Tag Archives: economic value

Sustainability is Stupid

Please read the entire article before sending me nasty notes. At the end of this piece, you may actually agree with me.

It’s a pretty inflammatory statement.

But I mean it. Just not in the way you may think.

Stupid Is As Stupid Does.  It is probably worth starting with the background on which my perspective is based. I have about thirty years professional experience cycling through the relevant environmental buzzwords of the times: environmental compliance in the mid-80s, environmental management and value in the 90s, environmental risk and sustainability after the turn of the century, and now corporate responsibility and supply chain sustainability for this decade.

In 1994 I was fortunate to obtain a pre-print copy of Michael Porter’s and Claas van der Linde’s seminal work Toward a New Conception of the Environment-Competitiveness Relationship, (Journal of Economic Perspectives (1995), Vol. 9, No. 4, pp. 97-118). The work was essentially reproduced in Green and Competitive: Ending the Stalemate (Harvard Business Review, September – October 1995). As cliché as this sounds, the article truly changed my career as I began seeking economic-environmental linkages with projects, clients and as in-house environmental staff at a Fortune 150 manufacturer.

I have read hundreds of research papers, articles, studies and analyses that, in a nutshell, attempted to link environmental or social responsibility performance to economic gains of some type. Others tied “intangibles” to financial benefits, defining/creating value, and valuing risk reduction. I have pored over texts on traditional cost reduction, cost accounting, marketing, strategy, etc., even completing executive education on these topics.

And yes, much of this has been put into practice (or at least attempted). I have been through a couple McKinsey exercises and a misguided and inappropriate implementation of Economic Value Added (EVA)1. I helped develop internal environmental performance metrics and reporting and attempted to create in-house sustainability initiatives. I served as a team member for sustainability and LCA tool development in GEMI, AIChE and on the US SubTAG to ISO for the Environmental Performance Evaluation standard.  For clients, I have developed and reviewed sustainability criteria, performance metrics and calculated the economic benefits; developed environmental risk assessment and valuation criteria leveraging traditional risk management/insurance models; and quantified the value of environmental risk avoidance investments/activities.

You get the idea.  My point is that I am fairly competent on the subject, if not a relative old-timer with an appropriately receding (or altogether non-existent) hairline. I don’t claim know every aspect of sustainability, but can speak credibly to the issue.

What’s Stupid About Sustainability?  Really, it isn’t sustainability that is stupid – it’s how sustainability is “sold” to business, including:

  • The lack of a consistent, reasonable and/or actionable definition
  • The flood of (mis)information, articles and studies about sustainability that are highly divergent in approach and results –  due in part to the lack of a consistent, reasonable and/or actionable definition
  • The inherent bias of sustainability media and practitioners that identify inappropriate or inconclusive linkages between economic value/financial returns to sustainability practices.
  • Ignoring customer perceptions of performance tradeoffs for sustainable products

Consistent Inconsistency.  About the only thing everyone can agree on about the word “sustainability” is that in its English form, it has six syllables. There are even disagreements about capitalization – should the “S” be capitalized to signify some importance of the word or not?

Readers can likely offer at least three different definitions of the word. I have no intention of listing various definitions here – it isn’t necessary. If you think about it, sustainability is not about doing more, it’s about doing less – spending less, wasting less, reducing resource use. Probably not everyone will agree on that either, but that is really the point – how can a company take on an initiative that can’t even be defined? And even if there is internal agreement, not all stakeholders will concur.

Buried Alive.  How do you go about establishing a definition from which to work? One answer is look to sustainability subject matter experts, studies, articles and white papers. This sounds straightforward (if not tedious), but the amount of available information is completely overwhelming, only increasing confusion. Just for fun, I did a simple test by doing an Internet search on the word “sustainability” and a few other very popular corporate buzzwords. The results speak for themselves.

sustainability table* Search conducted April 9, 2015

Think about this for a moment – some of the most popular (and ridiculed) Buzzword Bingo lingo rank significantly lower than sustainability in terms of Google results. I was actually surprised by this.

