2. Background and Context
This chapter provides some important background information and context that are needed to develop a complete appreciation of this book’s subject matter. The chapter begins with a brief introduction to sustainability and its importance to business. It then discusses terminology and general concepts, with the goal of establishing some clarity regarding what many of the commonly used words and phrases in the public dialog mean and how they differ. The chapter then presents my assessment of how and why sustainability as practiced in corporations has not advanced as far and as fast as some observers might have predicted. It also provides a similar diagnosis for the current status of sustainability investing. The purpose of this discussion is to help you understand some of the important barriers to sustainability thinking so that the strategies I present for formulating and implementing a sustainability program (in Chapter 5) are put into context. I then introduce some of the major factors that affect sustainability issues in a corporate setting, as well as some of the important actors and trends in this arena. The chapter closes with some observations concerning the many ways in which sustainability issues touch the corporation. They are or should be of abiding interest to anyone interested in working in or on behalf of a high-performing corporation in the years to come. This latter discussion also sets the stage for the more detailed examination of the points of intersection between the corporation and sustainability issues presented in Chapter 3.
What Is Sustainability, and Why Is It Important to Business?
“Sustainability,” and its close counterpart, “sustainable development,” are terms that have been in the public domain since their original formulation in the mid-1980s. “Sustainable development” was the original concept, but in recent times it increasingly has been supplanted by “sustainability.” These concepts emerged from the environmental movement and reflect the recognition that major environmental issues are interrelated to economic and social justice issues. It is generally recognized that the term “sustainable development” first appeared in the 1987 report of the Brundtland Commission, titled Our Common Future.1 This document presents the following widely cited and used definition:
Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.
The breadth of this definition has spawned many distinct interpretations of how society can (or must) adapt its behaviors and practices to enable continued growth and prosperity. However, it is generally agreed that sustainable development or sustainability reflects three interrelated dimensions: environmental quality, social equity, and economic prosperity. The impetus behind the sustainability movement has largely been provided by environmental (and, to some degree, population growth) concerns. However, there is a clear recognition within all sides of the movement that a reasonable balance among the three dimensions is a prerequisite to maintaining an organization, community, economy, or nation that is viable in the long term.
The term “sustainability” is in more common use within corporate organizations, probably because it is simpler and is not directly connected to either material consumption or development, which are major concerns to some stakeholders. Sustainability also seems more directly germane to the scale of a single organization and therefore is more useful as an organizing principle for internal business improvement initiatives.
More generally, however, the distinction between sustainable development and sustainability is not a matter of semantics, for the following reason: Sustainable development is about helping the world’s poor. The Brundtland Commission recognized the dire circumstances in which a sizeable fraction of humanity lived (and still does), as well as the legitimacy of their aspirations for a better life and higher standard of living. They also recognized, however, that if the billions living in poverty around the world were to achieve their goal with (then) current technology, infrastructure, and relative consumption patterns, their collective actions would unleash a global environmental catastrophe. In response, the sustainable development concept postulates that the developing world and its people must receive assistance so that they can build their economies in a way that does not undermine their own natural resource base, threaten the health of their people (or that of their neighbors), or unjustly enrich a small percentage of the population at the expense of everyone else.
Sustainable development remains a worthy and important goal, but it should be distinguished from the environmental, social, and economic challenges and opportunities directly facing most U.S. organizations, particularly those in the corporate sector.
What Is Sustainability?
In my view, sustainability is a value set, philosophy, and approach rooted in the belief that organizations (corporate and otherwise) can and must materially contribute to the betterment of society. Also, successful organizations must balance their needs, aspirations, and limitations against the larger interests of the societies in which they operate. Only organizations that provide goods and/or services that are of value to people and/or society more generally, and are dedicated to excellence, interested in the full development of human potential, and committed to fairness, are likely to be durable (sustainable) over the long term. Fundamentally, sustainable organizations are purpose-driven, with the purpose being an overarching objective larger and less tangible than self-gratification or profit maximization.
Accordingly, in my formulation of the concept, sustainable organizations are
• Aware of and responsive to societal and stakeholder interests
• Responsible and ethical
• Dedicated to excellence
• Driven to meet or exceed customer/client expectations
• Disciplined, focused, and skillful
This view places the conventional emphasis on the “three legs of the stool” (economic prosperity, environmental protection, and social equity2) within a larger, more integrative context. It also recognizes that each is a key dimension of any coherent concept of sustainable organizations, past or present. The importance of each of the three major elements of sustainability depends on the organization’s nature and purpose. Public sector and nonprofit organizations have been formed and structured specifically to provide some combination of products and services that benefit society, whether that involves forecasting the weather, teaching children, or defending the country from military threats. With the exception of agencies and non-governmental organizations (NGOs) specifically focused on some aspect of sustainability (such as the U.S. Environmental Protection Agency [EPA] or the Sierra Club), most such organizations have a primary mission to fulfill that is not directly related to either environmental protection or social equity. Nonetheless, by adopting sustainability as a guiding principle, such organizations commit themselves at the very least to ensuring that they limit any adverse impacts of their operations on the environment and treat all stakeholders fairly. As you will see in subsequent chapters, many public sector organizations, including the federal government and its many parts, have been moving decisively in recent years to institute more sustainable behavior.
Corporations are in quite a different place. They are not explicitly supported by and accountable to the American taxpayer and have not (generally) been formed to pursue a mission eligible for tax-exempt status as a nonprofit.3 Some observers believe that in contrast to the work done by the government and nonprofit sectors, the legitimate role of business is to make money for its owners (shareholders), and the more the better. In this view of the world, time and money invested in improving environmental performance, providing safer working conditions, supporting local communities through philanthropic activity, and other such corporate social responsibility (CSR) behaviors are an unwarranted and unproductive use of the firm’s assets. As discussed in this and subsequent chapters, this view, which has been held and promoted with great conviction by many in the business community and academia, is increasingly being challenged.
As I show in several places and ways throughout this book, corporate leaders should accept and, ideally, embrace the concept of sustainability, for two fundamental reasons. One is that U.S. corporations, as distinct entities holding enumerated legal rights and receiving numerous public benefits,4 have an obligation not only to comply with all applicable laws and regulations but also to ensure that their conduct does not harm the broader societies of which they are a part and on which they depend for survival. The other is that increasingly, recognizing important sustainability issues and acting on them in an enlightened and sophisticated way has been shown to increase revenue growth and earnings and to strengthen the firm’s position in terms of the factors that drive long-term financial success. In other words, the argument for embracing corporate sustainability has two elements: it is the right thing to do, and it is the smart thing to do.
What Sustainability Is Not
In addition to the distinction between sustainability and sustainable development, it is important at this juncture to highlight and clarify what I mean by sustainability and to distinguish it from several other concepts now in widespread use:
• Sustainability is not greening.
• Sustainability is not corporate social responsibility, social responsibility, corporate responsibility, or “strategic philanthropy.”
Each of these other, more limited concepts has considerable merit. However, none is new or sufficient to both address the needs and interests of the broad set of stakeholders to which most organizations (at least large ones) are accountable and to position the firm to avail itself of all related opportunities.
