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C O R P O R A T E REVEALING THE VALUE OF

S T R A T E G Y SUSTAINABLE DEVELOPMENT
T O D A Y Joseph Fiksel, Ph.D., Principal, Eco-Nomics LLC
Profitability is necessary but not sufficient to generate sustainable shareholder
value.The real purpose of profitability is continuity – enabling a company to
survive, adapt, innovate, and grow. Today, financial analysts and investors are
beginning to evaluate companies not just based on projected financial
performance, but also based on intangible value drivers such as intellectual
capital, customer relationships, and reputation.Yet the related concept of
sustainable development (SD) is still unfamiliar to the mainstream financial
community.

“The Discipline of Sustainable Value” in this issue of Corporate Strategy

Today, describes a “win-win” framework whereby companies can create
sustainable value for both their stakeholders and shareholders. Below, we
show further that the environmental, social, and economic interests of
stakeholders are closely linked to the intangible drivers of shareholder value,
and describe new tools for identifying these linkages.We will use the
experiences of well-known companies who are early adopters of SD to
illustrate how insights into value creation result in new sources of
Profitability is necessary competitive advantage.
but not sufficient to
generate sustainable Certain companies are able to create sustainable value over the long run
shareholder value.The because of intangible strengths such as vision, creativity, and dedication,
real purpose of which do not appear on financial statements. In the words of Collins and
profitability is Porras1, they are “built to last.” Future financial performance is a consequence
continuity – enabling a of excellence in leveraging these underlying strengths – thus, many
company to survive, investment analysts view these intangibles as leading indicators of market
adapt, innovate, and value. It is important to note, as shown in Figure 1, that the quality of
intangibles is driven primarily by excellence in staff functions – in a sense,
grow.
intangibles are the “products” of staff performance.

Figure 1: Intangibles are leading indicators of future market value,

and are driven primarily by staff performance, while financial
performance is driven primarily by line operations

What are these intangibles? They are no mystery, although different analysts
AHC Group may describe them using different groupings and terminology.The “Balanced
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C O R P O R A T E measurement of three major non-financial perspectives that drive financial

performance:
S T R A T E G Y

T O D A Y • The Learning and Growth perspective stresses internal training and cultural
norms that continually refresh the enterprise’s knowledge assets

• The Business Process perspective stresses operational excellence in carrying

out the key processes that make the enterprise run

• The Customer perspective stresses understanding and satisfaction of

changing customer needs and expectations

The Balanced Scorecard framework is extremely robust and flexible, but

leaves it up to the practitioner to select the indicators that need to be
measured within each of these broad perspectives. It does not explicitly
identify key intangibles such as innovation or stakeholder engagement that
may be extremely important in certain industries.

Another approach toward understanding non-financial value drivers is to

Leading companies such view them as enterprise assets.The “intellectual capital” model developed by
as DuPont and General Stewart3 and others includes the following categories of intangible assets:
Electric have • Human Capital – skills and knowledge of management and employees
systematically worked to • Structural Capital – patents and proprietary data, methodologies or
substitute intellectual processes
capital for physical • Relationship Capital – bonds with customers and suppliers, and brand
capital as a means of identity
increasing shareholder
Leading companies such as DuPont and General Electric have systematically
value. Intellectual
worked to substitute intellectual capital for physical capital as a means of
capital is less expensive increasing shareholder value. Intellectual capital is less expensive to maintain
to maintain and easier and easier to leverage, especially in an age of instant electronic
to leverage, especially in communication. Many industry analysts believe that knowledge assets rather
an age of instant than physical assets will become the basis of future competition.
electronic
communication. UNDERSTANDING AND MANAGING INTANGIBLE ASSETS