Clearly, this isn’t the answer.

Stupid Money.  As sustainability professionals, our knowledge creates biases that can turn into obstacles – forcing a sustainability solution where one may not exist, or may not be appropriate. This is where many sustainability professionals go wrong – and get stupid.   A major myth stemming from the sustainability bias is that sustainability performance is financially material. We wrote back in 2011 –

A myriad of studies completed dating back to the late 1980s attempt to demonstrate “environmental value”.  Most of these studies have shown rather tenuous linkages or used meaningless metrics. Interestingly, most of these studies link to equity markets – i.e., stock prices.  Maybe because stock prices grab headlines, are tied to compensation or are the target to which Boards and senior executive generally manage.

The thought is still on point2. More interesting, however, is the thought we expressed that sustainability value is more appropriately viewed in the context of bonds rather than equities (long term versus short term). Today, that is proving true as demonstrated by the global growth of clean energy financing through bonds which according to Bloomberg New Energy Finance, rose 16% last year to a record $310 billion, boosted by commitments to sustainability investments from Deutsche Bank, Citigroup, Barclays, Bank of American, Credit Agricole, Goldman Sachs and BlackRock.

As we said in 2011, “Given … the lackluster historical success of valuation of environmental/sustainability matters in the context of stock prices – perhaps it is time to redirect our efforts at finding relevant and credible metrics.”

Are Customers Stupid?  About twenty years ago I wrote a thought piece on sustainability and circulated it to a small group of colleagues. My basic premise was that sustainable products are a luxury for those able to afford the price differential or willing to accept certain trade-offs. For example, alternative fuel vehicles cost more than comparable gasoline powered cars, so alternative fuel vehicles were not likely to be economically successful in low-income populations. On the flip side, those able to pay more for the sustainability attributes of alternative fuel vehicles had to accept trade-offs in vehicle size, performance and selection.

This premise remains valid today, although the situation has improved. We now have more options for electric/hybrid vehicles and prices have come down for many makes/models, so trade-offs have been reduced in this instance. But other sustainable products still cost more, and the perception of performance trade offs still exists.

Four years ago, we wrote about a study undertaken by professors of marketing at William & Mary, Ohio State and the University of Texas. The study results were presented in The Sustainability Liability: Potential Negative Effects of Ethicality on Product Preference. Briefly, the authors’ study demonstrated that customers frequently feel that improving ethical aspects of a product reduces the ability of the product to fully perform its expected function. In addition, the authors demonstrated the impact of bias on the part of customers when they are being observed (such as in a survey scenario) versus when they aren’t observed (or don’t know it). Connect the dots – customers being observed as part of new product research aren’t likely to show their true concerns about sustainable products and may not buy them when they are available 3.

Going back to automobiles, Tesla has done a good job of battling perceptions of driving performance (such as creating an Insane driving mode that rivals traditional supercars in 0-60 times) and range limits. Few other companies or products seem to have attacked the trade-off perceptions in a similar manner.

To sum it up, you need to understand your customers’ key buying criteria, and how their perceptions of sustainability impact their decisions.

Don’t be Stupid.  Approach internal decision makers in their terms and you keep their attention with a higher likelihood of success. Or ignore that and emphasize ill-defined, unproven or irrelevant pie-in-the-sky sustainability concepts and see where that gets you.

To begin, you need to understand the company, how it operates and why it exists. Act as though you are the VP of Operations, Marketing, Communications, Supply Chain, Product Development and HR. Pretend you are working on a case study at Harvard Business School. Learn as much as you can, such as:

  • What does the company make or offer? What need does it fill? Why does that need exist in the first place?
  • What are key internal words, phrases, programs and initiatives?
  • What are the manufacturing processes involved?
  • What is the manufacturing capacity and efficiency?
  • How does the company make money?
  • What are the most critical aspects of revenue generation and profitability?
  • What are the direct and indirect cost drivers with the biggest impact?
  • Why are certain suppliers used? What are your company’s key buying criteria?
  • Why do customers buy from your company? What are your customers’ key buying criteria?
  • What is important in a new product? How is the market analyzed and demand predicted?
  • Who are the most important audiences for the company’s external communications?
  • Why do employees work at the company? What is important to them?
  • What are the different relevant compensation programs, metrics and triggers?

