Sustainability’s Triple Bottom Line
November 24 2009 by Bruce A. Keyes And Ben Sykes
In recent years, businesses have begun to realize that the benefits of implementing sustainable practices in any business go far beyond creating good publicity. Green initiatives, when properly implemented, can contribute to growth, protect against climate-change risk and promote environmental and social stewardship.
This “triple bottom line” concept is used to quantitatively relate the social and environmental impact of an organization’s activities to its economic performance in order to show improvement in all three areas. Measuring the triple bottom line or, at a minimum , establishing a baseline of current performance allows for better decision making regarding the relative cost and benefit of sustainability measures. The definition of return on investment can be extended to include nonfinancial metrics such as improvement in public opinion of the company, avoided costs for regulatory and climate risk and more immediate financial savings.
Furthermore, projects with longer payback periods may make sense when taking into account measures of the triple bottom line.
With such accounting tools, the means of financing green initiatives becomes easier to justify. Moreover, the push from increased government regulations, along with the pull of substantial government funding, will assist in bringing sustainability to the bottom line.
Internalizing the cost of carbon and demonstrating its impact on the bottom line has become a business imperative in 2009.
The Costs and Benefits of Carbon
Internalizing the cost of carbon and demonstrating its impact on the bottom line has become a business imperative in 2009.The cap-and-trade system currently proposed by congressional Democrats would require companies to pay for 100 percent of their current carbon emissions. Although it is yet to be seen what the final statutes and regulations will require, it is likely that, regardless of which cap and- trade system is eventually implemented, there will be a period of uncertainty during which prices for carbon credits will fluctuate and enforcement issues will be resolved. However, based on current cap-and trade markets for other air contaminants, the market for carbon credits and offsets should eventually stabilize. Therefore, companies of all sizes would benefit now by knowing their carbon emissions. Audits of carbon emissions, followed by a comprehensive review of how such emissions could be reduced, are an economic necessity in the face of both the upcoming regulations and increasingly frequent shareholder resolutions requiring such action. Measures to implement carbon reductions also can save on costs and have reasonable, or even short, payback periods.
Businesses that are first to recognize such challenges and identify carbon saving measures will be well positioned to reap a potential windfall by selling their excess carbon credits when the demand for credits increases, while at the same time decreasing the market risk of price fluctuations by lowering their own need for such credits. Many companies have already begun addressing carbon and other environmental credits in the contracting and supply chain process. The value of such proactive measures is hard to quantify, but the cost is modest.
The Costs and Benefits of Water Efficiency
Most of the civilized world pays only a fraction of the cost for transporting, purifying and ultimately disposing of fresh, potable water. This low cost, coupled with population increases and the rise of industry in previously undeveloped areas of the globe, has led to a growing demand for a resource that often takes decades to replenish. Such demand has garnered the attention of water-dependent companies that are attempting to assure their continued rights to water in a world where water quality and quantity are no longer guaranteed commodities.
The global leaders of business understand that water, energy, climate change and business security and stability are inextricably linked. As a result, companies such as Miller Coors and Coca-Cola have developed integrated water strategies to reduce the amount of water used and disposed of in both production and agricultural processes. Such programs have become economic necessities as public awareness of water scarcity has increased, often leading to protests against large corporate users of the resource. Even companies that would not traditionally be thought of as water intensive , including GE and IBM, have taken steps to lower their water consumption and wastewater discharges in the face of mounting public pressure. Due to the current low costs of water worldwide, the value of such water efficiency initiatives will be most apparent through energy savings, given the close relationship between energy usage and the delivery and management of water. However, water-efficient companies will also face much lower risks associated with the future scarcity or cost increases expected in the next 10 to 30 years.
The Costs and Benefits of Energy Efficiency
Perhaps the best known of the sustainability initiatives, energy efficiency has come a long way from simply adding insulation to buildings and replacing defunct heating ducts. Performance contracting, wherein the cost of an energy- efficiency improvement is paid for in energy savings over the life of the improvement, has made large gains in the past five years as businesses realize that such investments can help alleviate pressure from volatile energy markets and increasing regulation of carbon dioxide (CO2) emissions. Modern energy-efficiency projects now often go beyond traditional means of energy savings and include utilizing renewable energy to reduce a building’s fossil fuel use.
