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With all that's going on in the world, what is the role of environmental concerns within the corporation? Should that role be different, and if so, how?
CFO.com Staff, CFO.com | US
October 15, 2004
We asked a number of notable individuals and organizations to share their thoughts on the question, "Can companies still afford to be green?"
CFO.com welcomes your thoughts, too. Send your letters to: The Editor, CFO.com, 111 W. 57th St., New York, NY 10019, or email us at DaveCook@cfo.com. Please include your full name, title, company name, address, and telephone number. Letters are subject to editing for clarity and length.
Your question suggests companies could afford being green so far — a question that's difficult to answer, whether looking forward or back.
There is a lack of consistency of accounting in the industry for such expenditures. Drawing a precise line between what is or isn't green appears to be an arbitrary task at best — due, if you will, to the many "shades of green" that are possible.
Companies must adopt responsible environmental policies and practices in the production and delivery of their products and services; our "shrinking" world requires it to ensure any reasonable degree of quality-of-life for all of its inhabitants. Ultimately, it will be all of its inhabitants who will pay and who therefore must find a way to afford environmentally responsible practices as individuals and members of institutions. It is essential to sustain what we all treasure about the environment.
E. B. Galligan
Senior Director and Chief Financial Officer
Port of Portland
Green issues are actually rising in importance for many corporations as they begin to realize their environmental liabilities go beyond health and safety. These rising environmental liabilities for greenhouse-gas emissions are now important financial issues.
One cost-effective mechanism to reduce a company's "carbon footprint" is through emissions trading, which today is an emerging market but will shortly become a global market, especially for multinational companies. Other means to reduce environmental liabilities are through the purchase of renewable energy and its credits as well as the reduction of energy usage, which is beginning to have a financial value in the emerging "negawatt" markets.
Rather than looking at environment as a cost, sanguine companies consider the P&L as they would for any business unit. "Green trading" offers corporations the means to reduce their emissions, make money, and be responsible corporate citizens. Not only can companies afford to be green, but the impending costs make it more fiscally astute to be green sooner rather than later, when the costs will be higher.
Peter C. Fusaro
Global Change Associates
Your readers might be interested to know more about the EPA's plans for the nation's environmental protection programs. The agency's strategic plan for 2003-2008 is posted at www.epa.gov/ocfo/plan/plan.htm. It elaborates on the EPA's longer-term goals for air, water, and land; healthy communities and ecosystems; and compliance and environmental stewardship. This plan helps orient agency priorities and could prove useful to corporate executives seeking to plan their own organizations' environmental strategies.
We appreciate your efforts to address environmental issues from the point of view of the corporate and CFO community.
Director of Communications
Office of the Chief Financial Officer
Environmental Protection Agency
Sometimes it helps to have perspective.
Buzz Aldrin, the lunar-module pilot of Apollo 11, discussed his view of the Earth from the Moon this way: "The soft, glowing presence of planet Earth in the black abyss had a pristine clarity uncaptured by photographs. Images on film lack the subtle shades, the brightness, and the depth of the living sphere, which bulged out of the blackness as I sailed outward on Apollo 11... From the deep blue of the Mediterranean, all of Europe and Africa sprawled away in soft pastels, innocent of political boundaries. And from the surface of the moon, where I could cover with my thumb the site of all human history, the Earth seemed fragile as a Christmas ornament, drifting like a lost balloon on the black velvet of space. The image of a living Earth, capable of extinction, disarms illusions of individual or tribal isolation. We gained more than altitude in those 66 years from Kitty Hawk to the moon. Seeing Earth not as an extension of man, but man as an extension of Earth."
Gene Cernan, commander of Apollo 17, discussed his view this way: "It was something so awe-inspiring you had to sneak a glance at it every chance you got. It's too beautiful to have happened by accident. To me, it was like sitting on God's back porch, looking back home."
The mission statements and value statements of corporations are designed to provide perspective, not only to inspire but also to help corporations clarify their roles and responsibilities to multiple constituents, what I call the "5-Cs":
• The Corporation itself and its internal and external suppliers (i.e. board, management, employees and suppliers)
• Capital providers (investors and lenders)
• Critics (rating agencies, media, and special interest groups)
• The Community (including the local and broader communities in which the corporation operates and the governments in those communities appointed to represent community interests)
So when we ask ourselves about the missions and values of corporations, and whether corporations can afford to be green, we need to step back to look at the full picture of an organization, what makes for long-term success, and on multiple levels if we, as human beings organized into corporations, can afford not to be green.
