Corporate sustainability has become a buzzword in companies big and small. Wal-Mart Stores, Inc. (WMT), McDonald’s Corporation (MCD) and many of the true corporate giants have named sustainability as a key priority moving forward. Now other corporations are under pressure to show how they plan to commit, and deliver their goods and services in a sustainable manner. This, of course, begs the question of what exactly this all means.
Corporate sustainability in investment can fall under the terms ESG for environment, social, and governance or the acronym SRI which stands for socially responsible investment.
Sustainability is most often defined as meeting the needs of the present without compromising the ability of future generations to meet theirs. It has three main pillars: economic, environmental, and social. These three pillars are informally referred to as people, planet and profits.
- Corporate sustainability is a growing concern among investors who seek not only economic profit but also social good.
- ESG investment represents the 3 pillars of sustainable investing: environmental, socially responsible, and governance.
- With the growth of socially responsible funds and ETFs, corporate sustainability may ultimately add a competitive edge to a company’s bottom line.
Environmental, Social, and Governance (ESG) Criteria, Explained
The Environmental Pillar
The environmental pillar often gets the most attention. Companies are focusing on reducing their carbon footprints, packaging waste, water usage and their overall effect on the environment. Companies have found that have a beneficial impact on the planet can also have a positive financial impact. Lessening the amount of material used in packaging usually reduces the overall spending on those materials, for example. Walmart keyed in on packaging through their zero-waste initiative, pushing for less packaging through their supply chain and for more of that packaging to be sourced from recycled or reused materials.
Other businesses that have an undeniable and obvious environmental impact, such as mining or food production, approach the environmental pillar through benchmarking and reducing. One of the challenges with the environmental pillar is that a business’s impact are often not fully costed, meaning that there are externalities that aren’t being captured. The all-in costs of wastewater, carbon dioxide, land reclamation and waste in general are not easy to calculate because companies are not always the ones on the hook for the waste they produce. This is where benchmarking comes in to try and quantify those externalities, so that progress in reducing them can be tracked and reported in a meaningful way.
The Social Pillar
The social pillar ties back into another poorly defined concept: social license. A sustainable business should have the support and approval of its employees, stakeholders and the community it operates in. The approaches to securing and maintaining this support are various, but it comes down to treating employees fairly and being a good neighbor and community member, both locally and globally.
Between 2016 and 2018, sustainable, responsible and impact investing grew at a more than 38 percent rate, rising from $8.7 trillion in 2016 to $12 trillion in 2018, according to the U.S. Forum for Sustainable and Responsible Investment.
On the employee side, businesses refocus on retention and engagement strategies, including more responsive benefits such as better maternity and paternity benefits, flexible scheduling, and learning and development opportunities. For community engagement, companies have come up with many ways to give back, including fundraising, sponsorship, scholarships and investment in local public projects.
On a global social scale, a business needs to be aware of how its supply chain is being filled. Is child labor going into your end product? Are people being paid fairly? Is the work environment safe? Many of the large retailers have struggled with this as public outrage over tragedies like the Bangladesh factory collapse, which have illustrated previously unaccounted for risks in sourcing from the lowest-cost supplier. (For more, see: “Go Green With Socially Responsible Investing.”)
The Economic Pillar
The economic pillar of sustainability is where most businesses feel they are on firm ground. To be sustainable, a business must be profitable. That said, profit cannot trump the other two pillars. In fact, profit at any cost is not at all what the economic pillar is about. Activities that fit under the economic pillar include compliance, proper governance and risk management. While these are already table stakes for most North American companies, they are not globally.
Sometimes, this pillar is referred to as the governance pillar, referring to good corporate governance. This means that boards of directors and management align with shareholders’ interests as well as that of the company’s community, value chains, and end-user customers. With regard to governance, investors may want to know that a company uses accurate and transparent accounting methods, and that stockholders are given an opportunity to vote on important issues. They may also want assurances that companies avoid conflicts of interest in their choice of board members, don’t use political contributions to obtain unduly favorable treatment and, of course, don’t engage in illegal practices.
It is the inclusion of the economic pillar and profit that makes it possible for corporations to come on board with sustainability strategies. The economic pillar provides a counterweight to extreme measures that corporations are sometimes pushed to adopt, such as abandoning fossil fuels or chemical fertilizers instantly rather than phasing in changes.
The Impact of Sustainability
The main question for investors and executives is whether or not sustainability is an advantage for a company. In practical terms, all the strategies under sustainability have been co-opted from other business movements like Kaizen, community engagement, the BHAG (Big Hairy Audacious Goal), talent acquisition and so on. Sustainability provides a larger purpose and some new deliverables for companies to strive for and helps them renew their commitments to basic goals like efficiency, sustainable growth and shareholder value.
Perhaps more importantly, a sustainability strategy that is publicly shared can deliver hard-to-quantify benefits such as public goodwill and a better reputation. If it helps a company get credit for things they are already doing, then why not? For the companies that cannot point to an overall vision to improve in these three pillars, however, there isn’t a real market consequence — yet. The trend seems to be making sustainability and a public commitment to it basic business practices, much like compliance is for publicly traded companies. If this comes to pass, then companies lacking a sustainability plan could see a market penalty, rather than proactive companies seeing a market premium.
Although it very much a buzzword, sustainability is here to stay. For some companies, sustainability represents an opportunity to organize diverse efforts under one umbrella concept and gain public credit for it. For other companies, sustainability means answering hard questions about the how and why of their business practices that could have a serious, if gradual, impact on their operations.
The Bottom Line
Sustainability encompasses the entire supply chain of a business, requiring accountability from the primary level, through the suppliers, all the way to the retailers. If producing something sustainably becomes a competitive edge for supplying multinational corporations, this could reconfigure some of the global supply lines that have developed based solely on low-cost production. Of course, that scenario depends on how strongly corporations embrace sustainability and whether it is a true change of direction or just lip service.
View more information: https://www.investopedia.com/articles/investing/100515/three-pillars-corporate-sustainability.asp