Recent research by Cap Gemini Ernst & Young4 (CGEY) provides a more
fine-grain enumeration of the intangible assets considered most important by
senior executives and investment analysts. Using intangible performance
indicators, they have been able to demonstrate statistical correlations between
strength of intangibles and market value.They have also found that about
35% of portfolio investment decisions are driven by intangibles. CGEY ranks
the following value drivers as most important:
1. Innovation: Ability to innovate; effectiveness of new product
development; knowledge creation and use.
2. Quality: Reliability, flexibility; logistics & quality systems.
3. Customer: Customer relationships, intimacy and loyalty.
4. Leadership: Management capabilities, experience and future vision;
transparency, trust, accountability.
5. Alliances: Supply chain; strategic networks; partnerships.
6. Technology: Process know-how; information technology.
7. Brand Equity: Strength of market position and brand image.
8. Employee:Talent acquisition, retention, compensation.
9. Environment: Compliance, risk management, reputation.
Answering Public
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C O R P O R A T E frameworks into these drivers. For example, Learning and Growth

corresponds to a combination of Innovation, Human Capital, and Leadership.
S T R A T E G Y Likewise, Relationship Capital corresponds to a combination of Customer,
T O D A Y Alliances, and Brand Equity. However, there is no obvious Balanced
Scorecard mapping for certain key drivers such as Technology, Brand Equity,
or Environment. Moreover, neither the CGEY framework nor the
Intellectual Capital framework explicitly identify two important types of
intangible assets that are external to the enterprise but can provide value
nonetheless:
• Natural Capital5 refers to the natural resources and ecosystem services that
make possible all economic activity, indeed all life.
• Social Capital6 refers to the institutions, relationships, and norms that
shape social interactions and societal cohesion.

Every conceptual approach has its own merits, and the particular approach
adopted by a company is not so important – what matters is comprehensive-
ness and effective execution.The advantage of embracing one approach is
that it can be communicated effectively and can generate passion and
enthusiasm within the workforce. However, there is an important caveat:
Passionate adherence to a particular perspective may neglect key enterprise
assets that fall outside that perspective.

Thus, a focus on Quality and implementation of Six Sigma programs may

Thus, a focus on improve critical business processes but may neglect Human Capital. Similarly,
Quality and an emphasis on Customer may enhance customer loyalty but may neglect
implementation of Six Technology. Zealous advocates of a particular perspective often view it as
Sigma programs may overarching, and tend to subsume other ideas as derivative concepts.This can
be problematic if it leads to inappropriate applications of the tools – when
improve critical business
you possess a hammer, everything looks like a nail. Many companies have
processes but may tried to apply methods such as quality improvement or re-engineering to all
neglect Human Capital. their business processes, with decidedly mixed results.

DEVELOPING A BUSINESS CASE FOR SUSTAINABLE DEVELOPMENT

Sustainable Development (SD) is an emerging strategic issue in both U.S. and

global markets.The United Nations defined the principle of SD as follows:
Development today must not undermine the development and environment
needs of present and future generations7. In other words, as we strive for
prosperity today, we must not compromise quality of life for our descendants.
A more useful definition for business purposes is as follows: A sustainable
enterprise is a company that delivers enduring growth and superior long-
term financial returns by addressing the economic, social and environmental
needs of all stakeholders, including employees, customers, shareholders
communities, regulators, and other interested parties.These three major
dimensions of SD – economic, social, and environmental – are often called
the “triple bottom line.”