Sustainability is often framed in the media as a campaign to “green” the world or “save the planet.” I take the position that, when viewed from an appropriately broad perspective, sustainability extends beyond the currently fashionable focus on “greening.” Greening is simply the latest manifestation of public interest in the environment, which has come back into vogue during the past three or four years following a multiyear hiatus. As an interested party who has watched several incarnations of a growing public/business interest in improving the environmental performance of organizations (and individuals), it is both heartening and, in some ways, disturbing to observe the eagerness with which many are now embracing everything “green.” Greening sounds and feels admirable, but public interest in this topic tends to wax and wane over time. My fear is that it will again fall out of fashion, unless the renewed focus on environmental performance improvement is coupled with considerations of social equity and both are underlain by rigorous economic analysis. Sustainability, defined in this way, provides the only theoretical and practical environmental improvement framework that can be fully justified and maintained during both good and challenging economic times. Therefore, it is robust and “sustainable” enough for the long haul.
My concerns with the terms CSR and social responsibility are somewhat different. Although in most formulations they include the three “legs of the stool,” they really are about delineating and acting on the obligations of the modern corporation to society at large. In contrast, and as highlighted a moment ago, I believe that it is most useful to think of sustainability as an imperative that applies to all organizations and political entities (countries, states, municipalities). Each of these is challenged to understand and address the broad conditions under which it operates and its relationships with other entities and the natural world. They also must chart a course on which they can thrive without undermining their asset base or unfairly precluding or limiting the sustainable success of others. In that context, CSR can be thought of as one element of a corporate strategy to address the sustainability imperative. Such an element can, for example, identify the concerns of external stakeholders and define and execute processes to ensure that these external interests are respected as the firm pursues its broader business goals. In other words, CSR and its analogs can be an important part of (but in any case are a subset of) an organization’s approach to sustainability. In particular, CSR can, and often does, comprise an organization’s efforts to respond to the imperative to promote sustainable development. Similarly, CSR can be used to appropriately target a company’s philanthropic activities. Or the firm may separately deploy a strategic philanthropy campaign. But by its nature any such activity is far more narrow in scope and effect than organizational sustainability. The two should not be confused or, in my view, ever be used interchangeably.
These distinctions are not trivial. Indeed, understanding and resolving them has proven difficult for many organizations and practitioners. Regardless of what words you choose to employ, the key point is that pursuing sustainability at the organizational level is more complex, more important, and more difficult than simply greening the organization to some arbitrary but comfortable level, or becoming more attentive to particular stakeholders and their views. However, substantial rewards can accompany this greater level of difficulty. This topic is explored further next.
In this book and from this point forward, I will use the concept of sustainability rather than greening as the key objective to be pursued at the organizational level. As mentioned previously, sustainability has emerged directly from the environmental movement and is often focused on key environmental issues and challenges. However, there also are important opportunities for corporate leaders to examine social equity and economic issues in parallel with the environmental aspects of their organizations. The concept of sustainability provides an integrative framework to facilitate this thought process. Moreover, in practice, and as illustrated in many places in this book, synergies and scale economies often make it possible to address issues having both environmental and social aspects more effectively and economically than would be possible by pursuing separate, unrelated approaches.
What Is Sustainability, or ESG, Investing?
As discussed in depth in Chapters 6 and 7, an important new segment of the capital markets has taken shape during the past 30 years or so. It now represents a large and influential force. Initially constituted as practitioners of socially responsible investing (SRI), these organizations focused on identifying and selecting companies for investments that offered attributes acceptable to the subscribers, clients, or beneficiaries of the SRI firms. From its inception, the SRI community has focused on ethical issues, and early on it added environmental concerns to its evaluation practices. Today, the long-standing practices of exclusionary screening (for example, no investment in companies that produce or sell tobacco or alcohol, or participate in gambling) remain in place. But in terms of scale they have been overtaken by a broader and more sophisticated evaluation of an array of environmental, health and safety, social, and governance practices. Generally speaking, investors interested in considering sustainability endpoints use the term ESG. The acronym stands for environmental, social, and governance attributes.
In my formulation and throughout this book, I accept and use this terminology, with one small but important modification. Reflecting both the importance of the issues and the ways in which they are typically managed in companies and in the profession at large, I include health and safety considerations in my definition. Therefore, sustainability investing involves assessing a company’s (or industry’s) posture and performance with respect to environment, health and safety, social issues, and governance. To distinguish this treatment from that employed by others, including many sustainability investors and their data providers, I use the acronym ES&G, where it is understood that the E signifies the domain of environment, health, and safety (EHS).
Why Sustainability Is and Will Remain Important to U.S. Corporations
Capitalism—in particular, the entrepreneurial American brand of capitalism—emerged from the 20th century as the dominant global economic philosophy. This happened as the inevitable demise of the Soviet Union unfolded and sweeping economic liberalization took hold in formerly closed or tightly controlled economies from Eastern Europe to South Asia. The resulting growth in international trade has made the world economy ever more interconnected. We now confront the failure of multilateral efforts to further reduce international trade barriers, rising economic inequality within and across societies around the world, and the hazards posed by global environmental challenges such as climate change and access to water. Most recently, we have faced the failure of unregulated financial markets and the ensuing economic meltdown. Many people are questioning whether corporations are behaving appropriately, contributing more to solutions than problems, and, in some cases, are larger and more powerful than is appropriate for the good of society.
Concerns about the appropriate role of corporations and their behavior are hardly a new phenomenon. Yet the tenor of the debate is changing. Many more people are now openly questioning the classical position of free-market advocates that, in essence, corporations’ primary or even sole responsibility is to make money for their shareholders. It is now increasingly accepted that how corporations make money also is vitally important, for several reasons. One is the backlash against free trade that has occurred globally (even here in the U.S.). It has become clear that although some countries, companies, and individuals have reaped enormous financial benefits from globalization, many others have been left behind or put at a severe disadvantage. Another reason is the perception of outsized and inappropriate influence exerted by major multinational corporations on national and even international public policy. Many major companies have financial resources that exceed those of national governments in developing countries. Skeptics of corporate beneficence also are not comforted by the fact that corporate leaders are not elected by the people of the countries in which they operate. The speed and severity with which the recent economic contagion spread across virtually all international markets also illustrates the pervasive influence of corporate voices in promoting the idea that less regulation stimulates or unleashes innovation, reduces overall risk, and creates and helps distribute new wealth in ways that are equitable. It can fairly be said that the events of the past three years have called each of these assertions into question.
Finally, rightly or wrongly, corporations are blamed for many of the environmental problems that increasingly are receiving public attention. Ironically, many major corporations have been leaders in developing and deploying more environmentally friendly technology over the past three decades. Often they are far more eco-efficient than smaller organizations operating in similar businesses. In many cases, companies have invested considerable time and resources in attempting to reduce their EHS footprint, and even to develop new eco-friendly products and services. Some such efforts have been successful (both in execution and in generating a positive public perception), but in other cases they have been denounced by environmental advocacy groups as “greenwashing.”