After learning “the business” you can then put on your other hat and identify where sustainability initiatives may make sense. Where you  find a potential project, your pitch should be about the relevant business benefits using the appropriate business words. The word “relevant” is emphasized.  Unless specifically prompted by management, don’t use the word sustainability until near the end of any conversation: “Oh, and we also get to highlight this as a sustainability success, too.”

What? Why de-emphasize the sustainability aspects? Your audience is likely to be focused on traditional drivers/metrics of the company’s financial performance. Capital is limited, revenues need to increase, costs need to decrease, the stock price is too low and competitors are gaining market share. Cynical management only needs one reason to pull the plug and divert attention/funding away from the sustainability initiative.  Remember your audience and what your ultimate goal is.

Conclusion.  I don’t actually believe sustainability is stupid – quite the contrary.  But I do think that the concept is too frequently portrayed in a stupid manner in publications, by service providers and around corporate conference room tables. Being smart about it is easy as long as you can temporarily disconnect your sustainability expertise/bias and focus on your company’s business fundamentals.

Of course there are exceptions to this; numerous companies have embedded sustainability into their corporate culture and don’t operate as I described. The wide-ranging definition of sustainability also creates a broad (perhaps overly broad) set of examples.  All of these will be waved under my nose as examples of how wrong I am. Yes, it is right that I am wrong in those instances, but those companies are very much in the minority. As sustainability professionals, we need to create opportunities for that silent majority so they can reap the real rewards of sustainability.

We just have to be smart about doing that.

________________

1 EVA is intended to evaluate capital expenditure opportunities, but in this instance, each staff member had to demonstrate our own personal economic value added by applying the methodology to our everyday activities. That is why I call it inappropriate and misguided.

2 In contrast, perhaps the best examples we have seen that in our view comes the closest in realistically linking sustainability and equities valuation are (a) the April 17, 2015 letter from Ceres to the SEC on climate disclosure. Technically, the letter is about disclosure of climate risk as material information to investors, discussing the matter in terms of asset risk, materiality of future pricing/demand scenarios and long-term capital expenditure plans/assumptions for oil and gas companies; and (b) a recent study from Harvard Business School Corporate Sustainability: First Evidence on Materiality.  This paper isn’t necessarily easy to understand, but the authors performed a number of tests to validate their findings.  One possible weakness is that the authors relied on materiality guidance and data from the Sustainability Accounting Standards Board (SASB) for determining what sustainability matters are considered material, rather than independently confirming that assumption, or developing their own materiality benchmarks. We are not aware if SASB guidance and methodologies have been independently validated.

3 We recently brought these concepts forward to a major consumer products company who was looking to develop a marketing campaign based on sustainability attributes of a new product. After evaluating the matter further, the company put that campaign on hold.

EHS Journal Article on Sustainability, Financial Valuation

Recently, Elm posted a piece discussing comments from Kevin Parker, the CEO of Deutsche Asset Management, an investment firm with three-fourths of US$1 trillion under management.

We expanded that original post for EHS Journal, who just published it.  The expanded version dives deeper into trends in the past decade supporting Parker’s assessment of why capital markets are bullish on carbon-intensive investment opportunities even in light of this era of sustainability.

View the article in its entirety here.

PlayPlay

An Inconvenient Reality For Environmental/Sustainability Professionals?

For years, those of us in the environmental/sustainability profession have sought credible ways and metrics for quantifying the economic value of our efforts, activities and programs.  A myriad of studies completed dating back to the late 1980s attempt to demonstrate “environmental value”.  Most of these studies have shown rather tenuous linkages or used meaningless metrics.

Interestingly, most of these studies link to equity markets – i.e., stock prices.  Maybe because stock prices grab headlines, are tied to compensation or are the target to which Boards and senior executive generally manage.

