Creating the Wholly Sustainable Enterprise

Transcription

1 U.S. Manufacturing Industry Practice Creating the Wholly Sustainable Enterprise A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability January 2007 Give man a fish and he can feed himself a meal. Give man the tools to fish and he can feed himself all day. Teach a man to fish and he can feed himself forever. Help a man hatch new fish and he can feed the whole world forever.

2 Contents Section 1: Broadening the Definition of Green: What is the Wholly Sustainable Enterprise?... 1 Section 2: Past Views: Sustainable Design, Eco-Friendly, and Big Business vs. the World... 2 Section 3: The Green Company: A New Definition to Apply Across the Sustainable Enterprise... 4 Section 4: What Building the Wholly Sustainable Enterprise is NOT... 5 Section 5: Bringing it all Together: The WSE as Journey and Business Imperative... 7 Section 6: Painting the Picture: The Transformation Roadmap... 8 Section 7: Why Sustainable Enterprise Transformation is so Important now... 9 Section 8: Getting Started: Some Action is Better Than None Section 9: Additional Whitepaper Topics: The Wholly Sustainable Enterprise Series A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability

3 Section 1: Broadening the Definition of Green: What is the Wholly Sustainable Enterprise? Sustainability is rapidly becoming a critical business strategy, driven by a convergence of factors increasing regulation, changing customer expectations, competitor advances, value chain partner requirements, brand equity protection, and global risk management. Leading companies have begun driving improved value by broadening the definition of sustainable enterprise and by executing green practices where doing so delivers positive returns. Companies must undertake sustainability-driven enterprise transformation efforts in order to improve financial, environmental, and social performance. Sustainability, approached the right way, can be a significant driver of enterprise value, and must generate economic value in order to continue evolving from an environmental specialty to a mainstream growth engine. The Wholly Sustainable Enterprise (WSE) is defined as a company, institution, or entity that generates continuously increasing stakeholder value through application of sustainable practices throughout the entire base of activity products and services, workforce, workplace, functions/processes, and management/governance. The rate of change is increasing and the business world appears to be approaching a tipping point. Companies that build a capability for sustainable transformation will lock in competitive advantage as the marketplace, regulation, and customer demand move in this direction. Companies that do not invest now run the risk of being compromised or eliminated if the effect of sustainability on brand equity drives rapid changes in customer purchasing decisions and market valuations. A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 1

4 Section 2: Past Views: Sustainable Design, Eco-Friendly, and Big Business vs. The World The modern sustainability movement traces roots to the United Nations (UN) 1992 Earth Summit in Rio de Janeiro, Brazil. Over 180 public and private sector leaders discussed environmental sustainability and development resulting in the Rio Declaration 21 principles on the environment and development and Agenda 21 a global program for action on sustainable development. Others followed the UN s lead. In 1993 then-president Bill Clinton established the President s Council on Sustainable Development to provide a domestic sustainable development agenda. In 1995, the World Trade Organization (WTO) formally recognized linkages between trade, development, and the environment. The global community launched the voluntary ISO standard in 1996 to recognize corporate environmental management systems and in 1999, the first global sustainability index, The Dow Jones Sustainability Group Index, was launched to guide investors seeking to invest in companies following sustainable development principles. With the new millennium came new global gatherings, each larger than the previous. Learning from the Earth Summit s challenges, the 2000 UN Millennium Summit established concrete goals with metrics for each country to achieve by In 2002, the first World Summit on Sustainable Development was held in Johannesburg, South Africa, focused on integrating economic and equity issues. Business Action for Sustainable Development organized over 40 Chief Executive Officers (CEOs) and hundreds of corporate representative s attendance at the event. Beginning in the late 1990s many private sector companies began to evaluate their own practices to determine how to measure and report sustainability. The changing tide in the business world is evidenced by the increase in reporting on environmental and social performance. In 1996, an estimated environmental reports were published, while in 1999, over 1,100 were identified. Recent estimates are near 2,000 companies producing some form of sustainability report. Corporations such as GE, Ben and Jerry s, BP, DuPont, Wal-Mart, The Body Shop, and Shell are recognized as sustainability leaders that have led cultural changes within their organizations, and have sent a message that sustainability is an organizational priority. Leading companies and public sector entities are beginning to demonstrate the creation of shareholder value while delivering concurrent environmental and social benefit. Corporations are utilizing sustainable tools and practices such as life cycle analysis, industrial ecology, design for disassembly, the Natural Step framework, carbon neutralization, global energy management, LEED green building design, and socially responsible investment (SRI) management. However, efforts in most companies have been specialized, fragmented, and not yet part of broader strategies to use sustainability as a means to drive growth, profitability, and value. The green movement, such as it is today, reflects a set of beliefs and values that often conflict with the many of the perceived values represented by global companies. As such, the forces of green and those of big business have been at odds for much of history. Recently, however, examples of these opposing forces working together have demonstrated that when collaborating, private sector companies and environmentally oriented organizations can have a significant positive effect. Sustainable Enterprise Transformation reflects a series of actions required to move a company to a more sustainable or green position relative to today s baseline. The term also describes the ongoing, continuous, and permanent evolution of the company through future development stages towards being truly renewable. It is, at once, the way to transform today s company to that of a Sustainable Enterprise, and it is also the way to A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 2

