Tensie Whelan is the the founder and director of NYU Stern’s Center for Sustainable Business (CFSB). Prior to CFSB she served for 15 years as President of the Rainforest Alliance. She spoke to Christina Wong about her recent work delivering on the CFSB’s mission of envisioning a better world through better business.
Why focus on building the financial case for sustainable business?
In my years in sustainability I’ve been surprised by how few businesses track the ROI on sustainability investments even though there is a host of financial benefits. This blindspot negatively affects corporate decision making and the ability to scale up sustainability investments. It also negatively affects investors who may see correlations between good ESG and financial performance but no causality because the company isn’t tracking investment in ESG.
In my years in sustainability I’ve been surprised by how few businesses track the ROI on sustainability investments even though there is a host of financial benefits.
What can you tell us about your recent work?
We’ve developed a methodology that will articulate, quantify and communicate the financial impact of sustainability, the Center for Sustainable Business Monetization Methodology. We have found that if you imbed sustainability into business practices, it drives benefits like risk mitigation, employee engagement, and operational efficiency which results in outcomes like a lower cost of capital and better financial performance. You find many of these outcomes when a company is managed well anyway, but companies don’t look to how ESG drives that and are not capturing the financial impact.
We have been working with several companies to identify the financial impact of ESG investments. We first use SASB and GRI to identify sustainability practices that are material to financial performance. We then look at the potential financial and societal benefits of those practices and quantify the benefits. Lastly, we use a monetization process to calculate the dollar values for the intangible and tangible benefits.
We’ve developed a methodology that will articulate, quantify and communicate the financial impact of sustainability.
Can you give an example of what you are finding through the Center for Sustainable Business Monetization Methodology?
We’ve been working with several automotive companies, GM, VW and Aston Martin, to look at the monetization impacts. They all have waste reduction goals in place and one of the focus areas is recycling paint solvents. Recycling paint solvents unlocks several types of financial return: there is no more need for toxic waste disposal, less paint needs to be purchased, and they can then sell recycled paint. So, this ESG investment results in three financial benefits: cost avoidance, cost reduction, and revenue enhancement. And, we can then monetize those benefits.
Another great example comes from a recent project with McDonalds looking at the impact of sustainable beef on deforestation. The bottom line is that when ranchers implement sustainable practices the result is a 2.3x increase in productivity, a 7x increase in profitability and a transition from 0-70% quality beef. Better allows the ranchers to sell the beef at premium because it is now higher quality and to improve their margins because they use fewer costly inputs. Ultimately, the investment in more sustainable practices results in cash in hand for the ranchers.
Sustainability teams often lack credibility with finance teams, making it harder for them to prove value is being created.
What barriers to you see companies facing in understanding and tracking the ROI of sustainability?
There are several. One of the first is that sustainability people speak a different language from finance folks, so there is a breakdown in communication. Consequently, sustainability teams often lack credibility with finance teams, making it harder for them to prove value is being created. Two, neither sustainability nor financial teams have a framework for assessing intangibles in sustainability, so no one tracks sustainability well. Third, because many companies aren’t aware of how much value is created (and we’re starting to see that it is actually quite a lot of value), they don’t see the benefit of making changes to their accounting system, which can be costly and time-consuming.
Which sectors are critical to evaluate?
Companies that have a big environmental and social impact in their supply chains or own manufacturing are critical for this type of work. We’re beginning to do work with the apparel sector, the food and beverage sector and pharmaceuticals. But really, all sectors of the economy will find value in monetizing their sustainability investments as it helps with areas of concern to all companies such as talent enhancement, risk reduction, brand reputation.
What role can investors play in this work?
That’s pretty easy, investors just need to ask companies to measure the ROI of sustainability initiatives and they are beginning to do so. It’s not just about reporting on GHG emission reductions, which most financial analysts could not care less about, but more telling the story of ESG through a financial lens. For example, it is more powerful when companies frame ESG performance through financial impacts such as “an innovative new patented ESG process that results in xx amount of revenue and talent retention.” We’re starting to see more of this kind of communication. Goldman Sachs Sustain just came out with research showing that nearly half of S&P 500 companies addressed ESG topics in 4Q conference calls in 2018 and there has been a 75% increase in the number of companies discussing key environmental and social topics on their earnings calls since 2010.
What about sustainability or ESG initiatives that may not have a financial impact but are still really important?
I think some sustainability people are worried that if you focus too much on the financial impact you’ll forget about the social/environmental impact. But we’re seeing so much value created overall, that even if a few ESG initiatives don’t have positive ROI, the rest can help make up for them. Of the 19 benefits we’ve identified in our Monetization Methodology for the automotive sector, for example, we have seen significant ROI in about 17. I think that’s a problem in sustainability as well, people don’t look at the whole picture. Our analysis has shown that overall, many initiatives create positive cash flows which then creates the financial ability to invest in other areas that don’t have sufficient ROI, which you can only see when you look from a portfolio perspective.
Our analysis has shown that overall, many initiatives create positive cash flows which then creates the financial ability to invest in other areas that don’t have sufficient ROI.
How can companies get engaged with the Monetization Methodology and learn more?
We have a number of great resources at CSB including our regular newsletter and our upcoming annual practice forum where we bring both corporate practitioners and investors together to workshop the methodology. We also have an free online course for “Building your sustainability business case” to help corporate sustainability professionals understand and measure the ROI for sustainability. There are six modules in the course each taking only a few hours to complete. We’re also still in development of the methodology and want to test it with different companies and sectors. We are happy to hear from companies who want to work with us. Those interested in collaborating can contact me directly.
What are some immediate actions companies can take to start to build the financial case for sustainability within their firms?
I would first encourage companies as they do their annual sustainability reporting to assess the benefits created from their ESG initiatives using CFSB mediating factors from the Monetization Methodology. Second, I would suggest they identify the 3-5 that seem significant and use our training and materials to see if they can’t themselves test out what a good intangible/tangible analysis of what those 3-5 benefits would be. Finally, they can then go to their finance teams to share these findings and ultimately start applying this analysis across the entire sustainability strategy. If they haven’t already, I would also recommend that corporate sustainability professionals reach out and start to engage their CFOs on the ROI of sustainability.