Accordingly, the business climate today is challenging in ways that require new perspectives. The public in the U.S. and many other countries expects that companies will operate in compliance with the law and in ways that are environmentally sound, treat their own people and those in surrounding communities fairly, and engage with their stakeholders on issues of common interest. At the same time, the expectations of the capital markets have not changed. Publicly traded companies must grow revenues and earnings, consistently generate cash, and effectively manage risk. Balancing these sometimes conflicting imperatives requires a framework that, when applied to a specific organization, is flexible and yields an internally consistent set of values, normative behaviors, business goals, methods, and performance metrics.
Sustainability offers this framework.
Moreover, as suggested earlier, the “envelope” of expectations brought to bear by a wide array of interested parties is now wider than ever. Corporations face expectations and pressures from many sides. These include customers, suppliers, competitors, regulators, their own employees, and shareholders, to name a few. Companies that succeed in the long term will need to find ways to understand and satisfy the expectations of all of these and other important stakeholders. When and where possible, firms should seek to find and exploit opportunities to achieve financial success while creating value for one or more of these important constituencies. Given the apparent complexity of such a challenge, it is reasonable to assume that not all firms will have the vision, leadership, and skill to succeed. This suggests that solving (or at least making significant ongoing progress on) the sustainability challenge will produce durable competitive advantage.
There is evidence all around us that the need for corporate sustainability is growing significantly and at an increasing rate. Public perceptions of environmental behavior (and perceived misbehavior) already were at high levels before the Deepwater Horizon exploded and released a giant oil spill in the Gulf of Mexico in April 2010. Expectations for improved practices and acceptable behavior more generally are quite significant. These expectations will not diminish in the coming years as the magnitude and urgency of global environmental issues become more clear. Increasingly, corporations will be asked what they are doing to both protect their own operations and limit business risks and contribute to larger-scale resolution of these issues.
Two sustainability issues in particular should be in the minds of corporate senior executives in virtually any U.S. company of significant size: climate change and water availability and quality. Constraints imposed by climate change and, in the longer term, availability of water in needed quantities with adequate quality will influence myriad business decisions in the 21st century. Taking the broad-spectrum, integrative approach suggested in this book will help maximize the chances of any business making the best decisions when they need to be made.
Another factor that cannot be ignored is the growth in economic power and expectations among developing countries and the people within them. It is widely understood within the business community that expansion internationally offers many U.S. industries and companies their greatest growth prospects. Countries in the developing world often offer vital sources of raw materials. Companies will find that increasingly, the people in these countries will expect that firms that do business within their borders will show respect for their laws, customs, cultures, and the rights of indigenous people. And they will expect this whether or not in all cases the governments that (at least in theory) represent them uphold the same standards at all times. Many large U.S. companies and their senior managers are highly experienced and skilled at working under these conditions. But many others have not displayed the necessary cultural sensitivity or skill to avoid igniting controversy, resistance, and other problems. In some cases, U.S. multinationals have had to abandon major international investments and have generated extensive negative press coverage as well. I conclude that to prosper in the future, U.S. and other Western companies will need to compete on the basis of strength. Adopting the framework of sustainability to guide their plans and actions will help ensure that they are looking at investments and operations around the world through all the appropriate lenses. These issues are explored further in Chapter 4.
If you work in the EHS field within a large, advanced company, you might be wondering how much real upside potential embracing sustainability offers when your firm already has advanced EHS management practices in place. The following sections offer a few thoughts in this regard.
Sustainability Helps Demonstrate Appropriate and Effective Corporate Governance
Many stakeholders want assurance that the people at the top of the organization have thought through its important environmental and social issues and that they have developed and deployed effective programs, systems, and practices to address them. Sustainability provides an integrating structure that can both guide and explain how corporate leaders meet these expectations and do so in a way that is far more streamlined, sophisticated, and ultimately less time-consuming than would be possible otherwise.
Sustainability Serves as a Reference Point for the Organization’s Values
Illegal and, increasingly, unethical behavior is not well tolerated by regulators, customers, suppliers, and other business partners. Such behavior can have severe financial consequences, both immediately and in the longer term. Understanding what is legal requires competence and vigilance on the part of one’s general or outside counsel, but understanding what is ethical requires a set of organizational values and business norms. It is now widely understood that well-run companies have a core “DNA” or identity that embodies shared values and aspirations and is independent of any individual. This attribute enables the organization to remain strong and vibrant over an extended period even as people enter and depart from it. Moreover, this type of organizational identity provides many advantages under normal circumstances but is especially critical during crisis situations, when people need to know how to act as well as what to do. Sustainability can serve as a common, unifying principle to guide the thinking and behaviors of all members of the organization. This is important when different members are called on to execute their unique functions, some of which may be in conflict. Moreover, sustainability provides the needed flexibility to address the following realities:
• Environmental, social, and economic considerations must be balanced.
• The way in which they are balanced will differ according to the organization, issue, and circumstance in question.
• This balance will likely change over time.
Sustainability Helps Bring Clarity to Intrinsically Complex Issues
The complexities of and interrelationships among environmental, social, and governance (ESG) issues require a management approach that combines and considers all these disciplines. Such an approach should address all significant needs and requirements (particularly compliance), surface and resolve conflicts among them, provide consistency and predictability, and should be both effective and efficient. In other words, some sort of overarching concept and management structure is required, and sustainability provides the “umbrella” under which many organizations are now organizing their previously disparate internal functions. I am unaware of any competing or alternative concept that has been shown to be workable while providing similar benefits.
Properly Construed, Sustainability Provides the “Theory” Underlying a Value Creation Orientation
In my view, the best way to pursue sustainability is to consider the three primary determinants of value for any business enterprise:
• The revenue stream and the customer base that generates it
• Earnings or, in the case of public sector organizations, effective control of costs and management of capital
• Adequate understanding and management of risk
A sensible sustainability strategy embodies careful consideration of how new initiatives or changes to existing programs might affect all three of these determinants of value. History has shown that absent this orientation, environmental and social improvement initiatives are continually underutilized because they are not seen as contributing to core business drivers or creating financial value in any tangible way. By the same token, a properly specified sustainability approach imposes a new measure of financial discipline on both internal and external proponents of new “greening” ideas and prospective investments in projects or activities having primarily a social orientation.
Sustainability Facilitates “Mainstreaming” of Environmental, Health and Safety, and Social Equity Issues into Core Business Processes
As discussed in Chapter 3, EHS issues have in many cases been managed tactically in U.S. corporations and public sector agencies. Historically, EHS functions were often housed within and directed by the organization’s legal department because the focus then was on understanding legal requirements and ensuring compliance. More recently, EHS people have reported through various administrative functions (such as human resources), facility maintenance, or manufacturing management. In short, with few exceptions, EHS has been managed primarily as a facility-based tactical function rather than as a strategic issue or source of potential broad-spectrum financial value creation. Adopting a sustainability framework can help disrupt, and may even compel, the breaking of the resulting organizational “silos” that exist in many companies. This can create the conditions needed for people across the organization to reach out to one another. They can identify and manage environmental and social issues in ways that limit risk, build brand and market value, and generate new cash flows. In an organization actively pursuing sustainability, achieving better environmental performance or more equitable dealings with stakeholders is not a task to be delegated to someone else. It is an integral part of everyone’s job (if only in a small way), from the boardroom to the shop floor.
