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8 February 2006
Environmental Science & Policy Seminar
New Jersey Institute of Technology
The Business Case for
SustainabilityIssues Affecting the
Maximization of Benefits for
ALL of Society
John L. Cusack
[email protected]
Executive Director, NJ Higher Education Partnership for Sustainablity
www.njheps.org
President, Gifford Park Associates
www.giffordpark.net
“ In the 19th century,
we were making money with money,
in the 21st century,
I believe and hope that we will use
values to create value”
- Oliver Le Grand ,
Chairman of the Board of Cortal
(a subsidiary of BNP Paribas)
2
“ No Place To Hide for the
Irresponsible Business”
- Headline, Financial Times,
29 September 2003
3
A Word From Our Sponsor…New Jersey Higher
Education Partnership for Sustainability (NJHEPS)
NJHEPS is:
 A consortium of 40+ NJ Colleges & Universities
 an organization developing, promoting and implementing
sustainability among higher education institutions, businesses,
municipalities and citizens in NJ, the region and nationally
 Founded in 1998, hosted at NJIT
 Focused on energy efficiency, renewable energy, sustainable
campus and building design (issued guidelines, BPU support)
 Now an additional new focus on integrating social, economic
and environmental (I.e., sustainability) issues into curriculum
 Also targeting partnerships of higher education institutions
with their communities and with similar higher ed sustainability
groups in Northeast, Mid-Atlantic, nationally & globally
4
A Changing World for Senior
Corporate Decision Makers
Company Image
Balance Sheet
Management
Market Demands
Erosion of Public
Trust
Shareholder Value
Director’s & Officer’s
Liability/Management
Responsibility
Social and
Environmental
Disclosures
Legislation and
Regulation
5
Question: How Can Business Be Sustainable,
and thus Create Environmental,
Social and Economic Benefits/Profits?
Many Components to the Issue:
 Accounting/Measuring Performance
 Taxes
 Education
 Scientific Understanding
 Disclosure/Transparency
 Accountability/Responsibility
 Corporate Ethics (is that an oxymoron?)
 Risk Assessment
 Corporate Governance
6
Accounting/Measurement
Present Systems Far From Perfect...

Social & Environmental issues don’t fit well in our
400+ year-old economic accounting systems

Traditionally, if an item could not be quantified, it
was ignored (e.g., intangible assets, patents)

We need better ways of integrating sustainability
issues into the business measurement system

“That which gets measured, gets managed”

But, how do you measure Corporate Sustainability?

Some rating systems are being used by investors
7
Sustainability Rating Providers for Investors
A variety of sources...
Three Largest, (Best?) & Most Global:

Innovest Strategic Value Advisors (ISVA)

Sustainable Asset Management (SAM)

Trucost Limited
Others (many are national in scope):

