June 11, 2008

Companies That Report Sustainability Data Enjoy Higher Gross Margins

Companies that report sustainability data generally experience higher gross margins and return on sales, higher return on assets, and stronger cash flow and rising shareholder return, according to a recent report, “The Food, Beverage, and Consumer products Industry - Achieving Superior Financial Performance in a Challenging Economy - 2008,” from GMA and PricewaterhouseCoopers. The analysis was based on 60 large companies, 27 that reported sustainability data and 33 that did not.

According to the report, two factors might explain why companies that report sustainability data consistently achieve higher return on assets (see chart above): investment decisions and operational improvements associated with adopting sustainable practices.

In terms of generating cash flow, companies that reported sustainable data posted consistently higher free cash flow to sales ratios over 1-, 3-, and 5-year periods. Again, operational improvements and adopting best practices along the value chain have likely contributed to their ability to generate higher cash flows.

When compared based on gross margins and return on sales, the companies that reported sustainability data outperformed those that did not. Two explanations:

1. Companies committed to sustainable practices tend to operate more leanly, saving on energy costs and overall input costs

2. Consumers have begun placing a premium on goods produced in a sustainable manner

PwC points out that it’s still premature to conclude that these observations are indicative of a newfound market appreciation for green companies, or that sustainable companies may tend to be better able to adapt to changing markets and consumer demands.

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