Many CEOs have asserted a belief that SD will improve both enterprise
resource productivity and stakeholder confidence. According to KPMG, 36%
of the top 100 U.S. companies now publish annual Sustainability Reports8. At
the same time, a recent PriceWaterhouseCoopers survey of 140 U.S.
companies, 101 of which are in the Fortune 1000, showed that 75% claim to
have adopted sustainable business practices9. The most common reasons cited
were enhanced reputation, competitive advantage, and cost savings.There are
AHC Group several factors that underlie this growing business interest in SD:
www.AHCGroup.com • SD not only provides direct financial benefits through greater efficiency,
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C O R P O R A T E but also enhances several intangible factors that are known to influence
shareholder value including– reputation, brand equity, strategic relationships,
S T R A T E G Y human capital, and innovation.
T O D A Y • Top executives in the post-Enron era are increasingly stressing ethical
obligations and accountability, including social responsibility, transparency,
and constructive engagement with external stakeholders.
• Competitive pressures are mounting as more leading companies in every
industry adopt progressive codes of conduct (e.g., CERES principles),
openly report on their SD progress, and demand that their suppliers adhere
to the same practices.
• Emerging regulatory initiatives embrace principles such as climate
stabilization and extended producer responsibility, which broaden the
boundaries of corporate accountability and raise public expectations
regarding company practices.
• The financial community has begun to recognize that attention to
sustainable development is an indicator of overall superior management, as
Many CEOs have exemplified by the increasing interest in the Dow Jones Sustainability
asserted a belief that SD Group Index.
will improve both
enterprise resource While corporate interest in SD has grown dramatically, few companies have
been able to articulate a specific “business case” for adoption of SD. In reality,
productivity and
a serious corporate commitment to SD is invariably driven by a CEO
stakeholder confidence. mandate, backed up by generic policy statements and intuitive beliefs that SD
According to KPMG, makes business sense. One of the world’s foremost proponents of SD is Chad
36% of the top 100 Holliday, CEO of DuPont, who recently served as chair of the World
U.S. companies now Business Council for Sustainable Development (WBCSD). DuPont no longer
publish annual views sustainability as a separate thrust, but instead has woven SD thinking
Sustainability Reports. into its three corporate strategic priorities:
At the same time, a
recent Price Waterhouse • Knowledge intensity – creating products and services that deliver greater
Coopers survey of 140 value to customers and shareholders with less physical mass (DuPont
U.S. companies, 101 of actually created a metric to quantify knowledge intensity – shareholder
which are in the value per lb.).
• Productivity – improving operating efficiency and capital utilization while
Fortune 1000, showed
reducing the supply chain environmental footprint.
that 75% claim to have • Integrated science - seeking technological innovations that improve quality
adopted sustainable of life, e.g., by enhancing safety, recyclability, or nutrition.
business practices.
Holliday has co-authored a book containing dozens of examples of
companies that have benefited by embracing SD principles10. Yet despite
these success stories, the development of a business case for SD remains
somewhat of a black art. Specific SD-related initiatives typically have been
driven not by shareholder value considerations, but by reaction to external
forces such as regulatory requirements and stakeholder pressures. For
example, the European Union directives for end-of-life product take-back
have prompted the electronics and automotive industries to rethink their
product design and materials selection processes.This pattern is not
surprising, since the main benefits of SD fall into the category of intangibles,
which have rarely been quantified.

LINKING SUSTAINABLE DEVELOPMENT TO SHAREHOLDER VALUE

In order to incorporate SD more directly into business decision-making, it is

important for companies to understand the direct and indirect contributions
Answering Public of SD to shareholder value, including the full spectrum of intangible assets.
Expectations Since 1981 We have identified three major pathways toward value creation.
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C O R P O R A T E
1. Direct, tangible: SD initiatives can contribute directly to tangible financial
S T R A T E G Y value by enabling growth, reducing costs, conserving capital, and
T O D A Y decreasing risks. Examples of initiatives in each of these categories are
given in Figure 2, showing how they influence the financial metric
known as shareholder value added. For example, DuPont plans to expand
into new markets by addressing unmet social needs11. Baxter Healthcare
systematically measures and reports the contribution of its environmental
programs to reductions in capital and operating costs12.

