than 77,000 from 2004 to 2008 – a 70% increase.  These companies must be onto something. As I had written about previously, throughout a variety of industries, there are leaders and there are laggards.  Innovators who lead and can establish “first mover” status have the most market share to gain from proactive environmental management and attaining certifications like ISO 14001.

The GIT studies and the many others that have been produced over the past five years or so are healthy indicators of how proactive approaches to sustainability can positively influence behavior up and down the supply chain, and can add total market value in a recovering economy.

Survey: Leading Organizations ‘Embrace’ Sustainability, Create “Cultures of Innovation”

17 Feb

follow_the_leader.jpgOn the heels of my most recent post (Surveys Lift the Lid on Innovation & Sustainable Supply Chain Management, Uncovering Value & Leadership Traits http://bit.ly/h941Jb) comes another survey by the MIT Sloan Management Review and the Boston Consulting Group.  Like the Aberdeen and Capgemini studies, Sustainability: The ‘Embracers’ Seize Advantage uncovered two distinct camps of companies: “embracers” — those who place sustainability high on their agenda — and “cautious adopters,” who have yet to focus on more than energy cost savings, material efficiency, and risk mitigation.

According to the MIT/BCG study , the survey indicated that many companies view sustainability as eventually becoming “core,”; however the more advanced “embracers” were already acting on the belief that the sustainability ‘business case” was already a functional, core element of its organizational risk management and efficiency strategy. Embracers were also seeing the “payoff of sustainability-driven management largely in intangible advantages, process improvements, the ability to innovate and, critically, and in the opportunity to grow.”  Plus, and this is no surprise, embracers were found to be the highest performing businesses queried in the study.

Key MIT/BCG Findings

Several interesting findings emerged that synced up well with the Aberdeen and Capgemini studies, from an innovation and leader/laggard perspective:

  1. Embracer companies are implementing sustainability-driven strategies widely in their organizations and have largely succeeded in making robust business cases for their investments.
  2. All companies — both embracers and cautious adopters — see the benefits of strategies such as improved resource efficiency and waste management.
  3. Embracer companies are assigning value to intangible factors (employee engagement, stakeholder concerns) when forming strategies and making decisions.
  4. Embracers are more aggressive in their sustainability spending, but the cautious adopters are catching up and increasing their commitments at a faster rate than the embracers.
  5. The sustainability-driven management approaches of embracer companies — which claim to be gaining competitive advantage via sustainability — exhibit seven shared traits that together suggest how sustainability may alter management practice for all successful companies in the future.

From a supply chain perspective the study found that embracers appear to be able to make a more compelling business case for sustainability, developing and integrating sustainability strategies in “everything from procurement and supply chain management to marketing and brand building.”

The MIT/BCG study discovered seven practices or characteristics that “embracers share. They are:

1. Move early — even if information is incomplete. Embracers tend to be bold and see the importance of being a “first mover” from a competitive perspective. What the study found most compelling was that embracers generally accepted that they need to act before they necessarily have all the answers.

Embracers are not paralyzed by ambiguity, and instead see action as a way to generate data, uncover new options and develop evidence iteratively that makes decision-making increasingly effective. Movement diminishes uncertainty”.

2. Balance broad, long-term vision with projects offering concrete, near-term “wins.” Leading companies find a way to balance corporate visions with concrete, action oriented projects that will produce short-term successes.

“Smart embracers balance those aims with narrowly defined projects in, say, supply chain management, which allow them to produce early, positive bottom-line results. They exhibit relentless practicality”.

3. Drive sustainability top-down and bottom-up. Embracers find ways to engage its organization vertically and horizontally early and creating champions that can collectively ensure the 360-degree perspective that’s vital to sustainability.

4. Aggressively de-silo sustainability — integrating it throughout company operations. Embracers openly encourage cross-functional problem identification and problem solving and seek ways for more open innovation, group-think and collaborative action.

5. Measure everything (and if ways of measuring something don’t exist, start inventing them). I am not certain that I would measure EVERYTHING, but rather look for key performance metrics that matter to the core vision of sustainability that organizations seek to satisfy.  Measure what matters, don’t just measure just for measurements sake.

