I recently read this column by Graham Russell arguing that Wall Street analysts may be realizing that sustainability may help influence the valuation of assets, and it’s about time. Many have tried to analyze whether there is a link between corporate social responsibility and firms’ financial performance; I roughly categorize these reports into two buckets:
1) The first type surveys managers and asks, “Does sustainability pay off?” A report in the MIT Sloan Review earlier this year surveyed 4,000 managers and showed that an increasing number of them believe that pursuing sustainability leads to profits. While these are important reports to gauge how managers are thinking, it does not prove that sustainability leads to profits.
2) The second type of report uses statistical analyses to show linkages. In a 2007 paper titled, “Does it pay to be good?” 167 independent studies were analyzed; 27 percent of the reports found a positive relationship between corporate spend on sustainability and financial performance. Two percent showed there was a negative relationship whereas among the rest no significant relationship was found. While this displays some correlation, as my statistics professors used to warn me, “correlation does not prove causation.” Perhaps companies with higher profits simply tend to have the money to spend on sustainability and therefore invest in it?
Does it mean there is no positive business case for sustainability?
My opinion is that this is the wrong question to ask. Consider any other project – you can have a project with a positive ROI or a negative one. It is easy to demonstrate the ROI for a sustainable project from a theoretical angle – the value of an asset is essentially the sum of present value of all future cash flows. For example I own some shares of stock expected to yield a $10 dividend this year. I expect to receive this dividend from now until infinity growing at 2.43 percent every year (which is the average US inflation rate in the last 10 years). Considering a discount rate of 5 percent, that gives me a value of $409. Now what if this particular share belonged to a company that is heavily dependent on fossil fuels, and there are no commercially available alternatives to it? If I make the assumption that the price of fuel will keep increasing and that within 30 years the company will not be able to operate the price of the asset becomes $214, a 48 percent drop. So that is now the equivalent of the shareholder value for sustainability.
The real question to ask is how do we find out which sustainability project is worth spending on? In a recent whitepaper on Sustainability Valuation by PwC, the authors have shown that it is possible to put a value to almost any sustainability project. It is relatively easy to come up with the direct business case for some of the projects like those that end up reducing cost. Where it gets tricky is to justify the business case for indirect benefits. Various models like the multi-attribute utility analysis can be used for this purpose.
In conclusion, once we really get our hands dirty and look deep into a sustainability project, we should be able to justify whether or not to do that project. If a company has spent any money on marketing, HR or risk mitigation, then I do not see why they will not be able to justify the ROI for a sustainability project.
Shamik Mitra is a sustainability professional working with Infosys (www.infosys.com). Prior to being part of its sustainability business practice, Shamik worked with a number of US utility companies. Now as a sustainability professional, Shamik researches and writes about sustainability transformation strategies for companies.