Doing Well by Doing Good
by Helen Sanders, Editor
While the environmental message can still be heard, it has been drowned by the cacophony of economic laments. Statements of corporate social responsibility (CSR) still appear in the annual reports expressing great deeds of environmental and social progress, but for the time being at least, the primary focus is on the P&L page. But is this the right priority, and can CSR (particularly focusing on environmental issues in this article) contribute to the P&L rather than standing as a separate chapter in the annual report? Furthermore, what role can treasurers play?
Daniel Marovitz, Head of Product Management, Global Transaction Banking, Deutsche Bank illustrates,
“Companies tend to view environmental sustainability as a non-issue, a necessary nuisance or as an opportunity. Deutsche Bank is in the latter category. We see that there are financial advantages which will be realised through the transition from an economy which is not concerned by the environment to one which is focused on protecting it.”
Many treasurers’ initial response will be that they have little control over the company’s environmental policies; this ignores the fact that the right environmental strategy has the potential to reduce costs and generate income, while the wrong one brings significant risk to the business.
Looking first at risk, environmental issues have the potential to create both catastrophic but also more subtle risks to a company. In the former category, we tend to think of major events which have had a significant environmental impact, such as the Exxon-Valdez oil spill in 1989 and the toxic gas leak at Union Carbide’s plant in Bhopal in 1984, typically cited as the world’s worst industrial accident. The environmental, social and human effects are barely calculable in either case, but what about the financial result for the companies involved? In the case of Exxon Valdez, 18 years of litigation, the threat of more than $5bn in actual and punitive damages (although ultimately this was reduced) and $3bn in clean-up costs and civil and criminal charges. In the case of Union Carbide, the virtual collapse of the business and subsequent acquisition by Dow. Other severe outcomes relating to environmental issues include Sony’s “cadmium crisis”, when before Christmas 2001, Sony’s entire shipment of Playstations to Europe was blocked as a result of high levels of cadmium. The cost? Over $130m, including an 18 month process to identify and resolve the issue.
In recent years treasurers' involvement has evolved from financial to enterprise-wide ride management...
A relatively small proportion of companies are in such environmentally-sensitive industries as the chemical and energy companies. With this in mind, Sony’s case illustrates three important issues:
Firstly, Sony was not a company which would be considered to have a high environmental impact (unlike the energy or chemicals sectors, for example) but the cost was considerable. This is particularly significant bearing in mind that Sony has a strong environmental track record and reputation.
Secondly, the problem did not lie with Sony itself but further down the supply chain. The outcome, however, sat firmly at Sony’s door, with substantial damage to reputation as well as to income. With continuously extending supply chains, companies of all types need to scrutinise every stage of their supply chain as ultimately, they will be held accountable.
Thirdly, the opportunity cost, by delaying the launch of the Playstation, had far-reaching consequences in terms of ceding competitive advantage and causing reputational damage. Reputational risk is an important element in the green agenda, as customers, shareholders, employees, debtholders and wider public opinion increasingly have a preference for sustainable business practices and a commitment to both environmental and social responsibility. For large multinational corporations in particular, this is a double-edged sword as both actions and perception of actions are crucial to a successful green agenda. For example, as Esty and Winston explain,
“Globalisation creates opportunities for many, but fundamentally rewards scale... [however, in parallel].. operating in ways that respond to localised needs and preferences is becoming essential. The scale of environmental issues, ranging from entirely local to inescapably global, only adds to the complexity of this already daunting management challenge.”