6. Value intangible benefits seriously. Embracers are clearly distinguished from cautious adopters in their readiness to value intangibles as meaningful competitive benefits of a sustainability strategy. However, embracers accept that it takes time to develop their ability to measure — or even to understand fully — intangible advantages, and they need to make their investment decisions on the basis of a combination of tangible benefits, intangibles and risk management scenarios.

7. Try to be authentic and transparent — internally and externally. Finally, companies leading the charge on sustainability are fundamentally realistic. They do not overstate motives or set unrealistic expectations, and they communicate their challenges as well as their successes.

The Evolution of a Sustainability Mindset- From Laggard to Innovator

The results of all three studies compare well with Peter Senges and Bob Willards remarks in several of their books, mirroring the development phases in organizations toward a sustainability culture, governance and business strategy. Willards model shows how as companies progress toward being sustainable enterprises, they can be roughly nested into a five-stage sustainability continuum. They evolve from an unsustainable model of business in Stages 1, 2 and 3, to a sustainable business framework in Stages 4 or 5. Willard explains that “executive mindsets also evolve from thinking of “green,” “environmental,” and “sustainable” initiatives as expensive and bureaucratic threats in the early stages, to recognizing them as catalysts for strategic growth in the later stages.”

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Source: Bob Willard- Fives Stages of Sustainability

As leading organizations implement more efficient, creative, less resource intensive and wasteful practices, they quickly can realize direct and indirect financial and brand benefits. Truly innovative, agile and resilient companies with a leaning toward change management tend to ‘embrace’ this new paradigm as part of organizational ‘core values’ as successes rack up…it’s like a snowball effect.   The more that is achieved in the name of sustainability, the greater and larger the positive benefit.  Sustainability can become positively addicting!  At the same time, the chasm between the leaders and followers tends to widen, and the followers have to spend much more time, energy and resources to play catch up…if they catch up at all.

With the MIT/BCG and other two studies,  one common thread that is clear to me (and hopefully you) is that organizational dynamics have a lot to do with how well companies adapt to change, especially when it involves issues surrounding the three legs of sustainability.  The MIT study hit the nail on the head when it stated that “Where companies struggle when it comes to making sustainability an integral part of the business is often not so much with the technical side of things but with the human dimension of managing it.” In fact it was Peter Senge (in The Fifth Discipline), who states that a learning organization is one in which “people continually expand their capacity to create the results they truly desire, where new and expansive patterns of thinking are nurtured, where collective aspiration is set free, and where people are continually learning to see the whole together.”

image_carrousel.jpgSeeing business from a  “whole systems”  perspective is truly what characterizes innovative, leading organizations from the competition.  Embracing organizations typically are more agile, adaptive, and (ultimately) more productive.  As businesses seek stronger competitive positions and reach outside their four walls to integrate innovations across supply chains, one critical, intangible element will still remain- the “human dynamic”.

Upcoming posts  will dive into management and organizational culture, its effects on driving the sustainability business case, and approaches to drive “cultures of innovation” and leadership beyong “the four wall” and throughout the value chain.

ISO 26000 Social Responsibility Guidance May Offer Supply Chain Opportunities to Small-Mid Sized Manufacturing

4 Nov

Amid the pre- and post-election haze here in the U.S and the taking of the World Series by the San Francisco Giants (first since 1954), comes ISO 26000, Guidance on Social Responsibility. This guidance document from the International Organization for Standardization (ISO) integrates international expertise on social responsibility (SR), detailing what it means, what issues organizations need to address to operate in a socially responsible manner, and what the best practices are for implementing SR effectively and efficiently. ISO 26000 is designed to assist public and private organizations, and Small to Mid-sized Enterprises (SME) in particular by establishing common guidance on social responsibility concepts, definitions,and methods of evaluation.