As stated in Chapter 1, the ideas presented here are not entirely new and certainly are not a radical departure from the views held within many leading U.S. companies. Indeed, a number of firms have in recent years embarked on new initiatives to pursue organizational sustainability. Unfortunately, many of those efforts have not been fully successful, for reasons that I explore in the next section.
Where We’ve Been and What We’ve Learned
Although the active pursuit of corporate sustainability is a relatively new phenomenon, it builds on the three decades or so of experience of those involved in managing EHS issues in a corporate setting. This experience, and the understanding and perspective that it has engendered, provide the principal foundation on which most of the meaningful work addressing sustainability is now occurring, notwithstanding the claims of some in the architecture, information technology, and marketing fields. Chapter 5 attempts to distill the major principles and approaches that many successful companies have used to develop and deploy highly effective EHS and sustainability management programs.
In the current context, however, I believe that it is useful to review some of the less successful experience of many firms and practitioners and provide a diagnosis of what went wrong and why. I also believe it is useful to identify some additional factors that have limited the momentum of improved EHS/sustainability behavior across the American economy. Armed with the resulting insights, you will be in a position to identify potential barriers, ineffective approaches, and unseen threats when addressing sustainability issues in your own organization. Major root causes for some of the disappointing outcomes that have been obtained up to this point are discussed in the following sections.
Situational, Bottom-Up Management of EHS Issues
As discussed previously, at the outset, new EHS requirements were imposed through regulation. They were evaluated by corporate legal staff and addressed by plant-level engineers, manufacturing personnel, and/or a new cadre of professional EHS managers and staff. Generally, field staff reported to a plant manager, and even corporate EHS staff might be housed within facilities, engineering, legal, or human resources organizations. Even today, it is not unusual to find the corporate EHS organization buried several layers down on the company organizational chart. In the early days, such arrangements made a good deal of sense. Early implementation of EHS regulations was often contentious and involved new and poorly understood legal risks, so having EHS overseen by General Counsel was in many cases a prudent approach. As EHS activities became established, they shifted into more of a routine “maintenance” mode. In many firms, much of the ongoing work was performed by custodial and plant maintenance personnel and was overseen by facilities or, commonly, the plant manager. Again, this often made sense at the time. Regardless of which box was selected to house EHS, however, the common interpretation was that EHS activities were a cost of doing business and should be controlled and minimized as much as possible. That is, they were perceived to have little or no value-creation potential. As you will see throughout much of this book, this view of the situation is no longer accurate (if it ever was). The problem, however, occurs when people within such a deeply embedded EHS function attempt to turn around the thinking in their firm; shift to a more integrative approach; and focus more on cost savings, profit growth, and generating new revenues. They often have no platform, no visibility, no access to decision makers or resources, no authority, and no clear path to reaching their goals. As discussed in Chapter 5, senior corporate executives who want to promote sustainability thinking and practices in their companies should avoid the mistake of submerging those responsible for making it happen in low-visibility, low-status positions and reporting relationships.
Tactical Approaches Driven by Crisis, Isolated Events, or Loud or Persistent Outside Voices
Many organizations have pursued EHS or sustainability ideas and initiatives in what appears to be a haphazard manner, limiting their effectiveness. Some firms seem to move from crisis to crisis and often pay what seems to be disproportionate attention to one or a small group of stakeholders who have decided to focus their attention on a particular issue at that level of the firm (such as sourcing of paper). I would not dispute that some good can come from such interchanges and the detailed examination of current practices that often results. But I do have to question whether this is the most productive and effective use of the firm’s time and resources. The question in such cases is not, for example, whether a better sourcing policy resulted from intense dialog and focus. The question is what else might have been accomplished with the time and effort that were invested in them. Such questions are difficult to answer with much confidence. But I submit that putting the work into developing a comprehensive understanding of which EHS and other sustainability issues are truly important, to whom, and why is a much better investment than flying from crisis to crisis, attempting to mollify critics and possibly customers and the news media. Sustainability is simply too complex and important to be managed in such a tactical manner. Instead, it should be addressed through a formal strategy/policy formulation process. This topic also is explored at length in Chapter 5.
Frequent Lack of Corporate-Level Vision, Strategy, Commitment, Resources, and Follow-Through
Those who have worked in medium-sized or large corporations or other large organizations for any significant length of time have probably had the experience of going through at least a few reorganizations, or new mandates, programs, or initiatives. Unfortunately, all too often a new strategy or initiative is introduced with great fanfare, often by the executive leadership, and described in considerable detail. The leader makes many pronouncements about how this new way of doing things will improve effectiveness, productivity, morale, and opportunity and/or provide other benefits. The program will then be rolled out earnestly by those assigned. But within a matter of weeks or months, it will be moribund, and within a year or two, it will be all but forgotten. This rarely means that the idea of the program or initiative was invalid or did not have the potential to produce the promised benefits. Instead, failure is often a consequence of inadequate senior management forethought about how (or whether) the program would fit in with the established norms, practices, and incentives that exist in the organization. What is needed for success is a clear and compelling vision of how the proposed future state is better than the current state, from the perspective of the employees who are expected to make it happen. Often, even if there is general agreement that the proposed change would be desirable, there are no additional resources with which to perform the needed work. If we can confidently say one thing about human nature, it is that people tend not to do extra work for an employer without some type of compensation.5 This point is examined further in a moment. Finally, and on a related point, requests for more work from the “troops” without apparent forethought about how the additional work will be accommodated along with existing demands suggests that those promoting the new approach lack true commitment to and understanding of how things actually are done in their organization. The most effective way to counteract these negative reactions is for the senior manager to demonstrate visible, active, ongoing support. This person also should throw his or her weight behind the program by ensuring that those involved feel that they are all in it together.
Absence of Alignment with Financial Value Drivers or Endpoints Considered by Financial Sector Stakeholders
For many years, as suggested by conventional economic theory, it was generally believed that EHS activities, and their associated costs, represented a “deadweight” loss to the corporation that it would have to either internalize or pass along to its customers. The idea that managing EHS (and, later, sustainability) issues adroitly could be shown to impart financial benefits was at first considered outlandish but is finding increasing favor. Even now, however, the ways in which most firms describe their EHS/sustainability activities and present their outcomes does not conform to the types and forms of information that are sought and evaluated by financial industry stakeholders. This is particularly true of investors and the analysts who serve them. This remains a major barrier inhibiting more rapid and widespread acceptance of sustainability in both the corporate sector and the investment community, as discussed at length in Chapters 6, 7, and 8.