The greatest opportunities forCO2 reduction can be realized by increasing a building’s efficiency and reducing water usage and by implementing fuel-efficient commercial transportation. These opportunities will not only considerably reduce CO2 emissions but also offer positive payback opportunities; as such energy-efficiency projects provide those businesses with a green public relations platform.
Governments of all sizes also are realizing that efficient buildings are perhaps the most effective way to cut both energy consumption and CO2 emissions, and many municipalities and counties are passing stringent green-building requirements for all new construction within their boundaries. These requirements often require new or renovated construction projects to meet the minimum standards of the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) or an equivalent rating system. Companies that already have their own requirement to meet such standards— and therefore have already internalized such costs—will be poised to take advantage of situations and locations that their competitors may not be able to afford.
Retrofitting older properties to current technologies for energy and water saving has proven to be more challenging. However, companies that sell retrofit technologies will see a real boon from new and innovative approaches to aggregating and financing improvements to districts of older properties.
The Costs and Benefits of Life Cycle Cost Accounting
Product design—from the molecules that make up a product to the packaging used to sell it—has a profound impact on both a company’s ability to be sustainable and its bottom line. Consumers and governments are beginning to require that companies conduct assessments of the raw material production, manufacture, distribution, use and disposal of their products in order to fully account for the “life cycle” cost of each product and its packaging. The regulation of electronic waste, for instance, is moving toward a life-cycle cost perspective, where companies retain responsibility for their goods after they sell them, thus ensuring that the products are as harmless as possible to both people and the environment.
A life-cycle cost assessment can allow a company to move toward zero-waste operations with an emphasis on the reuse and recycling of postproduction waste while indicating where costs may be saved on more minimal packaging alternatives. For instance, Miller Coors made a small change to its beverage can that resulted in millions of dollars in annual savings on packaging costs. A life-cycle cost assessment can also help companies manage the risk associated with the potentially toxic contents of their products and packaging, which has become a heightened issue since the widely publicized lead- contaminated toy scares in 2008. In all, the primary benefits of life-cycle cost accounting and assessment to the bottom line are the reduction of risk associated with an increasingly ambitious regulatory agenda, the promotion of the highly efficient use of materials and the related cost savings from a decrease in raw products, energy and resource costs.
Funding Sustainability Initiatives
In the current economic climate, the ability to find some type of government assistance—either in the form of subsidized loans or grants— is crucial to the success of most sustainability initiatives. Fortunately, the U.S. Congress and the Obama administration have made the funding of sustainability initiatives a priority, with significant funding made available in the following pieces of legislation:
- Energy Improvement and Extension Act of 2008 (TARP) (October 3, 2008)
- American Recovery and Reinvestment Act (ARRA) (February 17, 2009)
- 2009 Omnibus Spending Bill (March 11, 2009)
- 2010 Omnibus Spending Bill (introduced April 2009)
Corporate Reporting on Sustainability Initiatives Financial reports are increasingly becoming forums for public companies to publicize their environmental and sustainability initiatives, as well as disclose environmental risks associated with their current activities. Because the goal of financial reports is often to communicate to investors a company’s financial position, performance, liabilities and risk, this should come as no surprise.
Currently, more than 30 percent of the companies that make up the Standard & Poor’s 500 index include some form of nonfinancial environmental information either in their yearly reports or as a separate document. Many of these companies follow the guidelines of the Global Reporting Initiative, which provides standardized forms so that investors have the ability to compare and contrast environmental and sustainability performance.
In addition, a substantial number of companies are facing pressure both from the outside—in the form of rating agencies—and internally— from shareholder resolutions—to disclose their environmental risks and liabilities. It is likely that in the future companies will need to disclose their total carbon emissions, even before the implementation of a cap-and-trade system, due to the future risk associated with a volatile carbon-credit market. Companies that are leading the way understand the market advantage to proactively reporting such environmental risks as well as sustainability initiatives on a voluntary basis, and continue to develop and refine such communication mechanisms.
Bruce A. Keyes is a partner and Ben Sykes is an associate in law firm Foley & Lardner’s Environmental Regulation practice.