Kinder, Lytenberg, Domini (KLD); Oekom; EIRIS; Arese;
Ethibel; IRRC; Light Green Advisors; ISS; Core Ratings;
Avanza; etc. [over 90 rating groups identified in a recent
study done by GPA for a major multinational company]
Note: traditional rating agencies starting to look at this field
(e.g.,Moody’s now does governance ratings)
8
Innovest Rating Sample Results: Steel Sector- 3 Years
50%
40%
30%
20%
10%
Jul-00
Aug-00
Jun-00
Apr-00
May-00
Feb-00
Mar-00
Jan-00
Dec-99
Nov-99
Oct-99
Sep-99
Aug-99
Jul-99
Jun-99
Apr-99
May-99
Mar-99
Jan-99
Feb-99
Dec-98
Oct-98
Nov-98
Sep-98
Aug-98
Jul-98
Jun-98
May-98
Apr-98
Feb-98
Mar-98
Jan-98
Dec-97
Oct-97
Nov-97
Sep-97
-10%
Aug-97
0%
-20%
-30%
-40%
-50%
-60%
A-97 S-97 O-97 N-97 D-97 J-98 F-98 M-98 A-98 M-98 J-98 J-98 A-98 S-98 O-98 N-98 D-98 J-99 F-99 M-99 A-99 M-99 J-99 J-99 A-99 S-99 O-99 N-99 D-99 J-00 F-00 M-00 A-00 M-00 J-00 J-00 A-00
Difference
0%
-3% -5% -5% -8%
Top Half Average
0%
-5% -13% -19% -25% -11% -3% -3% -1% -6% -10% -11% -28% -30% -23% -22% -23% -15% -18% -12% 6%
6%
11%
3%
4%
4%
8%
14% 15%
6%
12% 13% 12% 19% 15% 26% 28% 26% 31% 34% 33% 30% 29% 33% 37% 38% 38% 39% 31% 30% 32% 32% 26%
Bottom Half Average
0%
-2% -8% -14% -18% -17% -14% -6% -5% -9% -18% -25% -43% -36% -36% -35% -35% -34% -33% -37% -22% -26% -20% -20% -19% -19% -24% -27% -23% -32% -44% -42% -42% -45% -50% -48% -48%
0%
11% 14% 15% 11%
5%
6%
15%
6%
-6% -3% -11% -15% -18% -16% -22%
9
Innovest Ratings Sample Results: Telecom Sector
EcoValue '21 - Telecommunications Subset
1-98 to 7-99 Stock Performance
Top Half vs. Bottom Half
160%
TOP HALF
140%
120%
100%
80%
SPREAD
60%
40%
20%
0%
BOTTOM HALF
-20%
12/27 1/17
2/7
2/28
3/21
4/18
5/9
5/30
6/20
7/11
8/1
8/22
9/12
10/3 10/31 11/21 12/12
1/2
1/23
2/13
3/6
3/27
4/17
5/15
6/5
6/26
7/17
Difference
0.0% -2.7% -4.8% -2.3% -0.8% 4.1% 4.4% 7.8% 15.6% 9.2% 11.1% 8.5% 9.5% 9.7% 9.9% 7.4% 15.0% 22.2% 23.8% 28.5% 24.8% 30.0% 23.5% 28.1% 31.5% 47.6% 43.5%
Top Half Average
0.0% 3.1% 8.2% 18.1% 33.0% 39.3% 41.2% 43.6% 51.1% 55.2% 61.9% 49.2% 36.7% 36.2% 53.1% 59.9% 74.9% 93.1% 110.8 116.7 111.9 112.2 116.0 123.2 126.6 136.8 131.7
Bottom Half Average 0.0% 5.7% 13.0% 20.3% 33.8% 35.2% 36.8% 35.8% 35.4% 46.0% 50.7% 40.6% 27.2% 26.5% 43.2% 52.5% 59.9% 70.9% 87.0% 88.2% 87.1% 82.2% 92.4% 95.2% 95.1% 89.1% 88.2%
10
SAM/Dow Jones Sustainability Index Performance
DJSGI World Index
(December 1993 – March 2000, US Dollar, Price Index)
DJGI vs. DJSGI (in USD)
350
300
250
DJSGI
200
150
DJGI
DJSGI World
-0
0
03
-9
9
10
-9
9
05
-9
8
12
-9
8
07
-9
8
02
-9
7
09
-9
7
04
-9
6
11
-9
6
06
-9
6
01
-9
5
08
-9
5
03
-9
4
10
-9
4
05
12
-9
3
100
DJGI World
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Taxes
Giving People The Wrong Incentives...
Taxes are often used to create incentives, not just to
raise revenues (I.e., gas & oil drilling tax credits)
 People agree that Profit, Jobs and Health Care are
good, but we tax profits, jobs and health care!
 We say Pollution is bad, but we don’t tax pollution!
 Result : Management has an incentive to hide profit,
and cut jobs & health care, but pollution is “free”what is wrong with this picture? (Polish example)
 Need political will and understanding to set better
revenue-neutral incentives for corporate managers

12
Education
Why Don’t People Know What They Don’t Know?
Business schools just starting to teach social and
environmental issues to future business leaders
 Examples:
- Aspen Institute study of business schools
- HP funding of CSR Chair at York University
- FDU Institute of Sustainable Enterprise
- Programs at UNC, Yale, Cornell, Michigan,
Oregon, U. of California, etc. and in Europe
 Need to integrate business and sustainability
issues and education across all higher education