5 establish a truly sustainable way of continuous transformation towards improved shareholder value and reduced a global impact footprint. In recent years, a number of sustainability organizations, methods, and tools have been developed and adopted to varying degrees of success. Those targeted at the business world have had limited applicability for three primary reasons: They are driven by ecological or environmental priorities which may or may not be the highest priority for a company at any given time. This limits the applicability and longevity of such efforts, as short-term priorities may be in conflict with programs that come at a premium. They have been limited in scope or application to specialized areas of commercial activity (e.g. waste management, direct materials sourcing, etc.). The risk is that the potential benefits from a long list of discrete (but uncoordinated) efforts may be limited. Great ideas don t get expanded beyond their initial frame, bad ideas are tried again and again as learned lessons are not accounted for, and potential synergies derived from scale, coordination, and unforeseen benefits are lost. They have been hampered by the perception of green as being politicized and by the idea that green practices should be implemented irrespective of the underlying cost. Rather than positing that sustainable practice and environmental sensitivity should be moral imperatives, our premise is that shareholder value will drive the right set of actions that will, by their nature, achieve improved social and environmental outcomes. In short, companies are faced with an imperative to undertake enterprise sustainability as a critical strategy. A convergence of factors increasing regulation, changing customer expectations, competitor advances, brand equity protection, and global risk management requires that companies move rapidly to address these complex issues. A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 3

6 Section 3: The Green Company: A New Definition to Apply Across the Sustainable Enterprise One of the challenges facing a company seeking to drive improved sustainability is that the environment of ideas, definitions, tools, regulations, and priorities is rapidly evolving, and no single right way has surfaced. A sampling of recently published sustainability and corporate social responsibility reports illustrates that companies are interpreting requirements, addressing priorities, and reporting progress differently. In addressing the strategy of building a WSE, practices must be defined more broadly than the traditional terms that have been used in the past. In fact, to drive long-term and repeatable shareholder value, the definition and application of green principles must be expanded to encompass the entire activity base of the enterprise. What does it mean to be Wholly Sustainable? There are five major platforms where sustainability principles must be applied in order to transform the enterprise for value. These include: The Green Products/Services Portfolio: Organics vs. Synthetics. Waste and pollution management. Resource replacement. Sustainable design. Closed loop production. Lifecycle service strategy. Re-usability. Returnability. Adaptive reuse. The Green Workforce: Human resource strategies. Culture. Recruiting and retention. Training. Career path development. Diversity. Community service. Primary and secondary education. The Green Workplace: Global locations. Physical plant. Ergonomics. Virtual workplace. Green buildings. Environmental discharge. Waste. Energy use and source. Commutation patterns. The Green Function/Process Model: Sustainability applied to traditional functions. Enterprise-wide green process modeling and ERP. Process modeling to incorporate green practices and sustainable management. The Green Management and Governance Principles: Board and management accountability. Sustainability tests. Compliance. Incentives. Ethics. Reporting. Assurance. The framework for greening the company involves application of these principles across each element of the enterprise. The entire effort represents a fundamental change in the strategy and composition of the company, but the changes themselves are incremental and hence, executable. One of the challenges in creating a WSE is the amount and fragmentation of material, resources, tools, etc. around the topic. Sustainability comprises elements of a large number of technical and functional topic areas and one of the most difficult aspects is making sense of all the materials. Synthesizing them into meaningful activities and initiatives, and coordinating those efforts under a single comprehensive program to measure and report on benefits and value derived is a critical competency that many companies are evolving towards. A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 4