The core areas of ISO 26000 (see Figure 1, courtesy of http://www.desarrollohumanosostenible.org) address potentially contentious and volatile issues such as human rights, labor practices, the environment, fair operating practices, consumer issues, and community involvement and development.   According to the ISO, ISO 26000 provides guidance for all types of organization, regardless of their size or location, on:

  1. Concepts, terms and definitions related to social responsibility
  2. Background, trends and characteristics of social responsibility
  3. Principles and practices relating to social responsibility
  4. Core subjects and issues of social responsibility
  5. Integrating, implementing and promoting socially responsible behavior throughout the organization and, through its policies and practices, within its sphere of influence
  6. Identifying and engaging with stakeholders
  7. Communicating commitments, performance and other information related to social responsibility.

ISO 26000 is unique, not because it’s taken six years to get it finalized. It’s mainly because it’s a “guidance” and not a certification standard like the more well-known ISO 9001 quality management and 14001 environmental management standards.  That may be part of its weakness.  Most skeptics believe that ISO 26000 will not be the “magic bullet” which suddenly replaces all corporate social responsibility (CSR) initiatives in the Supply Chain. While the guidance is not a certifiable standard, it attempts to harmonize itself with UN Global Compact guidelines for ethical business practices and a number of existing practices, principles and guidelines devoted to social responsibility, like the Global Reporting Initiative (see recent crosswalk). Other recent studies (admittedly a very small survey group of less than 60 entities) by the International Institute for Sustainable Development (IISD) prior to the final release established that ISO 26000 may increase awareness, provide definitions and add legitimacy to the social responsibility debate.  However, as stand-alone guidance, ISO 26000 may not contain the practical guidance to enable SMEs to turn theory in practice.

Another recent post by Business for Social Responsibility, entitled ISO 26000 Approved for Publication. Now What?while not holding out great hopes for ISO 26000 stated that the guidance:  “… has the potential to increase the adoption of responsible business practices by all types and sizes of organization around the world—not just corporate entities. In bringing social responsibility to all entities, it may be a useful guide for engaging your supply chain in social responsibility issues. ISO 26000 can provide a first point of call for companies to understand the concepts and implementation tools for a social responsibility program, such as advocating stakeholder engagement and issues assessment methods to define priorities.”

In fact, doing a cursory review of the Final Draft International Standard published in July found many references to supply chain management issues, especially in the areas of “environment” and “fair operating practices”.  I believe that innovative,leading SME’s can successfully apply some of these guidance materials in a productive and cost effective manner.  Doing so begins to institutionalize “triple bottom line” thinking into their supply chain practices.

Turning Theory into Practice- Tips for Supply Chain Integration

Environment

  1. Practice life-cycle management – consider all the steps of a manufacturing process, and all the links in the supply chain and value chain right to the end of a product’s life and how it is disposed of;
  2. Seek way to integrate sustainable resource use and management to make manufacturing steps as environmentally friendly as possible (especially with regard to electricity, fuels, raw and processed materials, land and water);
  3. Test innovative technologies as a way to reduce the product environmental footprint

Fair Operating Practices

Promote social responsibility throughout the supply chain; and stimulate demand for socially responsible goods and services:

  1. In procurement and purchasing decisions, use criteria that select ethically and socially responsible products and companies;
  2. Examine your value chain/supply chain and be sure that you are paying enough to enable your suppliers to fulfill their own responsibilities;
  3. Promote broader adoption of social responsibility through networks of manufacturing associations and business sector colleagues;
  4. Seek business to business and peer network support to collaboratively develop best methods and approaches, leverage resources and document benefits
  5. Treat suppliers and customers/consumers fairly and equitably.

Like my recent posts discussing the supply chain benefits of two other draft sustainability and green product specification standards (ULE 880 and GS-C1), large to small organizations can strive to be ISO 26000-compliant, stay ahead of the curve and grab the “leader” advantage.  Or conversely, companies can risk being a “laggard” and lose vital business opportunities.

Large corporations are realizing the importance accountability, transparency, ethical conduct, and respect for stakeholders’ interests, human rights, rule of law, and international norms of behavior in managing internal and external stakeholder expectations.  Why not apply the same principles wholistically through ones supply/value chain at the SME level?

If you are an owner/operator of a SME, think about your values and principles of operation.  Believe me when I say that doing good can also mean doing well.