Passive Approach to Interpreting and Enforcing SEC Disclosure Requirements
As discussed in Chapters 6 and 7, publicly traded companies in the U.S. (those that have stock or bonds traded on exchanges) are subject to public disclosure requirements. These requirements include information on environmental liabilities (from contaminated site cleanup responsibilities, for example) and must be reported at the end of the fiscal quarter in which they are discovered. For many years, both companies and the responsible federal agency, the U.S. Securities and Exchange Commission (SEC), have interpreted this rule in a way that allowed firms to not report their potential liabilities if their actual occurrence, magnitude, and/or timing was highly uncertain. As discussed in Chapter 6, recent changes in accounting standards should at least partially close this loophole. However, it is fair to say that the absence of the public scrutiny that otherwise would have occurred has enabled many companies to devote less attention to managing their environmental issues than they might have otherwise.
Inadequacy of Corporate EHS/Sustainability Reporting Practices
Despite the emergence of consensus-based sustainability guidelines more than ten years ago, the unfortunate fact remains that most U.S. companies, even the largest, generally do not issue regular EHS or sustainability reports. As discussed at length in Chapter 8, the generally accepted standard for sustainability reporting is the guidelines produced by the Global Reporting Initiative (GRI). These guidelines address several dozen indicators of a given organization’s environmental, social, and economic performance. The GRI guidelines have helped promote clarity and consistency in corporate reporting, but I believe they have some important limitations. The most important is that they and the indicators embodied therein have only an unclear or limited relevance to financial endpoints and value creation. Although some investors and financial sector analysts may find much useful information in a GRI report, they will not find much, if any, data or information that they can use directly in a valuation model. And because most financial sector stakeholders don’t use or particularly value GRI reports, the business case for preparing them is often weak or absent in many companies, producing the observed slow rate of uptake of the GRI guidelines among U.S. companies. This situation is particularly unfortunate, because it leads to the absence of a potentially powerful driver focusing senior management attention and convergence on a widely accepted practice—sustainability reporting. As discussed in Chapter 8, I am a proponent of corporate transparency. I hope that more interaction between corporate leaders and financial market actors on sustainability issues and their financial implications will, over time, produce more regular and meaningful information interchange, through an improved set of GRI guidelines or some other means.
Several other barriers and problems have to do with more fundamental factors that accompany all human activity. All of these issues may limit the pace and effectiveness of any new initiative(s) intended to pursue organizational sustainability or, indeed, to accomplish any other change initiative. I have seen the pernicious effects of each one during my career as a consultant.
Inertia
Physical science tells us that inertia is the intrinsic resistance of an object to disturbance from its current state of motion or rest. Overcoming inertia requires the application of force, or energy. Human behavior includes an analogous form of resistance. We are all “wired” in a way that can accommodate change, but our natural, equilibrium state is to carry out many of our daily activities in the same way at regular intervals. More generally, if a person, or organization, has developed a certain way of thinking about an issue or carrying out a particular task that is established and accepted, “energy” is required to bring about a change that will be durable. In other words, to have real effect, this change will need to alter the existing state and establish and maintain a new equilibrium rather than allow the person or organization quickly revert to the prior state. Such energy can take the form of intensive ongoing communications and/or training, deployment of additional resources, visible and consistent management commitment, and new/reworked incentives, among other tactics. Many EHS, sustainability, and other organizational change initiatives have faltered because, although they had valid goals and sensible implementation steps, they were delivered with only limited energy, or impetus. The amount of energy needed in such situations is directly proportional to the magnitude and difficulty of the change being sought. Those pursuing or considering corporate sustainability initiatives should carefully evaluate the amount of change this will entail and be prepared to expend an adequate amount of corporate “energy” to overcome the inertia that these initiatives will inevitably encounter.
The “Principal-Agent Problem”
This refers to a situation in which the employee’s personal incentives are not fully in alignment with those of his or her employer. For example, a company may have established goals for recycling paper and other wastes that apply to all employees. However, suppose the responsibility for actually collecting, segregating/sorting, and separately managing this paper and other materials falls to the janitorial staff (as it often does). Suppose these staff members receive no benefits (overtime pay, recognition, a share of the cost savings) from carrying out these extra steps. All they get is extra work. In that case, no one should be surprised that such an arrangement tends to produce very little in the way of results (recycled materials or otherwise)—other than, perhaps, disgruntled employees. The key to preventing such unfortunate situations is to ensure that the incentives for the employee and employer are in alignment. So, if the employees get some type of reward for doing the extra work, they are more likely to actually perform it. In my experience and that of many organizations, the reward does not need to be large. Most people simply like to feel that they are valued. Recognition, small prizes, workplace amenities, and bonuses can go a long way toward stimulating the type of behavioral change that may be desired.
Culture
Beyond the inertia that exists in all human endeavors, in some organizations the culture poses a significant barrier to more sustainable behavior. Many companies and other entities have a well-established way of doing things and may not welcome change or promote individual initiative. Those who would suggest a new or better way may have a large burden of proof to surmount. If they are relatively early in their careers (they didn’t grow up professionally in the culture/work practices of their employer), they may be accepting significant risk by challenging the existing order, even if at the margins. Quite simply, questioning the wisdom of the existing hierarchy could be considered a career-limiting move. Corporate leaders interested in promoting sustainable business behavior can do a lot to ensure that they are projecting and, as appropriate, enforcing an attitude of openness to productive change, questioning the status quo, and, in general, promoting suggestions and feedback from their people. After all, those working on the front lines often have the best vantage point for seeing what works and what could be improved.
Inadequate Grounding in Science
Another persistent and serious problem is the capability of people within organizations to fully understand and take appropriate action on environmental/sustainability issues. The unfortunate fact is that the general level of literacy about environmental issues in the U.S. is quite low (see the following quotation). More fundamentally, scientific understanding is limited within this country’s adult population—even among recent college graduates (Hartley, Wilke, et al., 2011). Furthermore, it does not appear that the next generation will make up for our collective shortcomings. Assessments of children in our elementary and secondary schools, including a recent update of The Nation’s Report Card for science, show that the level of achievement in science is declining relative to that of many other advanced countries (National Center for Education Statistics, 2011). If we are to move decisively toward a more sustainable future, we need to correct this deficiency.
Personal Empowerment
Finally, the notions of decentralization and “empowerment” have received great emphasis in recent years. During the past 20 years, many organizational leaders and management “experts” have extolled the virtues of placing decision-making authority in the hands of those closest to the production of the organization’s goods or delivery of services. Such approaches often have been well received by the nonmanagerial staff to which they were directed. To be sure, nothing is wrong with giving each employee a voice or opening a communication channel that operates in both directions. Moreover, senior managers can often benefit from receiving occasional unfiltered perspectives from “where the rubber meets the road.” The problem arises when an organization attempts to institute change, or even to accurately represent itself to the outside world. If divisions, regions, facilities/sites, and even employees are empowered to interpret corporate-level directives as they see fit, and to implement new programs using a “tailored” approach in accordance with local conditions, serious problems can arise. It quickly becomes unclear whether or to what extent the organization has the following attributes:
• Speaks with one voice (ideally, that of senior leadership)
• Has a defined (or definable) philosophy about or approach to a particular business practice or issue
• Is performing in accordance with expectations (if indeed this can even be ascertained)
Embracing sustainability means instituting at least some degree of organizational change. As discussed in detail in Chapter 5, such change must be guided by a consistent and uniform approach. If it is not, and employees are empowered to interpret for themselves what a sustainability initiative is and how it will be implemented, the chances of success, meaning tangible performance improvement by the organization as a whole, will be greatly diminished.
