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Business Sustainability Measuring Where It Counts

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BUSINESS SUSTAINABILITY – MEASURING WHERE IT COUNTS

Decisions in many companies often are dictated by employees trying to justify the numbers and counting the expected net returns on a project. This is what I will term the bean counter approach – meaning that if you can’t count it, you can’t have it.

The time has come where companies can start to get their number crunchers excited about upholding high social and environmental standards in the emerging markets where they are looking at investing their limited resources. For companies trying to balance their various project spreadsheets, going out of your way to do the right things sometimes can never be enough.

As organizations continue to adopt the bean counter approach, there always seems to be a disconnect, between sustainability and financial managers who are always trying to balance their revenues and expenditure in order to maximize the value of the organization.

“Say as a sustainability manager you want to justify why the company should dedicate financial resources to your programs. How do you prove the return on that investment? If you are a CFO how do you know the money you are giving to social programs is paying off and what the best allocation of financial resources is?

To remove that disconnect and financial mystery shrouding sustainability programs, companies need to develop their models that will enable them to quantify the return on investment on sustainability initiatives.

This can be done using two approaches – direct value creation and indirect value protection by minimizing risks. Examples include – money saved by substituting expatriates with local workers and the money such companies would not loose as a result of protest that have been avoided.

These approaches help companies to uphold its environmental and social standards in emerging and developing markets where they carry out their activities. The approaches have set out eight performance standards to be used by companies for their investments.

As it has been reiterated regularly, “the private sector is seen as the engine for growth in the economies of emerging market countries. There is a fine line between having inadequate or excessive government regulation which can hamper competitiveness for the private sector. It is generally important to encourage fewer burdens on the private sector in terms of regulation; however, there is a role for government to correct certain distortions in the market or create certain incentives for local economic development”.

So having said all these, the question still remains as to why companies should uphold high sustainability standards? The answer is simply that it makes good business sense. It is a risk mitigation activity. This is because if you have backlash, protests, conflicts, and/ or NGO resistance because you are not managing the risk appropriately that will impact on the company’s business and bottom line. The truth is that there is an underlying principal of why companies should be doing the right thing but more than that there is a very strong business case.

One of the major risk mitigating strategies that companies should employ is having their own local content policy. They should also devote time to nurture and develop their supply chain in such emerging market countries where they are carrying out their activities. When you consider the facts based on the numbers only, it most times does not make sense to invest in your local supply chain; this is because you don’t have the relevant skills base within the supply chain for many of the things you want in carrying out your business activities. However the truth is that the time spent developing these local supply chains, will pay off in the long term and make your business more sustainable.

Over time companies realize local business is good business. You build better relations when you do business locally as opposed to functioning as an enclave where you operate in isolation from the local community. If you have all FIFO and all your suppliers come from abroad in time that breeds resentment and resistance from government and local communities. Local content is part of a strategy to, on the one hand to build better relationships and mitigate risk, but also there is always a business case for it.

In as much as we all know that it is impossible to achieve 100% local content, there should be an underlying principal for a local procurement policy. The reason for this is because in these new emerging market countries, it is one of the few opportunities for skills transfer. For example, when a company sources from a local supplier, the usually specify the technical specs and quality and this provides the opportunities to learn from the companies how to do business and brings about a trickledown effect on the local economy.

In conclusion, this writer is of the opinion that the impact of sustainability programs in determining the business justification plays a significant role in the long-term wealth creation and profit maximization opportunities. This is due to the fact that such companies enjoy what is referred to as a social license of operations and do not suffer major setbacks in their operations as a result of lack of necessary human resource skills, lack of technical skills of suppliers and any form of backlash by the community in which they carry out their activities.

A tool that come highly recommended for carrying such analysis is the IFC Financial Valuation Tool for Sustainable Investment and can be accessed through www.fvtool.com.

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