13
Scientific Understanding
When must one act without certainty in all the facts?




“Don’t have to be a weatherman to know which way the
wind blows”- Bob Dylan
Business executives operate in uncertainty all the time
Examples:
- 2/3rds of investors still use active investment managers
despite evidence that index funds outperform them.
- White House says we need more facts on climate
change, when number of global extreme weather
events has risen from 150 in 1950 to 1600 in 2001
Most European governments and citizens believe in the
“precautionary principle”, which means test new products,
medicines or chemicals BEFORE putting on the market,
as opposed to recalling them AFTER damage is done
14
Disclosure/Transparency
Investors can’t use information they don’t have...

Existing SEC and FASB rules cover some social
and environmental issues, but have been ignored

Proposal before SEC to increase environmental
disclosure is a start, but SEC moving slowly

Europe taking the lead, with countries like France
requiring major corporations to report on their
social and environmental impacts

Problem is standardization of reporting- GRI and
SA-8000 are a start, but far from perfect
15
Accountability/Responsibility
Post-Enron, Worldcom, Putnam, etc., who’s in charge?

Definition of Fiduciary Responsibility changing

Roles of Corporate Boards changing

Investor Pressure- both Mainstream & SRI

Supply Chain Issues increasing

Who should be held responsible? As the famous
philosopher Pogo said, “we have met the enemy,
and he is us…”

We all have to do something- as investors,
educators, consumers, managers, voters...
16
Ethics
What is a responsible corporation or institution?





Still a problem with the “entity that never dies- the
corporation”- (hard to fear hell if you never die…)
However, corporations don’t hurt society or the
environment, people do
Ethics and values are human issues set by society
Cultural values do differ by country, region and continent
(look at Denmark & the current “cartoon” issue)
Will the “global society” help or hurt?
17
Risk Assessment
Firms need to do a better job of assessing sustainability risks





As companies decentralize and expand, strategic interdisciplinary risks (like sustainability) sometimes fall
“between the cracks” of corporate management structures
As investors demand better disclosure of
social/environmental liabilities more corporate
understanding of sustainability risks is required
Thus, companies need to have a comprehensive system to
identify, assess and mitigate social, environmental and
economic risks and understand their potential impacts
Senior executives just starting to do this (BP, AIG, etc.)
National Association of Corporate Directors (NACD)
suggested board risk committees as a “best practice” in a
December 2002 report
18
Corporate Governance The rules that govern how management manages...
Definition- “Enhancing the Return on Capital
through Increased Accountability.”
Good corporate governance requires:
- More accountability of directors, CEO’s, officers and
managers of corporations.
- More accountability of fund managers, trustees and
investor shareholders.
“Boards of Directors are like sub-atomic particles- they
behave differently when observed” - Nell Minow
19
Example: Climate Pollution- It’s REAL, It’s HERE,
It Will Have MAJOR Financial Impacts
Climate Pollution will have a variety of financial impacts:



Health Insurance- “Climate change will lead to a resurgence in infectious
disease unseen since the 19th century”- Paul Epstein, Harvard Medical
School
Property Insurance- “World-wide economic losses due to natural disasters
appear to be doubling every ten years, & have reached $1trillion over the
past 15 years” - Munich Re
Impact on profits- “Companies will incur significant, & differing, material
increases in operating costs due to increases in energy prices and GHG
effects on suppliers” - Martin Whittaker, Swiss Re

7 of 10 most expensive US disasters occurred in last 4 years, 6 of 10 most
expensive US hurricanes in 2004/2005

New Jersey has 5th highest amount of insured property at risk from
hurricanes & storms (>$505b, as of 2004)
20
Corporate Governance & Climate Pollution
Why Do Investors Care?- It affects the Bottom Line…
and the long term survival prospects of a company!