After-tax
Shareholder Capital
Operating
Value Added Charge
Profit

Decrease Manage Decrease

Increase
Operating Assets WACC
Revenues
Costs
GROWTH UTILIZATION RISK
EFFICIENCY
Product Process Incident
Lafarge, the global simplification prevention
innovation Lean & clean
cement producer, has production
partnered with License to Supply chain Crisis
operate Resource streamlining response
environmental groups,
conservation
governments, and local New markets Capital Compliance
& recovery
communities in productivity assurance
advancing ecological
stewardship, thus
helping to improve its Figure 2: Sustainable development initiatives can contribute to
public image and assure enhancing both cash flow and capital utilization, frequently
its continued license to measured in terms of “shareholder value added.”
operate.
2. Direct, intangible: SD initiatives can directly improve intangible assets. For
example, an awareness of product life cycle issues can lead to Innovation
in material selection and end-of-life recovery, as demonstrated by Eastman
Kodak’s pioneering efforts in design of the single-use FunSaver™
camera13. As part of its product stewardship commitment, Ashland
Chemical has formed Alliances with Customers to promote safe,
economical, and productive use of chemical products14. Ford Motor
Company is building a sustainable automotive plant to demonstrate its
Leadership and to improve Employee well-being15. Figure 3 illustrates
that each intangible asset can be enhanced by collaboration among a
number of staff groups, with EHS playing a prominent role.

3. Indirect, intangible: Finally, SD initiatives can indirectly enhance

intangibles by creating value for external stakeholders.This ultimately
benefits shareholders, because strengthening of relationships with
customers and other key stakeholders is an important non-financial value
driver. Each company can choose the stakeholder issues that are best
aligned with its own interests and core competencies. For example,
Procter & Gamble has focused its SD efforts on creating innovative
products that address worldwide needs for water, health and hygiene16.
Lafarge, the global cement producer, has partnered with environmental
AHC Group groups, governments, and local communities in advancing ecological
www.AHCGroup.com stewardship, thus helping to improve its public image and assure its
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C O R P O R A T E groups can include customers, suppliers, local communities, regulators,

lenders, suppliers, business partners, advocacy groups, religious groups and
S T R A T E G Y indigenous peoples.The principal intangible assets that can benefit from
T O D A Y stakeholder engagement include Customer, Alliances, Brand Equity, and
Employee.

Figure 3: Sustainable development initiatives can contribute to

strengthening important intangible assets of the enterprise,
requiring collaboration among several staff functions.

Marketing Innovation

Legal Affairs Quality

Business Strategy Customer
Product Development
Leadership
Production Engineering
Alliances
Environment, Health & Safety
Information Services Technology

Human Resources Brand Equity

Communications
Employee
Using a value matrix, Facilities
illustrated in Figure 4, Environment
the SBDF identifies Finance
linkages between SD
outcomes and the The above three pathways to value creation were incorporated into a new
tool called the Sustainable Business Decision Framework (SBDF), developed
company’s ability to
under the auspices of the World Business Council for Sustainable
reduce costs, increase Development, and validated through several applications with multi-national
profits, and build cement companies18. The SBDF was motivated by a survey of global best
competitive advantage. practices across all industries, which revealed a widespread need for decision
methods to account for SD-related trade-offs and thus support business case
Figure 4: Simplified illustration of the Sustainable Business Decision
Framework. Creating value for external stakeholders provides
intangible strategic benefits to the enterprise, while improving
environmental and social performance provides tangible financial
benefits to the enterprise.

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C O R P O R A T E development. Using a value matrix, illustrated in Figure 4, the SBDF

identifies linkages between SD outcomes and the company’s ability to reduce
S T R A T E G Y costs, increase profits, and build competitive advantage. Thus, it enables
T O D A Y integration of SD into strategic and tactical decisions, including trade-offs
between financial gains and longer-term concerns such as company image
and future barriers to growth. It also helps to assure that voluntary SD
initiatives will deliver maximum benefits in terms of shareholder value.

The SBDF can be used in several ways: (a) by senior management to establish
broad objectives and decision guidelines that consider SD; (b) by decision-
makers to include SD considerations in business case development; and (c) by
external relations staff to support a balanced dialogue with stakeholders,
including financial analysts.