The good news in all of this is that although instituting sustainability is challenging, as is any other organizational change initiative, it can be done. Armed with an understanding of what can go wrong, I hope you will have greater success than some in the past in translating a sustainability vision into concrete action and in taking your organization where it needs and wants to go.
The next section returns to the other major topic presented in this book—the influence of investors on corporate EHS/sustainability behavior. As you will see, those who have been promoting the wider adoption of practices for considering sustainability endpoints in investment analysis and decision making have encountered some challenges that are unique to the financial services industry.
What ESG/Sustainability Investing Is and Why You May Never Have Heard of It
As mentioned earlier, substantial amounts of money are professionally managed using an approach that explicitly considers a firm’s environmental, health and safety, social, and governance posture and performance, as well as other, more conventional operating and financial information. This type of investing is increasingly being referred to as ESG investing. It is an outgrowth of the field of socially responsible investing (SRI), a segment of the market that has existed for several decades in the U.S. and Europe. ESG investors believe that a company’s ability and willingness to devote the resources needed to understand its important EHS and other sustainability issues and manage them effectively plays a meaningful role in that firm’s ability to consistently grow revenues, increase earnings, and control investment risk over the long term. This idea may not seem unreasonable or controversial, but it has encountered considerable resistance within the broader investment community, and, despite its impressive growth, has been limited by a number of important factors. These are discussed in depth in Chapter 6, but I provide a synopsis here to acquaint you with ESG investing. I do this because in writing this book, I have asserted that the continued growth of ESG investing and the demands of those who participate in it will induce more rapid and extensive adoption of corporate sustainability behavior. I contend that market actors will increasingly buy and hold securities issued by firms that show they understand and are effectively managing sustainability issues at the expense of those who do not.
To reach this point, the field of ESG investing (and SRI before it) has had to overcome some rather long odds:
• One significant barrier has been stiff, even fierce, ideological opposition to the concept that choosing securities based (even in part) on ESG criteria could possibly allow an investor to outperform the market. This objection is based on conservative economic theory, including, as discussed earlier, the belief that EHS practices create only costs, not benefits, to the corporation. The limitations of this theoretical argument are examined in detail and, I believe, refuted in Chapters 3 and 6.
• Another barrier concerns fiduciary duty, which in this context essentially requires those managing investment funds on behalf of someone else to place the interests of their beneficiaries above their own. This includes not constraining investment choices (such as through applying SRI/ESG criteria) that might limit available investment returns. As discussed in Chapter 6, recent evidence and detailed analysis of fiduciary duty and national securities laws show that this concern is no longer an obstacle to the use of ESG investing by such fiduciaries as pension fund trustees.
• An additional factor limiting the advance of ESG investing is the early track record of SRI (in the 1970s through the early 1990s), during which the predominant technique was use of negative screens. Negative screens remove the stocks of firms involved in certain activities from consideration for an investment portfolio. Historically, negative screens were often applied to preclude investments in firms involved in the production or sale of tobacco, alcohol, gambling, firearms/weapons, nuclear power, and other identified issues. Unfortunately, removing such companies from the investable pool often produced substandard investment returns, and as a consequence, early SRI funds often lagged their benchmarks. Such underperformance elicited further disdain for SRI as a fringe, specialist investment activity suited only to those willing to sacrifice their money for their convictions. However, as discussed in Chapter 6 and demonstrated (with empirical evidence) in Chapter 7, ESG investing as it is practiced today is not a fringe activity, nor does its skillful use result in substandard returns. Indeed, the more sophisticated approaches to ESG investing often outperform their mainstream counterparts.
• Along the way, ESG investing practitioners and proponents in the U.S. have not been helped by the public policy climate, although conditions in Europe have been far more supportive. The SEC has generally been silent on the question of the materiality of ESG issues to corporate financial success. No U.S. national sustainability policy, statute, or set of generally agreed-upon principles exists to provide clarity to the corporate sector, investors, and the public regarding sustainability and its importance. In this policy vacuum, corporate sustainability and ESG investing have had to blaze their own (and, up until now, separate) trails.
So although ESG investing is hardly a term that is widely known and discussed in the business community at large or in the public arena, that is changing. The information in this book will help you understand what ESG investing is and how it will affect corporate behavior in the years ahead.
Major Factors, Actors, and Trends
Several other external factors, agents, and phenomena affect the need for and practice of corporate sustainability and are worthy of mention. One is the great and nearly instantaneous availability of information (and misinformation) on specific companies, EHS and social issues, product characteristics, and many other aspects of corporate behavior. There are few places to hide in an age of extraordinary and growing connectivity. We can stream video, search the Internet, and reach large numbers of people (such as through tweets) instantaneously on their cell phones virtually any time, anywhere. Companies must manage their public image and brand(s) carefully and ensure that they are aware of how they are being portrayed by others. For many, developing and deploying proactive strategies to engage key stakeholders and the public may be a sensible way to limit downside risk arising from unfavorable changes in public opinion (whether warranted by facts or otherwise), as well as to gain insights into issues that may require active management.
A second factor that should be considered by the senior management of all publicly traded companies is the emergence of activist investors. The days when investors could be relied on to simply make buy and sell decisions and leave management of the company to its board and senior executives are over. Increasingly, major institutional investors such as pension funds are asserting their rights as owners of large blocks of company stock to press for changes that they believe are needed to improve their understanding of company operations, protect the firm from business and financial risks, and/or operate the firm in a more ethical and sound manner. These investors are wielding their considerable power, both individually and in coalitions, to press for changes to the status quo in many firms. In the current context, they have been particularly interested in such issues as corporate governance, climate change, and human rights. The importance of activist investors is discussed in more depth in Chapter 6.
The past decade or so has witnessed significant advances in SRI/ESG investment theory and practice, and this field appears to be on the verge of a major leap forward. During the past five years or so, and even in the face of a global economic collapse and prolonged downturn, ESG investing has grown substantially, at far greater rates than conventional investing. This activity also has stimulated the entry of major international financial institutions into the ESG investing market space. As discussed further in Chapter 6, ESG investing and investors can be expected to exert a major influence on the practice of corporate sustainability during the next decade.
