BUSINESS:

Corporate 'sustainability' push flowers in sluggish economy

NEW YORK -- The recession taught many companies that "sustainability" can mean profits.

Slashing energy use and streamlining production in hard times, businesses learned that being green made a positive difference in their bottom lines and made a positive impression on Wall Street analysts and investors.

So companies are now zeroing in on a range of green targets -- from curbing water consumption to analyzing the greenhouse gas emissions of suppliers -- to show the Street that solid managers are in control.

Consider the case of Goldman Sachs Group. Three and a half years ago, the firm launched GS SUSTAIN, a research-advice service that looks to environmentalism as much as it does management talent and market share. At the time, the firm said it wanted to prove investors could achieve solid, long-term returns from equity holdings through a focus on a company's performance on environmental, social and corporate governance (ESG).

Although GS SUSTAIN began just before the 2008 financial crash, the effort has survived and thrived, tripling its staff through the period and generally outperforming the overall market by a significant gap. Goldman Sachs says the GS SUSTAIN Focus List, an index of the top tier of the 1,000 companies tracked, has outperformed the more generalized MSCI All Country World Index by 39.9 percent since the unit's creation in June 2007.

Key to that performance, they say: methodology developed to measure corporate social responsibility, determining how closely and carefully a company's managers heed the environmental and social impacts of doing business.

"On average, the performance of the companies we've highlighted has been extremely strong," said Andrew Howard, Goldman's head of GS SUSTAIN research. "The philosophy and the logic behind what GS SUSTAIN is trying to achieve has been effective over the last three and a half years."

Companies large and small seem to taking notice, and consultancies are reaping the benefit as firms scramble to understand how they stack up to their competitors.

In the latest example, Unilever this week announced a campaign to "decouple future growth from environmental impact." Central to the announcement is a goal to cut by half the amount of water, solid waste and carbon emissions from product production, supply chain and end-use consumers. Unilever CEO Paul Polman said he sees no conflict between sustainability and shareholder returns.

"We are already finding that tackling sustainability challenges provides new opportunities for sustainable growth," Polman said at an event announcing the initiative. "It creates preference for our brands, builds business with our retail customers, drives our innovation, grows our markets and, in many cases, generates cost savings."

Not to be outdone, Avon, the cosmetics giant more famous for tackling women's issues, said it has launched a new global green campaign starting this year with a focus on product manufacturing. "We set very, very tight and stringent goals," Avon CEO Andrea Jung told a sustainability-focused event for executives in Manhattan. "We're committed to progress in water, energy, recycling and waste."

Green consultants doing 'quite well'

Companies that consult on corporate sustainability, many with their own specialized ESG offices, have also done well throughout the downturn.

Firms scrambling to hire them not only to manage their corporate social-responsibility reports but also to integrate green practices into their entire operations are signs, many executives say, that corporations are taking to heart the concept that firms that are more environmentally and socially aware are also more profitable.

The "Big Four" accounting and auditing firms as well as a range of smaller competitors are reporting that their divisions specializing in greenhouse gas accounting, managing water consumption and auditing energy use have all grown during the recession years, with demand for these services only getting stronger.

"It's been doing quite well, even in spite of the recession," said Chris Park, national leader of sustainability and climate change services at Deloitte. "While we slowed down a little bit during the recession in sustainability, we took the opportunity to really refresh our growth strategy and kind of double down on sustainability, alternative energy and related topics as the growth areas."

Today, sustainability advising is one of Deloitte's top five growing business segments. Officials with Ernst & Young, PricewaterhouseCoopers and KPMG all report similar results.

Though the firms had built up those service areas in anticipation of cap-and-trade legislation for curbing U.S. greenhouse gas emissions, the business of carbon management and green consulting has branched out into services ranging from assurance to tax compliance and corporate performance audits.

"The business is very robust," said Steve Starbuck, Americas head of climate change and sustainability services at Ernst & Young. "Even without federal regulation, and even without state regulations, our clients are being driven by a number of different business drivers; the most obvious one is that companies are trying to make money off of this."

The strength of that approach hasn't gone unnoticed. Through the ups and downs of the stock markets, Wall Street analysts' appetite for verifiable environmental and social indicators placed alongside financial data is getting stronger, raising the odds that financial regulators may require companies to report on their green performance every time they file quarterly earnings statements.

"What you're seeing also is regulators like the [Securities and Exchange Commission] taking some steps to require financial reports to cover material sustainability issues," said Aron Cramer, CEO of BSR, a consulting firm that specializes in social responsibility and environmental, social and corporate governance.

"I think there's a trend. I think where it lands is to me still uncertain, but I think you'll see more sustainability information in the financial, mainstream financial reporting."

Sustainability splits from climate debate

However, it's unlikely there will soon be a merging of sustainability and financial reports in the United States, although a handful of European firms are said to already be doing this, Cramer said.

"On balance, it's a good thing, but it's not unequivocally a good thing, and figuring out how to maintain both the quantity and quality and essence of the information that companies report will have to be rethought if you have integrated reporting," he said.

The sustainability movement is also becoming more divorced from the larger climate change debate.

From a focus on carbon ahead of last December's U.N. summit on greenhouse gas emissions in Copenhagen, Denmark, the market has grown "and really has shifted to companies looking at the complete sustainability footprint," said Dailey Tipton, sales and marketing leader for FirstCarbon Solutions, an eco-consultancy.

FirstCarbon's own experience is telling.

A spinoff from ADEC Solutions, the company grew out of units that dealt mainly with credit-card application, human resources and expense management to moving into carbon footprint calculations and assessments of supply chain waste streams in 2007.

Though its very name implies a climate change-centric approach, Tipton says demand for his company's services has only increased since Copenhagen, and that customer requests reflect a higher level of sophistication as companies start to take sustainability more seriously.

"At this time last year, everyone was concerned about carbon management this, carbon management that, how do I get my footprint, how do I get my energy bills into a program to allow so on and so forth," he said. Lately, however, his clients seem to be driven more by investors and analysts' concerns and a desire to stay afoot of the trend toward sustainability in business.

Market data and information giants that serve investors are also joining the fray as they scramble to acquire in-house expertise on renewable energy, waste management and climate matters.

Most of these information firms are buying the expertise they very recently lacked.

Hence Bloomberg's purchase of New Energy Finance last December and Thompson Reuters' acquisition of the ESG-focused investment research firm ASSET4 late last year and carbon market monitor Point Carbon in May.

Booming participation in sustainability index

More and more major corporations are also working hard to get their brands listed on the Dow Jones Sustainability Index (DJSI), which has emerged over the past decade as a sort of seal of quality that identifies well-managed firms.

"We see a steady rise in the participation rate," said François Vetri, a researcher at Sustainable Asset Management in Zurich, the company that assists Dow Jones with creating the index.

"Even during the recession, because sustainability has reached top management or even board level, each company wants to be perceived as being sustainable, and since the DJSI is one of the most renowned indexes, yes, they do want to get in it," Vetri said. "That's exactly what we want."

Competition for spots on the DJSI is exploding.

From just 200 firms agreeing to fill out the lengthy questionnaire at the start of measuring in 1999, Vetri said, today, more than 700 firms actively do so, a number that is steadily rising.

Though the corporate world has experienced bouts of green euphoria in the past, many experts say it's here to stay this time.

"Our sincere belief is that if it were a fad, it would have dwindled out in '03, '04 or maybe '05," Deloitte's Park said. "It stuck around longer than that, it has weathered this recession as a top issue, and now, if anything, the global recovery will only reignite the debate about human impact on climate, energy, energy security, social impact and all those other sorts of things."

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