Tag Archives: financial return

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.

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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.

Tracking Reputational Value of Sustainability and Corporate Responsibility

Companies who implement sustainability and corporate responsibility (CR) efforts universally cite reputation enhancement as one of the key benefits from the investments in such programs.  Oftentimes, generic survey information (sometimes generated by popular media sources) is used as supporting data.

However, with current real-time communications technology literally “in the hands” of an overwhelming segment of the population located in key markets globally, other methods of gathering customer-generated reputational data are available.

Social networking enabling technology can be leveraged to more clearly define a company’s sustainability and CR message and direction to harvest greater return on the program investments.

An article published in Social Media Explorer discusses a few methodologies that exist today.  The article features Sentiment360, with whom Elm has formed a cooperative relationship to provide expertise on sustainability and climate matters.  Read more about the announcement.

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.

The Elm Consulting Group International, LLC to Participate in the 2010 Hospitality Law Conference

Lawrence Heim, CPEA, Director with The Elm Consulting Group International LLC, will speak at the 2010 Annual Hospitality Law Conference on February 3-5, 2010 in Houston.

Mr. Heim’s presentation will be part of the “It Ain’t Easy Being Green” track at the annual conference.  The presentation will review business risk concepts to be considered when evaluating when and how to develop and implement a sustainability program in the hospitality sector.  Topics covered include relevant activities and exposures to be condered within such a risk assessment considerations and scoping and ideas for quantifying the economic value of reducing identified environmental, helath and safety (EHS) risks.  In addition to presenting, Elm will also be an exhibtor at the conference, showcasing the company’s EHS and sustainability consulting expertise.

Elm is the only EHS/sustainability consulting service provider participating in the exhibition and conference presentations.

The Annual Hospitality Law Conference is a one-of-a-kind opportunity that brings together more than 350 private attorneys, human resource professionals, in-house counsel, loss-prevention personnel, risk managers, and hospitality owners and operators to learn about a host of legal issues pertinent to the hospitality industry.

The 2010 Hospitality Law Conference covers the areas of lodging, food and beverage, human resources, and loss prevention.

Debate Over Bolivia Carbon Project Spotlights Risks

The New York Times published an article highlighting questions surrounding a major forest preservation project in Bolivia sponsored by American Electric Power, BP and PacifiCorp, known the Noel Kempff Climate Action Project.

Greenpeace claims it found that from 1997 to 2009, the estimated reductions from the program had plummeted by 90 percent, to 5.8 million metric tons of carbon dioxide, down from 55 million tons. It also questioned the “additionality” of the program, which says that a specific forest area would not have been preserved without the program.

What is striking about this matter is not the debate of the project’s effectiveness (given the on-going controversy surrounding the use of forestry in climate risk management).  The surprise was a comment made by Glenn Hurowitz, a director of Avoided Deforestation Partners, a small nonprofit organization that claims to “advance the adoption of U.S. and international climate policies that include effective, transparent, and equitable market and non-market incentives to reduce tropical deforestation”:

In the proposed climate legislation, you can’t get credit for conservation or any other type of offsets until you’ve delivered the offsets. So inaccurate projections would not affect the issuance of credits.

This statement clearly demonstrates a critical business risk in using forestry for carbon management.

While “inaccurate projections” may not impact the issuance of credits, the sequestration calculations/projects have a significant impact on the upfront project support and financing.

It is reasonable to foresee that a failure of forestry to deliver on its projections will have a severely negative impact on the perception of forestry projects as a financially successful and viable carbon risk management tool.

As with any business investment, financial analyses are based on projections about what an investment will deliver in terms relevant to the investment.  In the case of forestry projects, calculations are completed to determine the amount of carbon that is projected to be absorbed and therefore generate the amount of credits/offsets.  These offsets create a financial return in terms of both cost avoidance and potentially revenue.  Financial analyses may be completed for different carbon management options and an investment is made in accordance with the option judged to be the “best” as defined by the criteria applied by the investor.

So what happens if the projections are inaccurate?  Sure, some offsets will likely be delivered by the project.  But will the investment deliver the anticipated return?  Will a shortfall trigger the need for pollution control investments and/or non-compliance penalties?

There continues to be a critical need to reduce risk in forestry-based carbon management investment.  As we have discussed before, it is advisable to take a deep dive into to uptake calculation methodologies, delivery milestones and scenario planning in advance of such investments.

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.

Elm Offers Perspectives on Sustainability Risk in BusinessWeek Blog

Recently, Patty Calkins
, Vice-President for Environment, Health, and Safety
 for Xerox posted a piece in BusinessWeek’s blog. In her article “Dispelling Two Sustainability Myths for Small Businesses”, she stated that

many small businesses still struggle to justify an investment in green initiatives, because they perceive the efforts will generate added costs, not concrete business benefits.

Lawrence Heim, Director in Elm’s Atlanta office, posted a response that offered a valuable perspective about “various ways to identify and quantify benefits AND RISKS of choosing a sustainability path.”

Read the Business Week blog entries here.