The problem is that environmental/sustainability matters don’t fit into this model, either because they tend not to be financially material, or they don’t develop economic certainty within the “current quarter” myopia of corporate management, financial markets and analysts.

A recent article on the topic was published in The International News.  The article includes an interview with Kevin Parker, CEO of Deutsche Asset Management (DeAM) on the subject of how capital markets currently view environmental/sustainability risks.  DeAM manages over US$775 billion in assets.

With simplicity, clarity and unquestionable credibility from the financial market viewpoint, Parker made key points in the article and interview:

  • Bond markets are poised to punish polluting companies in the aftermath of the Macondo oil spill and Fukushima nuclear crisis.
  • “The process of re-pricing carbon and environmental risk has begun, because these two events were catastrophic.”
  • By contrast, shorter-term equity and commodity markets have continued to chase high-carbon opportunities, including voracious emerging market demand for coal.
  • But investors in longer-term debt including bonds will increasingly avoid unsustainable companies … an inexorable trend that will push up their borrowing costs.
  • “What this boils down to be risk in capital markets, and capital markets know how to price risk once they understand it.”

Pension investment managers realized this years ago since they emphasize stability and a long-term investment horizon.

But there seems to be far less recognition of this by environmental/sustainability practitioners, as the amount of studies, white papers and pseudo-financial metrics is mounting, with continued emphasis on the equities side of capital markets.  Perhaps the driving forces for this are general economic pressures facing companies are pushing staff to find ways to justify their existence and cost, consultants are trying to come up with that elusive short-term ROI metric for the cost of their services to clients and much of the HSE/sustainability media are vying for limited attention on the part of their readership.

Given Parker’s comments – and the lackluster historical success of valuation of environmental/sustainability matters in the context of stock prices – perhaps it is time to redirect our efforts at finding relevant and credible metrics.

In limited circumstances, financial value of environmental/sustainability initiatives can manifest in material and short-term impacts.  Those instances give practitioners hope of riding those coattails.  But generally, the reality is a little inconvenient.

Warren Buffett, Berkshire Hathaway Agree with Elm on Sustainability Risk

A recent article on the absence of sustainability reporting for Berkshire Hathaway is highly thought-provoking.  The piece begins:

This company, as many of you may know, was founded and is run by the 80 year old Warren E. Buffett, the current chairman and CEO, one of the richest men in the world and, apparently, one of the most successful investors of all time. The Berkshire Hathaway company turns over about $30 billion and employs 287,000 people. It owns a long string of Companies, 10 of which are in the insurance sector, and the other 60 or so in a diverse range of sectors including textile and apparel, jewelry, furniture, gas, electricity, steel and many more. And now the moment you have all been waiting for:  ESG, CSR, citizenship, sustainability, responsibility or any form of similar non-financial disclosures are conspicuously absent from any of Berkshire Hathaway’s communications…

Apparently, the company seems to be sustainable, since, from its beginnings in 1965, the book value of the company has grown by 20.3% compounded annually, whatever that means, but it sounds successful.

And ends with

… it astounds me that there are still leading, influential, financially successful businesses such as Berkshire Hathaway, with the potential to do so much to engage 257,000 people in over 70 companies in a sustainability mindset and don’t. Even some basic things such as a common sustainability charter for all Berkshire Hathaway businesses, or attention to very basic direct impacts would be a good start, let alone the potential to develop business opportunity and advantage.

Is Warren E. Buffett missing a trick here? Or is he cleverer than most? Is his financial leadership so powerful that it blinds all stakeholders to all other aspects of doing business? I don’t know the answer. But it just makes me a little sad that we don’t see sustainability leadership from the direction of the Buffett empire.

Hmmm.  Perhaps the author is missing a few key points about – and relevance of – the long-term financial success of The Oracle of Omaha and his no-nonsense business philosophy.

What this article supports, however, is that it is valid to ask

What is the business risk of NOT implementing a sustainability program?

We at Elm have mentioned on several occasions that the same business considerations apply to investing in sustainability as they do any other investments proposed.  So the business risks of jumping into the sustainability pond must be thoroughly assessed in advance – and this should include a critical review of the need for doing so in the first place.  Unfortunately in many cases, companies make the decision from an emotional or “me too” perspective.

