Published: June 15, 2009
by Helen Sanders, EditorWhile the environmental message can still be heard, it has been drowned by the cacophony of economic laments. Statements of corporate social responsibility (CSR) still appear in the annual reports expressing great deeds of environmental and social progress, but for the time being at least, the primary focus is on the P&L page. But is this the right priority, and can CSR (particularly focusing on environmental issues in this article) contribute to the P&L rather than standing as a separate chapter in the annual report? Furthermore, what role can treasurers play?
Daniel Marovitz, Head of Product Management, Global Transaction Banking, Deutsche Bank illustrates,
“Companies tend to view environmental sustainability as a non-issue, a necessary nuisance or as an opportunity. Deutsche Bank is in the latter category. We see that there are financial advantages which will be realised through the transition from an economy which is not concerned by the environment to one which is focused on protecting it.”
Many treasurers’ initial response will be that they have little control over the company’s environmental policies; this ignores the fact that the right environmental strategy has the potential to reduce costs and generate income, while the wrong one brings significant risk to the business.
Looking first at risk, environmental issues have the potential to create both catastrophic but also more subtle risks to a company. In the former category, we tend to think of major events which have had a significant environmental impact, such as the Exxon-Valdez oil spill in 1989 and the toxic gas leak at Union Carbide’s plant in Bhopal in 1984, typically cited as the world’s worst industrial accident. The environmental, social and human effects are barely calculable in either case, but what about the financial result for the companies involved? In the case of Exxon Valdez, 18 years of litigation, the threat of more than $5bn in actual and punitive damages (although ultimately this was reduced) and $3bn in clean-up costs and civil and criminal charges. In the case of Union Carbide, the virtual collapse of the business and subsequent acquisition by Dow. Other severe outcomes relating to environmental issues include Sony’s “cadmium crisis”, when before Christmas 2001, Sony’s entire shipment of Playstations to Europe was blocked as a result of high levels of cadmium. The cost? Over $130m, including an 18 month process to identify and resolve the issue.
In recent years treasurers' involvement has evolved from financial to enterprise-wide ride management...
A relatively small proportion of companies are in such environmentally-sensitive industries as the chemical and energy companies. With this in mind, Sony’s case illustrates three important issues:
Firstly, Sony was not a company which would be considered to have a high environmental impact (unlike the energy or chemicals sectors, for example) but the cost was considerable. This is particularly significant bearing in mind that Sony has a strong environmental track record and reputation.
Secondly, the problem did not lie with Sony itself but further down the supply chain. The outcome, however, sat firmly at Sony’s door, with substantial damage to reputation as well as to income. With continuously extending supply chains, companies of all types need to scrutinise every stage of their supply chain as ultimately, they will be held accountable.
Thirdly, the opportunity cost, by delaying the launch of the Playstation, had far-reaching consequences in terms of ceding competitive advantage and causing reputational damage. Reputational risk is an important element in the green agenda, as customers, shareholders, employees, debtholders and wider public opinion increasingly have a preference for sustainable business practices and a commitment to both environmental and social responsibility. For large multinational corporations in particular, this is a double-edged sword as both actions and perception of actions are crucial to a successful green agenda. For example, as Esty and Winston explain,
“Globalisation creates opportunities for many, but fundamentally rewards scale... [however, in parallel].. operating in ways that respond to localised needs and preferences is becoming essential. The scale of environmental issues, ranging from entirely local to inescapably global, only adds to the complexity of this already daunting management challenge.” [[[PAGE]]]
They continue, by way of example,
“When operating on foreign soil, companies must expect especially intense scrutiny. One telling example: while Coca Cola faces ongoing protests in India over its water use at a plant in Kerala, the Indian-owned Kingfisher brewery down the road, which uses far more water, draws no political ire.”
The economic challenges of recent months have been a catalyst for many firms to stimulate efforts to reduce costs and increase efficiency.
Treasurers have a significant responsibility for managing risk in the organisation. In recent years, treasurers’ involvement has evolved from financial to enterprise-wide risk management, but environmental risk is an issue in which every treasurer should be engaged. Environmental risk has the potential to make a significant financial impact on the business. Treasurers should be exploring risk sensitivity and seeking to insure for, or hedge these risks. One such risk is the impact of the weather (weather risk). As Jean-Louis Bertrand explains in his article in the TMI Treasurers’ Guide to Hedge Accounting 2009, most companies’ revenues are exposed to weather-related risks, but few are proactively measuring or managing this risk.
Most companies’ environmental risks, and their potential outcomes, are relatively inconspicuous and do not reach the headlines; for example, the opportunity cost and loss of competitive advantage by companies which have not invested in greener technologies and processes to reduce their costs. For example, a company that has replaced paper and postage for invoicing customers with electronic invoices can make substantial savings over a competitor. Banks are competing hard in this area, not only to support their corporate customers in replacing inefficient, manual or costly processes, with the help of third party, specialist vendors, but to reduce costs from their own activities. The environmental and tangible cost implications of moving from paper to automated statements are enormous; for example, a bank printing 60 million pages of bank statements each year would cost around $7m, equivalent to felling 6,000 trees. Consequently, many are encouraging their clients to go paper-free by offering value-added electronic alternatives.
The economic challenges of recent months have been a catalyst for many firms to stimulate efforts to reduce costs and increase efficiency.
Crisis can be a powerful catalyst for change and the global recession serves to strengthen the business case for sustainable business practices. Companies are going back to basics with initiatives to eliminate paper-based processes, increase the level of process automation and consequently reduce waste and their own carbon footprint.