The news has been sprinkled with scandals in corporations. These scandals tend to boil down to the actions of a few within the company in the betterment of that few, rather than the actions of the organization in the betterment of many. Most recently the case of Lord Black at Hollinger springs to mind. And it is an issue faced daily, not only by CEOs deciding who they will be, but also by every individual inside an organization struggling with inadequate corporate cultures and moral dilemmas — the issues of taking an action to better the lives of their family (the few) in the short run, which may violate the rights of the many (other stakeholders and constituents) in the longer term.
Often when it relates to the environment, the question is raised: are we making judgments solely to benefit those on the planet today — or have we considered those generations that will come after ours? Again we have the ethical choice: the many or the few.
The problem is similar to that faced by many corporations today in making not just environmental but other long-term versus short-term decisions: the dilemma of quarter-to-quarter earnings pressures versus long-term value creation.
Even if environmental initiatives are value creating, a recent study by professors Graham, Harvey, and Rajopal on "The Economic Implications of Corporate Financial Reporting" shows that "55 percent of managers would avoid initiating a very positive NPV project if it meant falling short of the current quarter's consensus" and "78 percent of executives would give up economic value in exchange for smooth earnings".
So this "many and the few" dilemma — the short term and long term — is a global one, and it is the "environment," so to speak, for this question of environmental corporate responsibility.
So let's live in the world companies and investors have currently created for themselves. A question that every "bottom line" CFO will surely ask is this: if corporations do look to their larger responsibilities to all constituents and look to address environmental concerns, is there a payoff beyond that of our souls — or of generations that come after?
The largest U.S. investor thinks so. Acknowledging the positive correlation between environmental performance and investment returns, Calpers has embarked on initiatives this year to invest in stocks of environmentally responsible companies.
And investment firms like Innovest explicitly address it, asking the question: "How fiduciarily responsible is it not to consider environmental records and liabilities?"
Employees care, too. The workforce will be shrinking, we are told, and the motivations of employees are changing. They value many different aspects of their lives. To attract the best of them, pollutant employers are increasingly finding they have to communicate what they are doing to address issues of the environment and larger issues of corporate responsibility.
And customers increasingly are making choices that go beyond just their own materialistic considerations to address issues of broader focus and concern.
And now, a study this past summer offers support for the contention of Harvard Business School Professor Michael Porter that the win-lose dichotomy between bottom-line results and the environment is a false one. This important multidisciplinary study by professors Al-Tuwaijri, Christensen, and Hughes ("The Relations Among Environmental Disclosure, Environmental Performance, and Economic Performance") shows that for a cross-section of companies, environmental performance (defined as the ratio of toxic waste recycled to toxic waste produced) and economic performance (defined as industry adjusted stock price returns) are very correlated. Those companies that have strong environmental performance also have better economic performance.
This correlation supports Dr. Porter's assertion that rather than viewing environmental pollution as a deadweight cost, the best management teams view it as an opportunity — because pollution represents resources that have been used incompletely, inefficiently, or ineffectively — and that this creates innovative potential to use new technologies, products, and processes to address customer and community needs.
The study also finds that those companies that are better environmental performers also have better environmental disclosure. Today, organizations like KLD Research and Analytics help the investment community by providing research on environmental practices of firms. GovernanceMetrics International includes environmental practices in the "corporate behavior" section of its governance ratings system. And to help all constituents, but particularly investors, this year some in the Securities and Exchange Commission and Congress have begun to re-explore and recognize the need to enhance requirements surrounding environmental disclosure of liabilities so that better choice-making is possible.
Despite these advances in understanding and the clear evidence of the benefits of addressing environmental concerns, more education is needed. Of course, economics and accounting are different. So what is required? Better disclosure, so investors and others can make informed decisions about where to invest money, time, and talents. Better management systems and executive incentives established by boards, to take these future liabilities into account. Because, in fact, if the liabilities were shown and known and the true economics and opportunities were understood, then the choice would be clearer from all perspectives: the "dollar bottom line" and the "real bottom line," that is, the deathbed question of "Did I do what I could to help the world while I passed this way?"
To be green or not to be green — in the broadest sense there is no question. But when we focus on our own individual short-term worries, fears, and greed or become myopic about the role of corporations and allow the externalization of their costs to the many for the benefit of a few, we must stop — stop to consider our illusions and step back to the "back porch" view to gain perspective. The vision calls us. And there is much less conflict in this choice than we imagine.
CEO and Founder
The Value Alliance and
Corporate Governance Alliance