And obviously Warren Buffet agrees.

McKinsey Study on Sustainability

Last month, McKinsey & Co. published a study titled “How companies manage sustainability”.  The survey was conducted in February 2010 and received responses from 1,946 executives representing a wide range of industries.

The fact that the topic of sustainability is significant enough for McKinsey to conduct this analysis is notable.  The study itself is short and it is easy to distill the major themes presented.

Theme 1:  “Sustainability” has no defined definition

… many [companies] have no clear definition of [sustainability]. Overall, 20 percent of executives say their companies don’t. Among those that do, the definition varies: 55 percent define sustainability as the management of issues related to the environment (for example, greenhouse gas emissions, energy efficiency, waste management, green-product development, and water conservation). In addition, 48 percent say it includes the management of governance issues (such as complying with regulations, maintaining ethical practices, and meeting accepted industry standards), and 41 percent say it includes the management of social issues (for instance, working conditions and labor standards). Fifty-six percent of all the respondents define sustainability in two or more ways.

Theme 2:  What gets measured gets managed, or vice versa

[E]xecutives [of proactive companies] … are more aware than executives at other companies of the metrics their companies track. For example, 84 percent of respondents at engaged companies are aware of whether their companies measure their carbon footprint, compared with 40 percent of respondents at less engaged companies. More importantly, among the group that is aware of what’s being tracked, the engaged companies are far more likely to be tracking relevant sustainability indicators such as waste, energy and water use, and labor standards for their suppliers and consumers.

Theme 3:  Implicit in sustainability leadership within the energy industry is risk management

… senior executives in the energy industry take an active approach to managing sustainability, likely because of the potential for regulation and increasing natural-resource constraints. Indeed, 10 percent of energy executives say addressing sustainability is the top priority on their CEOs’ agendas (versus 3 percent overall), and 31 percent say it’s a top-three priority (versus 22 percent overall). Further, energy executives are much likelier than others to be active in seeking opportunities to invest in sustainability (40 percent versus 28 percent), to integrate it into their companies’ business practices (43 percent versus 29 percent), and to shape regulation actively (29 percent versus 16 percent).

Theme 4:  Risk assessment and quantification is severely lacking

only about 35 percent of executives say their companies have quantified the potential impact of environmental and social regulation on their businesses; only 40 percent feel prepared to deal with regulation in the next three to five years and are personally confident about handling climate change issues.

Failure to reach an agreement in the recent Copenhagen UN Climate Change Conference was seen by respondents to this survey as twice as likely to increase uncertainty (30 percent) related to climate change regulation as to decrease it (15 percent); 55 percent say they saw no difference.

Those of us who have been in the EHS risk management/sustainability world for awhile will not find any of this new information.  But McKinsey’s brand behind this may bring valuable C-level credibility to the need to fill the information gaps.

Coal Ash May Become Regulated as Hazardous Waste

The environmental newsletter of the Association of General Contractors (AGC) sheds some light on the status of EPA’s developing regulation of coal ash or coal combustion products (CCP).  The newsletter indicated that

the agency expects to release a rulemaking on coal combustion residuals (or waste) in April 2010, with a hazardous designation reported likely.

CCP has been exempted from regulation as a hazardous waste through an interpretation of existing hazardous waste law.  Under that interpretation, coal ash was “pardoned” as part of the “Bevill Amendment” – a 1980 amendment to the federal waste management legistration that excluded from regulation certain mining and mineral processing waste.  The amendment also mandated that EPA conduct a study to determine how to manage CCP.

The study was completed and the findings were presented to Congress in 1988 and again in 1999 – both times, EPA recommended that CCP not be regulated as hazardous waste.  Two regulatory determinations were subsequently published – one in 1993 and one in 2000, both again affirming that regulation of CCP as hazardous waste was not warranted.

Although EPA has not yet released its proposed regulation, AGC’s article stated that

sources indicate that EPA is strongly favoring a hazardous waste designation in order to establish standard and federally enforceable practices.