Fiduciary responsibilities of pension fund trustees,
company board members and senior management
regarding social & environmental issues like climate
change & GHG emissions will continue to increase
In absence of corporate trust, verification of
environmental and social performance will become
increasingly important, creating new corporate reporting
requirements and a new auditing field
Shareholders must be responsible too- (i.e., SEC says
mutual funds voting proxies responsibly is the fund
managers’ fiduciary responsibility, and is now required)
21
Value at Risk From Climate Change:
Results of recent benchmarking exercise in the US energy sector…...
E x p e c te d C a r b o n E x p o s u r e a s a % o f M a r k e t C a p .
70.00%
60.00%
L ig h t
H ig h
50.00%
K yo to
40.00%
30.00%
20.00%
10.00%
ENE
PEG
EXC
DUK
AES
PCG
FPL
D
ETR
EPG
EIX
CMS
TXU
W MB
SO
REI
NI
AEP
DYN
0.00%
Source: Value At Risk, CERES/Innovest, 2002
22
Corporate Governance &
Climate Change Liability Disclosure




Corporate governance pressures on companies for
reporting environmental compliance and disclosure, & to
better identify & quantify emerging risks (like climate
change) are increasing [Carbon Disclosure Project]
With recent studies indicating that 75% of CEO’s think
climate is a serious business issue but only 25% say their
firm is doing something, investors are VERY worried
Active and interested shareholders are submitting
shareholder resolutions in increasing numbers on climate
change issues (often attracting > 25% of the vote)
AIG says Directors &Officers insurance will not cover
lawsuits by shareholders due to pollution exclusion; may
cover if they disclose their climate risk management policy
23
Of Course, One Must Beware
of Mere Superficial Changes...
24
Climate Change and the Financial WorldConclusions

Climate Change is a long term financial problem and financial
markets are worried that firms are managing it poorly

Energy efficiency and GHG reduction costs are highly related
to operating costs, and thus will directly affect financial results

Investors want to see more disclosure of how firms plan to
assess, manage &mitigate potential climate change liabilities

Alternative energy will take a very long time to have an impact

Climate Change will present opportunities as well as problems

There will be winners and losers within industries, and across
sectors (distributed generation vs. transmission lines)
25
Examples: How Poor Sustainability
Management Can Reduce Shareholder Value
•
•
•
•
•
•
•
•
•
•
•
Aventis – Starlink genetically-modified corn
Union Carbide – Bhopal chemical leak
Exxon – Valdez oil spill
Sandoz – Warehouse fire, pollution of the Rhine
Royal Dutch/Shell – Brent Spar, Nigeria
Nike – “Sweatshops” in Asia
Monsanto – Genetically modified foods
ABB - Bakkun dam in Malaysia
GE – PCB in the Hudson & Housatonic Rivers
Elf Aquitaine – Erika tanker wreck off Brittany
Putnam Investments- allowing off-hours trading
26
Examples: How Innovative Sustainability
Management Adds Shareholder Value
•
•
IBM Recycles computers and computer parts for use in
leasing business- added $2 billion in sales in less than 3
years at 50% profit margin;
French chemical company Rhodia’s stock went up 20%
in one day (12/05) after announcing CDM approval of
GHG emission projects that will add $300m/yr to profits
•
DuPont invested $120m to reduce greenhouse gas
emissions and added $240m/yr. to bottom line;
•
Patagonia and Timberland build businesses around
clothing/apparel made by sustainable means.
27
In Summary- Companies can Materially Affect
Their Bottom Line and Society in a Positive Fashion

However, major changes are needed in the ways
we measure, assess, manage and assign
responsibility for sustainability issues

Sustainability issues do have direct material
financial impact, and are being used now as
indicators of good corporate management and
future financial performance of companies by
investors

We are the ones responsible for making change
happen!
28
A Final Thought-
“ It’s about demonstrating that
companies can do the right thing
while pursuing an economic return.
That’s a vital part of the business
school’s mission, because if business
schools don’t teach it, who will? ”
- Dr. Steve Jones, new dean of UNC’s
Kenan-Flagler Business School, in
interview with the FT, 11/10/03
29