7 Section 4: What Building the Wholly Sustainable Enterprise is NOT Historically, sustainability has been in the realm of three circles of influence business, civic institutions (government), and the public. Much of the debate has centered on broad issues over which a company has no control; influence perhaps, but no ability to decide the course regulation is one such area and globalization is another. Rather, a company can undertake broad transformation programs to incorporate value-driving sustainable practice, hence maintaining control over destiny by using long-term imperative (sustainability) to drive short-term objectives (growth and profitability). The triple bottom line financial, social, and environmental reporting touches on two very important issues, social responsibility and environmental sensitivity, around which clear business cases and shareholder value is, in some cases, tenuous. For the time being, the debate continues about the value of such efforts. Since corporations and executives remain accountable to shareholders in the short term, this remains a high degree of motivation to address issues that affect earnings growth, ROI and other key financial metrics. The basic premise is that financially sound short-term efforts, such as those described here, will in an increasing number of instances, drive concurrent benefits in the social and environmental spaces. Importantly, we expect to see continued evolution of triple bottom-line reporting to explore the inter-relationship between financial results and the non-financial aspects of performance, focusing on where well-planned and executed sustainability initiatives can drive value (improved financial performance) as well as improved outcomes in social and environmental outcomes rather than viewing them as trade offs to one another. Increased regulation may drive some of this reporting emphasis, as well as a company s desire to promote sustainability efforts. In evaluating a company s evolution to WSE status, there are some organizational constructs that may limit or reduce the effectiveness of an enterprise-wide sustainability strategy. Green Is Not A Corporate Function: Companies that limit sustainability efforts on to a specific department or function (e.g. EH&S) may fail to advance in the journey towards overall sustainability. Ownership of sustainability by a single function suggests that responsibility resides with a specific, limited number of individuals rather than responsibility residing with everyone as an inherent element of the overall culture. Green Is Not An Executive Position: Companies are experimenting with a Chief Sustainability Officer and other such titles, perhaps a positive step but insufficient on its own to drive consistent value. While executive ownership and accountability for green is an essential element of an overall approach, it is not, in itself, sufficient to drive the enterprise-wide activities required to succeed. Green Is Not a Fad: Like business trends of recent decades, sustainability as the next big thing may be advancing as a means to driving competitive advantage. Yet greening the company is more than a fad. Many business improvement methods of recent years MRP, reengineering, lean manufacturing, Six Sigma, and others can be considered specific application of sustainability principles applied to business activity. It would be appropriate to begin to think of sustainability as an organizing principle within which business improvement methods are developed, applied, and evolved. And over time it is reasonable to presume that the next waves of business improvement frameworks will be based at least in part on principles of value-driven sustainability. Green Is Not a Cost of Doing Business: Thinking about sustainability in this manner establishes a culture of sustainability as an add-on or incremental cost. Rather than being an integral part of every process, sustainability is evaluated after core decisions are made. This can be illustrated by describing the difference between a traditional design project followed by a value engineering phase, vs a design project initiated as a A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 5