IMPLEMENTING SUSTAINABILITY IN THE NEAR FUTURE

While many businesses and non-governmental organizations continue to

actively promote sustainability concepts, it is instructive to take a more
dispassionate view of SD from an enterprise management perspective. After
approximately a decade of experience with SD implementation, lessons have
emerged and some fallacies have become evident.
SD investment is
• The social and economic dimensions of SD are confusing. SD advocates
growing. SD investors have used the social dimension as a catchall bucket for a host of issues that
are divided into two do not logically fit together. For example, employee health, safety, and well-
distinct investment being (i.e., Human Capital) are quite distinct from other “social” issues
styles.Together, these such as equity, transparency, and community engagement. Likewise, the
groups have grown to economic dimension confounds profitability and shareholder value creation
comprise as much as 10 with external contributions to economic welfare, including the emerging
to 15% of all managed concept of “strategic corporate philanthropy” as a means of improving the
assets. competitive position of the firm19.

• Sustainability reporting may have a limited time window. The

development of sustainability reports has burgeoned, in many cases
replacing EHS reporting.Yet it is still unclear whether a natural audience
exists for these reports beyond the community of SD advocates. Some
leading companies, such as Dofasco, the Canadian steel maker, have begun
to incorporate their SD message directly into their annual report.This
appears to be a logical shift if SD is to become an integral part of the
corporate identity, and not just a clever “spin.”

• SD investment is growing. SD investors are divided into two distinct

investment styles20: (a) Socially responsible investing (e.g., FTSE4Good
Index), in which ethical, environmental and social screening criteria are
used to influence company behavior and thus enhance societal well-being;
and (b) Sustainability investing (e.g., Dow Jones Sustainability Group
Index, Innovest EcoVALUE ‘21), in which similar criteria are used to rate
companies and identify attractive investments that deliver long-term
shareholder value.Together, these groups have grown to comprise as much
as 10 to 15% of all managed assets.

• The majority of investors are indifferent. Despite the above growth, SD

remains a specialized field. Mainstream institutional investors and fund
managers tend to consider environmental and social performance as
AHC Group second-order issues not worthy of attention.While acknowledging the
www.AHCGroup.com importance of intangibles, they prefer to focus upon a familiar set of
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C O R P O R A T E fundamental attributes rather than delving into the arcane vocabulary of

eco-efficiency and social responsibility.
S T R A T E G Y

T O D A Y • SD does not necessarily improve financial performance. Analysis of the

Dow Jones Sustainability Group Index (DJSGI) over 3, 5 and 10-year
periods shows that the DJSGI leaders, on the average, did not outperform
the market.This should not be surprising – SD is not a magic formula for
success. Nor does it invalidate the importance of SD for improving
enterprise assets.The secret to success is not good intentions, but good
strategy execution.

• The greatest value of SD is in building intangible assets. For all of the

effort to quantify a business case for SD, financial performance remains the
domain of line operations.With a few exceptions, the contributions of SD
initiatives to revenue growth, cost reduction, or capital conservation are
generally incremental, and therefore tactical in nature. On the other hand,
the primary strategic value of SD initiatives such as environmental
stewardship or community assistance lies in the enhancement of intangible
assets such as Reputation and Human Capital, which exert a significant
On the other hand, the influence on shareholder perception and market value.
primary strategic value
• There is really only one bottom line.The triple bottom line metaphor was,
of SD initiatives such as no doubt, useful in expanding the consciousness of corporations regarding
environmental the needs and expectations of different stakeholder groups. However, the
stewardship or downside of this metaphor is that it encourages separate reporting of social
community assistance and environmental indicators without a clear understanding of how they
lies in the enhancement contribute to sustainable enterprise value. A more integrated view is
of intangible assets such needed of how social, economic, and environmental improvements
as Reputation and collectively drive financial performance.
Human Capital, which
exert a significant In summary, the SD community must adapt itself to the language and
influence on shareholder world-view of the finance and investment communities, rather than trying to
perception and market “educate” them about the hidden value of SD. Although more CEOs may
become SD champions, it is likely that the majority of line managers, chief
value.
financial officers, and external financial analysts will continue to adhere to
traditional views. Unfortunately, this means that SD may continue to be
associated with regulatory compliance and risk management, and that the
many opportunities for gaining competitive advantage through SD may be
lost.