Finally, no discussion of corporate behavior and markets would be complete without addressing the role of government. Government touches virtually every aspect of commerce and finance in some way. Usually government defines and enforces boundaries within which market activity can take place and/or provides information to participants and the wider public. In the sustainability arena, however, the role of government has largely yet to be defined. As noted earlier, the U.S. has no national policy or statute on sustainability. But over time the U.S. government and several specific departments and agencies have taken leadership roles in helping organizations of all types and sizes understand and manage their environmental and social aspects. Some of these take the form of regulations required under various statutes. But increasingly, federal activity in these domains is focused on technical assistance, training, information development and dissemination, and other activities intended to move American business and other organizations to beyond-compliance, sustainability-driven behavior.
In recent years, and under several different administrations, the federal government has sought to provide environmental and sustainability leadership. This has often been done through issuing executive orders (EOs). These are directives signed by the president that require, with any stipulated exceptions, all federal departments, agencies, and locations to conduct their operations in a certain prescribed manner or to carry out certain activities. Some of these EOs provide tangible, and often comprehensive, descriptions of how an organization can better understand its current environmental/sustainability footprint and then take steps to reduce it.6 In that respect, they, and the programs developed in response to them, can serve as models and useful sources of information for those working on sustainability issues in a corporate context.
It also is important to recognize the catalytic role of voluntary, beyond-compliance programs. Typically, these take the form of a government agency (such as the EPA or OSHA) defining a policy goal and then forming an initiative offering services, information, and other benefits to a target industry or group. Industry participants agree to analyze their operations and adopt new or modified practices where they are indicated and will be cost-effective. Post-adoption, participants measure and report changes in, for example, energy consumption, waste generation, or pollutant emissions, as well as any cost savings or other positive results. Such programs have attracted skepticism from the outset. But experience has shown that the more thoughtfully conceived and effective among them have made major contributions to reducing pollutant emissions, risks, and manufacturing costs while providing other benefits as well. Although such approaches appear to have fallen out of favor in the current political climate, those involved in sustainability activity may want to evaluate the existing program offerings for information, examples of successful projects and approaches, and ideas. This book is not oriented toward the public sector policy maker per se. But it is important to understand that cooperative/collaborative arrangements brokered by public sector entities can be a highly effective means of defining and capturing sustainability improvements across an entire industry or set of industries. Hence, they are often worthy of corporate support.
Companies have responded to these trends in a variety of ways. As is usually the case, certain companies (and industries) have chosen to exercise leadership positions and aggressively pursue new opportunities created by advances in technology, growing understanding of ES&G issues and their importance, and increasing stakeholder demands. Among leading companies, awareness of the importance of adopting a sustainable business posture has been accelerating during the past several years, as discussed in the sidebar on page 48.
ES&G Concerns as Key Requirements and Determinants of Long-Term Business Success
So far, I have established that sustainability appears to be an up-and-coming business management concept and that a substantial portion of the investment community appears to be paying increasing attention to certain ES&G issues. This section briefly highlights some of the major categories of ES&G issues that are of interest to investors and that have relatively clear connections to business outcomes that can affect corporate financial and investment performance in a material way. Growing evidence exists that in the foreseeable future, investors will enforce a high level of performance along each of these dimensions. Accordingly, it would be advisable to those working on sustainability within corporations to ensure that their program adequately and explicitly addresses each one, preferably in the program design stage.
Resource Efficiency
Simply stated, pollution and waste are nothing more than resources that a company has paid for but not put to productive use. Indeed, some of the more sophisticated firms now refer to such “nonproduct output” as a single category that is to be minimized or eliminated wherever possible. The good news is that U.S. (and many international) companies have made quantum leaps during the past few decades in (at first) preventing pollution from occurring or being generated and (now, increasingly) designing waste and emissions out of their production processes altogether. Techniques such as Lean Manufacturing and Six Sigma have been particularly useful in continuing to drive higher efficiencies and productivity. Such gains are a good example of sustainability thinking, in that they often reduce waste, pollutant emissions, energy and material use, and costs, and also may improve product quality. That is, they offer “wins” along multiple business-relevant dimensions. As discussed in Chapter 6, the more sophisticated ES&G investors already evaluate companies’ resource efficiency when making their portfolio selections. Those involved in corporate sustainability (or management more generally) can expect this to become the norm in the near future.
Risk Management and Reduction
EHS management always has been about risk management and reduction. What is relatively new is a wider appreciation of the different forms that sustainability-related risks can take, how significant they can be, and how difficult they can be to detect and effectively manage. The most prominent example today of the risk to individual firms posed by an ES&G issue is climate change. It is not an exaggeration to say that climate change impacts, or the consequences of possible legal mandates imposed to address climate change (such as carbon emission constraints), could pose an existential threat to some companies. This phenomenon is widely understood within the investment community, particularly the ESG investor segment. What is less widely appreciated is that the availability of water is emerging as an issue that may be even more problematic to some firms. It is not by coincidence that the most successful initiative designed to promote corporate disclosure of climate change risk and posture is led by investors. Those working in corporations should take note. Increasingly, investors will be inquisitive about whether and to what extent their senior managers understand the risks posed to their businesses by ES&G issues. They will seek adequate assurance that effective management strategies are in place.
Customer Expectations
Well-run companies tend to be attentive to the needs and wants of their customers and to invest ample resources in remaining abreast of emerging, even unexpressed, needs. Although many consumers may feel that they have little say over what corporations produce and how, the last few years have witnessed some substantial efforts by large multinational firms to “green” their supply chains, producing ripple effects that are being felt far and wide. New supply chain requirements may include eliminating certain materials, not sourcing materials or components from certain countries, adopting particular production or management practices, conforming to specified codes of behavior (such as human rights/labor practices), and reducing their energy use or broader environmental footprint. These expectations can have major implications for how the supplier company can operate its business and hence have nontrivial revenue and cost impacts. Investors are increasingly aware of these intercompany dynamics and are factoring the possible implications from an investment standpoint into their evaluations. In the future, those working on company sustainability efforts will need to understand what these emerging demands are, how they are likely to evolve, and what options exist for addressing them effectively and optimally.
Fair Dealing and Ethical Treatment of Stakeholders
With today’s 24-hour news cycle and constant access to various forms of news media via the Internet, it is important that corporations continuously safeguard their reputations. The experience of the past 15 years or so has shown that the quickest and surest way to garner vast amounts of unflattering media coverage is to mistreat your employees or purchase from suppliers that mistreat theirs. (Just ask the folks at Walmart and Nike.) Moreover, another consequence of globalization is access to large numbers of new suppliers, along with the downward pressure on prices that this wider access brings. This means that existing commercial relationships may be put to the test, and business partners that are found not to warrant the trust of their counterparts may be supplanted by others. Even with a more competitive economic landscape, it is probably more important than ever for firms, and the managers and executives within them, to uphold a reputation for integrity and fair dealing. Such behavior becomes even more important with new scrutiny from investors who demand that the companies that they invest in be ethically managed. Despite the old saw that “business ethics” is an oxymoron, people involved in corporate sustainability efforts would be unwise to take this sentiment to heart.
