By Dr. Blair Feltmate

If it’s your mandate to define the business case for sustainable development, you need to be able to make that argument quickly and concisely.

Twenty years after Brundtland’s landmark publication, Our Common Future, it is reassuring that the lexicon of sustainable development has infiltrated all industry sectors. Although sustainable development (SD) was originally the province of the resource sectors, it has since spread to such domains as banking, hospitality, telecommunications and health care.

Notwithstanding the "good news" regarding the promulgation of sustainable development, many SD specialists, particularly those operating in sectors new to SD, cite a common malady - that they have difficulty within their companies answering two common questions - "what is sustainable development," and more pointedly, "why are we doing sustainable development? What’s the business case?"

Herein lies a test: can you, as your company’s SD expert, answer in an elevator speech - i.e. in one minute or less - what sustainable development means to your company and present the business case?

If you can’t answer "yes" to both of these points - and don’t feel bad, most SD experts can’t - you are failing your mandate and you need to remedy this omission.

Defining SD
In reference to the first question - what is sustainable development? - if you don’t have a working definition, the following can serve until you develop a company- specific response: "Our company defines sustainable development as engaging efforts to minimize the environmental footprint of our operations, while simultaneously working to create social and economic value within the communities where we operate." If your company elects to develop a more specific SD definition - and in most situations this is a prudent choice - here are a few guidelines.

Company-specific definitions of sustainable development generally share three common elements: (1) they recognize a commitment to environmental, social and economic stewardship, (2) they recognize key stakeholders, and (3) they reference the need to address the needs of current and future generations.

For example, the international mining company, Xstrata PLC, defines SD as, "the implementation of practices and policies that contribute to the well-being of the environment, economy and society to address the needs of customers, suppliers, shareholders, employees, government, the general public and the communities in which we operate, without compromising the ability of future generations to meet their own needs." The key point of differentiation between corporate definitions of sustainable development pertains to the identification of key stakeholders, which will differ between and within industry sectors.

Relevant talking points for your CEO
In reference to the second question - what’s the business case for sustainable development? - a minimum of 12 categories of reasons collectively describe the added value that sustainable development can bring to companies, collectively, spanning all industry sectors. Of this list of 12 categories, two or three categories will generally emerge as directly relevant to the creation of value within a specific company. A summary of the 12 sustainable development value drivers follows below. From this list, you can identify which drivers are relevant to your company:

Customer Attraction/Retention
Customers are increasingly concerned regarding harm that a company’s practices might cause from environmental, economic or social perspectives. To retain or gain customers, which will ultimately affect share price, companies are increasingly adopting recognized business practices that demonstrate corporate citizenship.

Access to markets / ease of operational start-ups
A company that carries positive brand as a sustainable development practitioner will often be welcomed into communities, and therefore will realize the revenue and share price benefits associated with expanded operational and market access. Conversely, companies seen as environmental, economic or social pariahs will generally not be welcomed into communities, and they may suffer the associated share price impact resulting from diminished market access or operational delays.

Address media / activist pressures
Non-governmental organizations (NGOs) can affect public perceptions of business. These perceptions may influence customers’ buying practices, product switching and operational start-ups, which in turn may influence share price. To gain or retain the support of these organizations, a company must demonstrate its commitment to sustainable development and it must engage NGOs to identify potential omissions in practices.

Discounted loan rates
Many banks employ environmental managers to assess the environmental risk associated with lending capital for mergers and acquisitions, mortgages, etc. Companies that are positioned as sustainable development practitioners may be perceived as presenting less risk, and, accordingly, banks may charge them lower interest rates on borrowed capital. This will generally have a positive impact on share price.

Also, as banks are increasingly concerned with issues of lender liability, the success of a company in securing a loan, at any cost, is affected by the sustainable development practices of the company.

Reduced insurance premiums
Insurance companies are including sustainable development and environmental risk in their underwriting process. Sustainable development companies that are not self-insured will generally receive a risk-reduced rate on premiums, which can translate into savings that can have a positive impact on share price.

Operational efficiency
Eco-efficiency (a contraction of ecological and economic efficiency) means doing more with less. For example, an eco-efficient company will reduce energy inputs, material requirements and waste production per unit of production. In turn, the company will retain more cash for alternative applications that can have a positive impact on share price.

Due diligence regarding partnerships/acquisitions
Due diligence requires that the sustainable development performance of partners or acquired companies be assessed, since engaging in a relationship with a company that has a negative reputation can result in potential liabilities. A company that carries the "sustainable development brand" is more likely to be engaged as a partner and derive associated benefits. Similarly, if a company is to be acquired, a sustainable development brand can command a premium in share price.

Legal due diligence / assurance
Despite best efforts, for any company accidents can and will occur - e.g., spills, air borne exceedances, etc. In such cases, from the perspective of legal liability, companies with a track record of exemplary environmental, economic and social performance will generally be viewed more favourably by authorities than companies bearing a poor reputation. Similarly, from the perspective of assurance, companies with "high standing within a community" will generally encounter a more understanding, and perhaps forgiving, public response versus companies that function at or below minimum performance standards.

Employee satisfaction / retention / productivity
Companies that are practitioners of sustainable development report that most employees welcome challenges associated with environmental, economic and social stewardship. Accordingly, employee job satisfaction scores generally increase within one to three years following the initiation of sustainable development programs, employee productivity increases, and the service time of employees increases, thus lowering start-up training costs. All of these factors can have a positive influence on share price appreciation.

Industry self-regulation
When industry and government share expertise regarding the application of sustainable development best practices, practical and cost-effective self-regulatory programs and/or legislation will often result. History shows that sustainable development programs resulting from collaboration between industry and government are generally preferable, from a share price perspective, to programs developed through isolated efforts.

Facilitate divestitures
Companies with a positive sustainable development record will generally realize a higher valuation for shareholders upon sale. Increasingly so, due diligence requires the assessment of sustainable development, prior to divestiture, as a factor for inclusion in valuation.

Sustainable development investment funds
A large (and growing) number of mutual and pension funds apply sustainable development assessment criteria to portfolio construction. Corporate sustainable development programs can facilitate a company’s inclusion in funds, thus resulting in a positive impact on share price.

In sum, the expectation of a growing contingent of diverse stakeholders is that companies will embrace environmental stewardship and bring social and economic value to the communities in which they operate - i.e. they will practise sustainable development. Companies that recognize this reality will be competitively advantaged and rewarded in the market place. Conversely, companies that do not embrace sustainable development will ultimately destroy shareholder value and select for their own demise. The choice of where to position your company should be simple.

Dr. Blair Feltmate is Director of Sustainable Development, Ontario Power Generation. The opinions expressed in this article are his own.

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