In addition to creating significant direct waste management costs to CCP generators, a hazardous waste designation for CCP would have a detrimental impact on CCP reuse.  CCP-based materials would likely create the potential for third-party liabilities in addition to the costs/questions associated with regulatory compliance.

Walmart’s Supplier Sustainability Squeeze Starts

The Financial Times reported that the retailer has announced an initiative to eliminate 20 million metric tons of CO2 emissions from its supply chain over the next 5 years.  All but 10% of the reductions will come from Walmart suppliers rather than direct Walmart operations.  The article stated that:

Mike Duke, chief executive repeated Walmart’s view that its efforts would ultimately lower prices for its customers, chiefly through resulting savings in energy use.

The company is in the process of developing GHG emissions/reduction quantification standards.  What remains to be seen is the extent to which the methodology will align with existing – and regulatory – calculation standards.

Clearly, suppliers will be expected to pass emissions-related cost savings on to Walmart, while concurrently addressing the additional administrative requirements related to the sustainability/emissions reduction programs.  The company has stated that vendor sustainability will become incorporated into its buying decisions.

As we mentioned in an earlier post, some suppliers may choose not to take on the additional efforts and costs associated with implementing Walmart’ sustainability and CO2 emissions requirements.  But before making such a decision, suppliers should conduct a thorough assessment of it environmental profile to identify where the opportunities and risks lie.  This information will assist in making more informed decisions, especially in the context of being a supplier to the largest retailer in the world.

The World Economic Forum in Davos Releases Global Risk Report 2010

The Global Risk Network (GRN), an initiative under the World Economic Forum (WEF), released its Global Risk Report 2010 today.  The report is produced annually in conjunction with the WEF Conference in Davos and 2010 is the fifth year of the report.

This year, the report emphasizes the “interconnectivity” of global matters and the long-term view needed to identify and reduce major risks.  The report sets the stage by noting that

the increase in interconnections among risks means a higher level of systemic risk than ever before. Thus, there is a greater need for an integrated and more systemic approach to risk management and response by the public and private sectors alike.

In a contrast to previous years, today’s report underscored that a long-term view is critical to predicting major exposures.  Previous Global Risk Reports have not been as careful to clarify the timeline of the discussed exposures.  The report comments that:

the biggest risks facing the world today may be from slow failures or creeping risks. Because these failures and risks emerge over a long period of time, their potentially enormous impact and long-term implications can be vastly underestimated.

Further, the 2010 document seeks to provide more pragmatic guidance for companies to try to address the risks reviewed in the report.  A few points brought forward by GRN/WEC include:

Typically, risk is considered in terms of “impact and likelihood” based on internal consensus, often involving very little external or expert input [emphasis added].  Corporate risk assessments rarely consider a time frame beyond two to three years, or explicitly examine the long-term volatility introduced by risks to strategies with a five to 10 year execution horizon. Decision-making is further skewed by necessary focus on the reporting of short-term results and known or recent risks affecting the current period.

Further, research shows that relatively few companies effectively apply tools, such as scenario analysis, or effectively integrate risk data into long-term strategic planning.

…. institutions and governments collaborate to:

  • Take a long-term approach to global risk identification, analysis, tracking and mitigation
  • Use frameworks that reflect risk interconnections rather than silo approaches
  • Address the need for more robust data on key risks and trends to be collected and shared in a coordinated manner
  • Conduct cost-benefit analysis on risk solutions to improve fund allocation and better understand the long-term benefits of investment choices
  • Track emerging risks and educate leaders and the public about real, rather than perceived threats
  • Communicate clearly and consistently about the nature of threats and about strategies to manage and mitigate them
  • Understand the influence of behavioural aspects of risk perception

Our experience with various client HSE risk frameworks mirrors a number of GRN’s points.  Among our common observations:

  • HSE risk assessments frequently rely solely on internal senior management views.  Unfortunately, these views are not always consistent with operational reality in the field or trends outside the company.  To generate truly valuable information,  a risk assessment process should include senior management perspectives that are benchmarked against middle management directions, operations in the field and external emerging pressures.
  • Traditional financial and cost/benefit analyses do not adequately evaluate risk reduction benefits.  We find there are two primary reasons for this.  First, the complete array of relevant costs and benefits are not typically captured.   Second, the traditional view of short-term financial benefits tends to conspire with the internal “behavioural aspects of risk perception” to drive investment away from HSE risk assessment/management needs.  These findings lead to Elm’s development of our HSE risk reduction financial metric Return on Investment of Loss Avoidance (ROIa©).  Read more here.