Transparency
Calls for more disclosure along more dimensions of corporate behavior and performance are being heard from a variety of audiences. The public and members of the communities in which firms operate want to receive assurance (in the form of facts) that companies are being operated ethically, safely, and in a way that provides overall net benefits to society. Regulators and members of the NGO community seek evidence that firms are in compliance with all pertinent laws and regulations and that unregulated activities are being conducted in a way that does not pose unreasonable harm to the environment, workers, or communities. And, as discussed earlier, investors increasingly seek information on corporate ES&G posture and performance. Meeting these demands requires significant effort and a level of corporate transparency that may pose both cultural and practical challenges for many companies. Notwithstanding the difficulty of the task, those involved in corporate sustainability efforts should understand that demands for greater transparency and disclosure are likely to intensify in the coming years. Moreover, if, as I anticipate, ES&G investing becomes further established or, over time, the dominant form of institutional investing, much more extensive and regular disclosure will, as a practical matter, become mandatory, whether formally required by SEC rule or otherwise.
Assurance of Senior Management Control and Awareness
As suggested previoulsy and illustrated at various points throughout this book, ES&G issues can affect the performance and future prospects of companies in numerous ways. Many external stakeholders, including regulators, customers, suppliers, investors, and rating agencies, among others, have a direct and important interest in understanding whether and to what extent those managing companies at the most senior levels are aware of these issues and have taken adequate steps to ensure that they are being managed effectively. The news media (including the “green” segment thereof) tends to focus on either existing problems or new initiatives, products, and services having a sustainability orientation, but many of the most important stakeholders of companies are focused on the bigger picture. They require ongoing assurance that the firm is adequately capitalized. They also need to know that its senior management understands both the threats and possible opportunities presented by ES&G issues. Finally, management should have established structures and practices that are sufficient to adroitly manage day-to-day operations and address any possible contingencies. For this reason, some stakeholders, particularly investors, have an abiding interest in corporate governance practices, policies, management systems, programs, and involvement in activities that may produce new revenues from sustainability-oriented products and services. It is important to understand that ES&G performance data (such as energy conservation and pollutant emissions) are necessary but insufficient. As discussed in depth in Chapter 6, investors make judgments about firms’ future prospects based on the evidence they have and what they can infer from current behaviors. Demonstrating senior management command of and engagement in sustainability issues is a crucial means by which companies can send the appropriate signals to the investor community. This will become increasingly important to retaining investor support during the next decade.
Implications for Sustainability Professionals and Others Working on Corporate Sustainability Issues
From the foregoing, it should be obvious that understanding and producing meaningful results in the domain of corporate sustainability is substantially more multifaceted than is commonly realized. My hope and intent are that you will find much of what you need to know to get started in earnest in this book. For now, it is perhaps useful to be mindful of the following issues as you read further:
• Language/terms. As illustrated in this chapter, many terms are used in the EHS and sustainability field. I have offered here my own formulation of sustainability, which I find useful and employ throughout this book. Whether you accept this formulation, adopt another, or create your own for use in your company or in those you work with, I encourage you to be clear about what you mean by “sustainability” or whatever other terms you employ. Also be consistent in how you apply them. This is the best way to avoid confusion and spending lots of unproductive time debating what specific words and phrases mean instead of solving real problems.
• Interrelationships. This chapter also offers a few brief glimpses of how various ES&G issues are related to one another, as well as how the interests of the corporation and many of its external stakeholders are interconnected. As you think about how to contribute to your organization’s long-term sustainability, it is important to remember the presence and importance of these interrelationships. The analogy of a spider web comes to mind, in that touching one part of the web sets off vibrations that may be felt in distant, seemingly unrelated parts. Many sustainability issues have similar widespread, and often subtle, connections, and it is important to try to identify and understand them as you proceed.
• Interdisciplinary knowledge. By now, it is perhaps clear that actively pursuing sustainability in a company has many moving parts and that many people and business functions must be involved for substantial success to be achieved. This necessarily means that any one person’s knowledge and domain expertise are likely to be inadequate to address all the necessary tasks and activities involved in operationalizing sustainability. Instead, a multidisciplinary, collaborative approach is required to ensure that all appropriate expertise and perspective are brought to bear. This is particularly true during initial planning (or periodic retooling) stages, and in defining and launching initiatives to enhance existing and introduce new products and services having a sustainability component.
• Skill sets. Similarly, the skills required to orchestrate and manage an internal sustainability program or initiative extend well beyond technical knowledge of the issues. They include team building, communications, facilitation, and mentoring. It also is important to bring an open mind and exhibit flexibility and a willingness to try new ways of doing things. These aspects of pursuing corporate sustainability are discussed in more depth in Chapters 5 and 9.
The next chapter delves into more specific details about how various ES&G issues can and do affect the business enterprise. As you will see, the influence of many sustainability issues is substantial—or can be under some circumstances. This means that effective management of the business requires careful consideration of the points of intersection between the company and various environmental, health and safety, social, and governance/ethical issues. Knowing what some of these influences are will help you understand the perspectives of many major stakeholder groups (profiled in Chapter 4) and will demonstrate that the formal approaches to sustainability management that I advocate and describe in Chapter 5 are both necessary and appropriate.
Endnotes
1. The Brundtland Commission (named after its chair) was formed by the United Nations in a 1983 resolution.
2. Some people and organizations are now using the phrase “people, planet, profits” as convenient shorthand for this concept.
3. Most U.S. nonprofits are organized under Section 501(c)(3) of the Internal Revenue Code, which enables them to receive monetary and other donations that are tax-deductible for the donor. Tax-exempt organizations eligible for Section 501(c)(3) status are limited to organizations formed and operated exclusively for charitable, religious, educational, scientific, literary, or other defined purposes (Internal Revenue Service, 2001).
4. Sadly, many people in the business community and press seem not to recognize how many benefits the U.S. federal and state governments provide, and how different this largesse is from the situation in many other countries. I would point out but leave aside the issue of the vast direct subsidies and tax expenditures that benefit specific industries and companies. A fair treatment would require an entire book to fully outline. A simple and partial list of the benefits provided to U.S. firms in general would include the ability to operate within secure borders; transport their goods and employees along/through advanced roads, ports, airports, secure sea lanes (protected by the U.S. Navy), and other infrastructure; have use of a reserve currency accepted (and preferred) around the world; have instant access to astounding quantities of free and valuable information; and have dedicated civil servants traversing the globe, working to open new international markets and execute trade agreements. Despite receiving these many benefits and more, some corporate representatives continue to complain about paying taxes (paying their fair share) and “excessive” regulation. Regulation in the ES&G context is discussed in more depth in Chapter 3.
5. Importantly, though, such compensation need not always be monetary. As discussed in Chapter 5, there are many different ways of motivating line employees to contribute to company goals, many of which are not particularly costly. One essential element is respect.
6. EOs can be retrieved, by number, from the U.S. National Archives at www.archives.gov/. Prominent examples of important environmental/sustainability EOs include EO 13514, Federal Leadership in Environmental, Energy, and Economic Performance (2009); EO 13148, Greening the Government Through Leadership in Environmental Management (2000); and EO 12856, Federal Compliance with Right-to-Know Laws and Pollution Prevention Requirements (1993).