8 green project where sustainable materials, systems, etc. are a core part of the initial specification and conceptual design amongst key participants in the design process. Green Is Not a Political Statement: The history of conflict between environment and big business, combined with the natural politicization of the issues creates a substantial amount of baggage to the company undertaking a broad Sustainable Enterprise effort. The successful organization will undertake this transformation based on the principles of improving shareholder value and company performance, and the environmental and social benefits will be positive, concurrent consequence. A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 6

9 Section 5: Bringing it all Together: The WSE as Journey and Business Imperative Companies that are sustainable across the entirety of their activity base will drive improved short-term profitability and long-term stakeholder value, while contributing to permanent betterment of social and environmental issues. By virtue of this win-win proposition, these are the companies that will sustain themselves indefinitely. With due credit to Porter, we can begin to identify how companies can frame all of their enterprise activity along two critical dimensions: the contribution to enterprise value and the impact on the Global Impact Footprint (GIF). In increasing order of desirability: Increasing GIF/Destroying Value: Theoretically, companies with adequate capital planning and management practices will not undertake value-destroying initiatives. Yet there are numerous examples of ill-fated projects within companies where value is destroyed while the global footprint is increased (negative environmental/social impact). Reducing GIF/Destroying Value: These are the enterprise activities that cost capital, resource, or effort while lowering the calculation of enterprise value (reflected in share price). Activities in this quadrant include taxes, regulatory compliance, charitable contributions, environmental advocacy, or contractions/downsizings that reduce shareholder value. Increasing GIF/Improving Value: This is the set of traditional company growth activities that usually pits environment against commerce. It s the utilization of natural resources in exchange for profits that has reflected much of the growth since the Industrial Revolution. It is impossible to imagine a business paradigm where every profit-generating activity is also good for the environment, but the goal of the new sustainable enterprise is to move the bar to change the mix. Reducing GIF/Improving Value: This is the new sweet spot, where the convergence of factors described earlier creates opportunities to increase value while concurrently reducing the GIF. Companies that can identify, fund, and execute these kinds of efforts will be doubly rewarded for having done so. Companies that align all of their enterprise sustainability activity around value-creating opportunities are the companies that will succeed over the long term. A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 7

10 Section 6: Painting the Picture: The Transformation Roadmap Companies can begin to outline sustainability transformation roadmaps that address the entirety of enterprise activity, and to identify initiatives that will, using established business case methods, drive shareholder value. The transformation roadmap includes specific elements of the journey towards sustainability, social responsibility, and environmental sensitivity. However, our approach is grounded in the practical realities of what is controllable, implementable, repeatable, and valuable. Controllable: Companies should act in those areas where efforts yield real and predictable results. Even with the advent of the extended enterprise, globalization, supplier, and partner networks, etc., an individual company is limited in what is controllable through applied effort. The transformation roadmap framework (the universe of possible areas in which a company could make an effort) is bounded by those areas where outcomes are truly controllable by the entity. Implementable: To have the desired results and expected benefits, initiatives outlined as part of the transformation roadmap must be implementable. The process of evaluating, approving, and executing new projects is in fact a test of the basic principles behind sustainable management practice. One of the most challenging aspects of developing the transformation roadmap is prioritizing amongst the universe of possible changes, and focusing on those that meet the basic tests of being implementable doing the right things in the right way. Further, the effective transformation roadmap utilizes benefits derived from early efforts to directly fund future work creating a cascade of outcomes and benefits that once primed, becomes repeatable, then self-sufficient, then sustainable. Repeatable Self-Sufficient Sustainable Cycling: good outcomes can be repeated, even though new inputs are required. Initially requiring excess inputs, over time activities becoming self-sufficient and then fully sustainable. Valuable: initiatives defined as part of the transformation roadmap must be supported through application of rigorous financial evaluation, taking into account traditional business case metrics (ROI, payback, etc.) and also, importantly, through application of Full Input Accounting (FIA), allowing reasonable proxies for the costs of traditionally free or ignored resources and impacts. In the context of creating the WSE, the transformation roadmap is a set of practical efforts that are undertaken to drive value for the entity, not necessarily to assume any greater degree of influence over, or responsibility for broader social change. Over time, enough companies undertaking enterprise-wide efforts of the types described here may create a de-facto change in the underlying social, governmental, and environmental spheres in which they reside; rational short-term actions on the part of companies and bold management teams will drive the types of changes advocated by politicians, environmentalists, and alarmists but the improvements will flow from positive elements of growth, profitability, employment, and value rather than from conflict, regulation, and premium costs. A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 8