The Global Risks report is produced by WEF’s Global Risk Network – a partnership of Citigroup, Marsh & McLennan Companies (MMC), Swiss Re, the Wharton School Risk Center and Zurich Financial Services.

More New of the Same Old

EPA announced two more major Clean Air Act enforcement settlements today that stemmed from the Agency’s long-standing industry New Source Review (NSR) enforcement initiatives.

Saint-Gobain Containers, Inc. of Muncie, Ind. agreed to install pollution control equipment at an estimated cost of $112 million to reduce emissions of NOx, SO2, and PM by approximately 6,000 tons each year. The settlement covers 15 plants in 13 states. This is the federal government’s first nationwide Clean Air Act settlement with a glass manufacturer that covers all of a company’s plants.  In addition, as part of the settlement, Saint-Gobain has agreed to pay a $2.25 million civil penalty.

Lafarge North America, Inc., based in Herndon, Va., and two of its subsidiaries agreed to install and implement control technologies at an expected cost of up to $170 million to reduce emissions of NOx by more than 9,000 tons each year and SO2 by more than 26,000 tons per year at their cement plants.  In addition, as part of the settlement, Lafarge has agreed to pay a $5 million civil penalty.

Companies potentially on EPA’s NSR radar screen should review their environmental audit programs to evaluate how critically the programs evaluate plant changes that could trigger this enforcement.  With the capital cost at stake, investing a small amount in a program review may generate a significant return in the event of NSR enforcement.

New Report by The Conference Board: Gaps Exist Between Risk Management and Financial Measures

A report released today by The Conference Board concluded that few companies link Enterprise Risk Management (ERM) data into corporate performance management/metrics.

Enterprise risk management and performance management are two complimentary processes essential for the management of an organization. Both disciplines are designed to support organizations’ efforts in making decisions and meeting their goals–ERM through the identification and management of those risks that could affect business objectives, and performance management through the identification and measurement of the drivers needed to achieve results.

Risk-adjusted performance metrics offer managers tools that strike the appropriate balance between meeting performance goals and achieving appropriate returns for the risks being taken. The application of risk-based performance management may also lead to incentives that are more aligned with an organization’s long-term success.

These points raise interesting implications for those companies implementing sustainability and other EHS management programs.

–       How are EHS elements reflected in the ERM program?

–       Are existing EHS/sustainability performance metrics aligned with internal risk management standards and benchmarks?

–       Do financial measures of EHS/sustainability performance incorporate risk-adjusted factors that are obtained from the ERM framework?

Elm’s Return on Investment of Loss Avoidance (ROIa)© is an innovative valuation methodology that links EHS/sustainability risk data and financial performance.  ROIa© demonstrates financial return of EHS risk reduction investments in terms of both reasonable anticipated loss and the cost of generating new profits needed to recover associated profits.  ROIa© utilizes existing financial data along with frequency and severity data obtained through EHS risk assessment processes, then benchmarks that exposure information against varying sets of cost data that are most relevant to client organizations.  This produces ROI information for EHS management costs in the context of internally-credible values, risk management and revenue/profit generation benchmarks.  Click for a graphic showing general guidance on interpreting ROIa©

About The Conference Board:   For over 90 years, The Conference Board has created and disseminated knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. The Conference Board operates as a global independent membership organization working in the public interest. It publishes information and analysis, makes economics-based forecasts and assesses trends, and facilitates learning by creating dynamic communities of interest that bring together senior executives from around the world.