From every perspective, automation and efficiency bring benefits, and these apply at every stage of the financial supply chain.
We have considered the financial supply chain extensively in recent editions, in particular in ING’s series earlier this year, and SEB’s Guide to the Financial Supply Chain during 2008 (TMI edition 165). While these have described the cost and efficiency savings, which can be extremely substantial, the environmental benefits can also be significant.
There are, of course, companies that have a clear advantage in their ability to profit from environment initiatives, such as the renewable energy sector. However, as we saw earlier when discussing reputational risk, every company is tasked to improve its environmental credentials and demonstrate both global and regional sensitivity. Otherwise, a small issue in one country can become a major issue on the front pages in another. [[[PAGE]]]
Companies with big fossil fuel bills face a double whammy of higher prices and greenhouse gas emission targets.
My initial impression was that every large, publicly quoted company would consider environmental issues to be an important element in their strategy, even if their industry did not immediately seem to present revenue opportunities as a result of pursuing a “green” agenda. I contacted a couple of very large multinational corporations which have a strong environmental marketing message, to discuss how they had turned “green to gold”. The response was very surprising. The press officer of one company which presents itself as an icon of sustainability, (who I assume was either new to the role or soon to be out of it) said that they did not want to participate as their “green” message was (and I quote) “a necessary evil”. Another did not want to be interviewed as they wanted to discuss their “core business instead”. On the other hand, others such as GE and Walmart have announced pro-active environmental improvement strategies as part of their commercial framework, and a growing group of apparently lower-impact companies, which do not appear to have the ability to contribute to environmental sustainability, have made some very positive progress and strengthened their brand credentials accordingly. Fig 1 illustrates some examples of business segments which have the most to gain, or to lose, from their environmental strategy.
With many firms going “beyond compliance” from the perspective of environmental responsibility, a number of leading international banks are amongst these organisations. This is reflected in investment policies, as evidenced by commitment to the Equator Principles, most recently adopted by Banco Santander in April 2009, an increasing recognition of the need to approach emerging economies in a way that is sustainable from both an environmental and social perspective, and the way they manage their own business. For example, as Daniel Marovitz, Deutsche Bank describes,
“As part of our environmental commitment, Deutsche Bank is completely renovating its headquarters in Frankfurt. The staff was moved out two years ago, and will be relocating back early in 2010. By that time, our offices will be amongst the greenest office buildings in Europe. Not only did we want to demonstrate our own “green” credentials, but we wanted the building to be a benchmark for companies globally. Unusually, the project is not a new build, but the refurbishment will exceed many new buildings in terms of environmental standards. Although the cost is substantial, it is far less than the removal and replacement of the existing facility, which is an example to other companies and illustrates the conjunction of economic and environmental considerations. Furthermore, the cost savings from the refurbished building will be substantial, so the project will bring both environmental and cost benefits.”
There are a variety of benefits to Deutsche Bank’s approach (and similar initiatives by other banks). Not only does Deutsche Bank gain cost benefits and gain employee support, which has been considerable, but, as Daniel Marovitz, Deutsche Bank continues,
“Through the experience of our own building project, Deutsche Bank can be both partner and adviser to our clients. Like them, we want the best working environment for our employees, to increase our commitment to environmental sustainability, and to reduce costs. Our new headquarters satisfies all of these requirements and we can pass our experiences on to other companies.”
As we discussed earlier, many firms are turning environmental challenges into competitive advantages – although as we have also ascertained, beware those whose commitment goes no further than wholesome images on their marketing billboards. Introducing greener, more cost-effective processes creates value, in some cases substantially so. For example, DuPont has cut greenhouse gas emissions by 72%, with a saving of $2bn over 10 years. Much of this has come from the change in production for one chemical, adipic acid, to eliminate nitrous oxide emissions. [[[PAGE]]]
This is an area in which treasurers can contribute substantially by their involvement in the financing of capital projects which contribute to cost and process efficiency. With continuing market uncertainty, many companies are loathe to embark on capital projects, but this could mean missing out on substantial environmental, reputational and competitive advantages. Treasurers can assist in this by constructing innovative financing solutions which do not affect existing bank facilities and covenants, nor put pressure on working capital. For example, although traditional financing remains expensive and undesirable for many firms, in many cases, projects with long-term environmental and energy-efficiency objectives are suitable (and often preferred) for alternative financing methods such as asset finance as Patrick Sherrington, Lloyds TSB Corporate Markets illustrated in TMI 173 (March 2009). The green angle should be a major factor in both the project objectives and the amount it costs. As Daniel Marovitz, Deutsche Bank explains,
“If projects are performed correctly, the environmentally sustainable option should be more cost-effective than an unsustainable alternative.”
“Green to Gold” authors Esty and Winston explain that creating “eco-advantage” is not easy, but the rewards can be substantial. They warn against divorcing “core” strategy with “eco” strategy, and stress the importance of maintaining a commercially pragmatic approach. For example, when devising a “green” product strategy, they emphasise the following common-sense messages:
Responsible, sustainable business can be profitable business and it is a core value that is directly attributable to reputation, cost reduction and revenue growth. Rarely should the environmental and financial agendas compete, and treasurers that can assist their companies' environmental initiatives can make a direct contribution to the future sustainability of the business.
Further Reading:
I strongly recommend “Green to Gold” by Daniel C. Esty and Andrew S. Winston, John Wiley & Sons Inc. 2006 for ideas and experiences about greening the business and the commercial advantages that can be gained.
We would like to thank Daniel Marovitz, Deutsche Bank for his kind contribution to this article.
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