Companies that grasp the important linkages between SD and shareholder

value will be able to shift their SD initiatives from a stakeholder-driven
approach to a value-driven approach, in which SD is one of many
contributors to overall value. Ultimately, the real test of success for today’s SD
visionaries will be that “sustainability” as a separate concept fades away, and
people across the enterprise learn to weave SD principles naturally into their
strategic and tactical thinking. In the words of Charles Handy21:

“The purpose of a business is not to make a profit, full stop. It is to make a

profit so that the business can do something more or better.That
‘something’ becomes the real justification for the business.”

ABOUT THE AUTHOR:

Dr. Joseph Fiksel, Principal and Co-Founder of Eco-Nomics LLC, is an
Answering Public internationally recognized authority on sustainable business practices. He has
Expectations Since 1981
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C O R P O R A T E over 20 years of management consulting experience, and recently directed a

$2.5 million study of the global cement industry commissioned by the World
S T R A T E G Y Business Council for Sustainable Development. He has been engaged on
T O D A Y several projects by the Global Environmental Management Initiative (GEMI),
a consortium of 40 leading U.S. companies, to develop tools that capture the
business value of environmental excellence and sustainability.

Fiksel Footnotes
1. J. Collins and J. Porras. Built to Last: Successful Habits of Visionary Companies. New York: Harper, 1997.

2. R.S. Kaplan and D.P. Norton.The Balanced Scorecard. Cambridge: Harvard Business School Press, 1996.

3.Thomas A. Stewart. Intellectual Capital:The New Wealth of Organizations. New York: Doubleday, 1997.

4. J. Low, and P.C. Kalafut. Invisible Advantage: How Intangibles Are Driving Business Performance.
Cambridge, Perseus Books, 2002

The purpose of a 5. P. Hawken, A. Lovins, and L.H. Lovins. Natural Capitalism: Creating The Next Industrial
business is not to make Revolution. Rocky Mountain Institute. Snowmass, CO. 2001.
a profit, full stop. It is 6. The World Bank. “What is Social Capital?” PovertyNet.
to make a profit so that http://www.worldbank.org/poverty/scapital/whatsc.htm 1999.
the business can do
7. United Nations Commission on Environment and Development, 1987.
something more or
better.That ‘something’ 8. Tomorrow Magazine, May 30, 2002.
becomes the real 9. PriceWaterhouseCoopers, 2002 Sustainability Survey Report.
justification for the
business. 10. C. Holliday and J.E. Pepper.Walking the Talk:The Business Case for Sustainable Development.
Geneva:World Business Council for Sustainable Development, 2001.

11. DuPont website: http://www1.dupont.com/NASApp/dupontglobal/corp/index.jsp?page=/content/

US/en_US/social/index.html

12. Baxter Healthcare website: http://www.baxter.com/investors/citizenship/environmental/index.html

13. J. Fiksel, Editor. Design for Environment: Creating Eco-Efficient Products and Processes. McGraw-
Hill. New York, 1996.

14. Ashland website: http://www.ashland.com/environment/index.html

15. Website: http://www.ford.com/en/ourCompany/environmentalInitiatives/cleanerManufacturing/

rougeTurningAMonument.htm

16. Procter & Gamble website: http://www.pg.com/about_pg/corporate/sustainability/

substain_catmain.jhtml
Please see:
www.ahcgroup.com for 17. Lafarge website: http://www.lafarge.com/, and see lead article by Laszlo, former head of strategy at
the full listings of Lafarge
The Corporate Strategy 18. D. Fiksel,T. Brunetti, and L. Garvin.Toward a Sustainable Cement Industry, Substudy 3, Business
Today Monograph Case Development, Battelle Report to the World Business Council for Sustainable Development,
series. Geneva, 2002.

19. M.E. Porter and M.R. Kramer. “The Competitive Advantage of Corporate Philanthropy. Harvard
Business Review. December, 2002.

20. Source: Brian Pearce, Centre for Sustainable Investment, Forum for the Future, 2002

21. C. Handy. “What’s a Business For?” Harvard Business Review. December 2002.

AHC Group
www.AHCGroup.com
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