This primer introduces basic terminology and provides an overview of key issues to help you translate CSR activities into financial value.
July 19, 2010
Do investments in sustainability enhance the financial bottom line? They do, according to the Network for Business Sustainability’s Systematic Review of 159 studies. In fact, 63 percent of the studies say such investments pay off, and just 15 percent claim they don’t - the rest had mixed results. But benefits from sustainability initiatives suffer from a perceived lack of measurability. Often the benefits are not clear, making it hard to link the investments to the bottom line. Managers often assume the effects of sustainability investments are too broad to be captured, and feel paralyzed into inaction. As the primer illustrates, this need not be the case.
Risks can lead to high-profile lapses in social and environmental stewardship, such as BP’s offshore oil spill in the Gulf of Mexico and Union Carbide’s chemical leak in Bhopal, India.
Profits are payoffs from high-profile investments, such as automotive hybrid technology.
The dynamic landscape of potential risks and profits motivates businesses to rethink their approaches to energy, water, waste, employees, communities, consumers, and supply chains.
How do we measure outcomes?
Managers often measure success using financial metrics (e.g. share price) or accounting metrics (e.g. revenues or costs). Therefore, managers must understand how CSR investments translate into these financial outcomes.
What are the sources of value?
The essence of sustainability is the triple bottom line: measuring the financial, environmental, and social impacts. However, these measures are not independent —they reinforce each other.
In other words, both environmental and social sustainability initiatives can help create financial value. For example:
Social Sustainability: Firms that invest in community projects can benefit from better reputations, increased consumer goodwill, and less stringent regulatory environments.
Environmental Sustainability: Firms can benefit financially by reducing their energy costs or by creating a culture of innovation. By reducing packaging or input use, companies can help both themselves and the environment.
How can we measure value from CSR?
Most businesses already have strong financial management systems, and financial metrics such as share price are available on a daily basis. So, for financial performance, the most important issue is understanding how CSR investments can translate into financial impacts.
Sustainability initiatives can lead to many potential impacts. Those environmental and social benefits fall into one of three broad categories: firm processes, firm outcomes, and external outcomes.
Firm processes: These impacts are easiest to quantify since they are based on readily available data, such as the change in the amount of an input used or of an output produced. For example, if a firm implements an energy conservation program, the metric is energy consumption. Cost savings are then determined using market costs.
Firm outcomes: Opportunities to impact the firm internally are less obvious. Using the conservation program example, the program can improve employee satisfaction and retention, producing cost savings for the firm. It can also encourage employees to innovate. In this example, the metrics of satisfaction and innovation are less obvious, but still readily measurable. These benefits translate into costs, revenues and, ultimately, share price.
External outcomes: The energy conservation program can also impact the firm’s stakeholders. Customers may view the firm more favourably, nurturing their loyalty. Regulators may be more likely to approve future projects or take a hands-off approach to regulation. Community groups may show their support for the firm or come to its defence because of its reputation for conservation.
Implications for Managers and Researchers
In each case, these outcomes translate into costs and revenues. In addition to reaping reputational benefits, the firm can benefit by extending its mandate into product development. For example, the energy conservation initiative may include R&D advancements in product energy efficiency. A more efficient product can improve perceived customer value, translating into revenues and increased market share.
Though much research exists on the overall link between sustainability and financial performance measured by share price, more research is needed on measuring the underlying processes. The outcomes of this research will help managers optimize investments at the firm level.