11 Section 7: Why Sustainable Enterprise Transformation is so Important now A convergence of factors, technologies, and social and environmental issues make it critical for companies to consider making the transformation to green as a way of life. The principles embodied in developing the sustainable enterprise are responsive to these factors, and are, at the same time, necessary to address and resolve many of the issues we face. What factors today create risk for those companies that are not addressing sustainability on an enterprise-wide basis? Increasing Regulatory Requirements Changing Consumer Expectations Advancing Technologies Risk Management: Hedging Against Major Disruptions Competitive Positioning: Keeping Up Value Chain Leadership (the Wal Mart effect) Changing Employee Values; Gen X and Y Values The Moral Imperative (It s the right thing to do) These factors may not have been as obvious even a few years ago, but with the acceleration of activity, news, and public awareness of these issues, it is reasonable to assume that the time for action is now. A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 9

12 Section 8: Getting Started: Some Action is Better Than None Evolving towards a fully sustainable global enterprise is a long-term journey. Companies are approaching these issues in different ways, for different reasons, and no clear picture has yet emerged on the market s valuation of sustainability transformation. Yet it seems clear that some action is better than none even as a hedge against the possibility that sustainability will continue to grow in importance as a strategy to build a global carbon neutralization program, complete a global energy baseline, and establish absolute and relative targets for investment. Educate and train management and the workforce on key principles of sustainability and corporate social responsibility. Publish a Sustainability Report any report to focus efforts on describing what is being done and why. Begin transforming existing facilities to LEEDs certification and design new ones at the highest level. Take active steps to size the GIF and to identify ways to reduce it while generating value. Creating the WSE is a critical business strategy. Doing so with an orientation towards shareholder value will yield the triple bonus of growth combined with improved environmental and social outcomes. A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 10

13 Section 9: Additional Whitepaper Topics: The Wholly Sustainable Enterprise Series Following publication of this whitepaper, Deloitte Consulting LLP will be publishing a series of additional whitepapers on topics of planning, executing, and reporting on the WSE: Elements of the Practical WSE: What Constitutes Success? Creating the WSE: Planning, Executing, and Reporting Results The WSE Roadmap: Initiatives, Sequencing, Coordination, Execution, and Results Navigating Rough Waters: Making Sense of Evolving Protocols, Methods, Regulations, and Expectations Leading Practices Compendium: Top Ways Others are Building the WSE Real Results: Case Examples of Value-Driving Sustainability in Action For further information contact: Christopher Park Principal Deloitte Consulting LLP (313) chrpark@deloitte.com A Practical Guide to Driving Shareholder Value Through Enterprise Sustainability 11

14 About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 140 countries. With access to the deep intellectual capital of approximately 135,000 people worldwide, Deloitte delivers services in four professional areas, audit, tax, consulting and financial advisory services, and serves more than 80 percent of the world s largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other s acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names Deloitte, Deloitte & Touche, Deloitte Touche Tohmatsu or other related names. In the United States, Deloitte & Touche USA LLP is the U.S. member firm of Deloitte Touche Tohmatsu and services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP, and their subsidiaries), and not by Deloitte & Touche USA LLP. The subsidiaries of the U.S. member firm are among the nation s leading professional services firms, providing audit, tax, consulting, and financial advisory services through nearly 40,000 people in more than 90 cities. Known as employers of choice for innovative human resources programs, they are dedicated to helping their clients and their people excel. For more information, please visit the U.S. member firm s Web site at Copyright 2007 Deloitte Development LLC. All rights reserved. Member of Deloitte Touche Tohmatsu