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Defining the Competitive and Financial Advantages of Corporate
Responsibility and Sustainability
Project ROI Sponsors
By: Steve Rochlin, Richard Bliss, Stephen Jordan, Cheryl Yaffe Kiser
IO Sustainability and Babson College thank Verizon and Campbell Soup Company for their support of the project.
Copyright IO Sustainability, 2015
Table of Contents
About The Research Organizations
I. Executive Summary
Necessary, But Not Sufficient
About Project ROI
Defining Corporate Responsibility
III. ROI Findings – Firm Value, Share Price, and Risk
Company Value, Share Price, and Risk ROI Scorecard
How Does CR Drive Market Valuation and Share Price?
IV. ROI Findings – Sales and Reputation
CR Sales and Reputation ROI Scorecard
How Does CR Management Drive Sales and Reputation Benefits?
V. ROI Findings – Human Resources
CR Human Resources ROI Scorecard
How Does CR Drive Human Resource Benefits?
VI. Defining CR’s Strategic Role
VII. Strategies and Tactics for Generating Value from CR
VIII. Achieving the Target: Diagnostic Tool
Diagnostics for the Way the Company Fits CR Practices into its Business
Diagnostics for the Company’s Commitment to CR Practices
Diagnostics for the Way the Company Manages CR Practices as an Asset
Diagnostics for the Way the Company Makes Connections that Enable CR Practices to Drive ROI......... 46 IX. A Look Ahead
2 | Project ROI: Defining the competitive and financial advantages of corporate responsibility and sustainability
I. EXECUTIVE SUMMARYCorporate Responsibility (CR) practices have great potential to deliver financial returns on investment (ROI) as well as related business and competitive benefits. But it’s not enough to engage in CR activities, one must manage them well. Companies should view their combined CR practices as value-creating assets. With proper design and sufficient investment, a company’s “CR
Assets” can support returns related to:
• Share price and market value • Human resources
• Sales and revenue • Risk and license to operate
• Reputation and brand
The potential ROI from CR for large, publicly traded companies, includes the following:
4 | Project ROI: Defining the competitive and financial advantages of corporate responsibility and sustainability To enhance the potential for CR to deliver value, companies will benefit from adopting the
management framework of:
1. Fit: Make CR commitments that fit your company’s core attributes and your key stakeholders’ expectations.
2. Commit: Make a genuine commitment to address CR issues.
3. Manage: Think of, develop, and manage your portfolio of CR practices as a valuable intangible asset.
4. Connect: Build key stakeholder awareness, trust, engagement, and affinity.
These findings suggest that it is time to move away from the debate over whether CR in the
creates or destroys value. Companies and their managers are able to exert some measure of both choice and control over the business-related benefits that their CR management will deliver. Like other investments, some CR initiatives will pan out and others won’t. The implication for companies is to develop business-aligned and integrated CR strategies. This includes applying to CR some of the same management disciplines as any other business function.
The authors intend to continue our investigation of how CR drives financial and societal value, and develop ways the systems companies can use to improve the results from their CR investments and strategies.
6 | Project ROI: Defining the competitive and financial advantages of corporate responsibility and sustainability About Project ROI Verizon and the Campbell Soup Company launched Project ROI to support their efforts to continuously improve their ESG performance and to tangibly measure the benefits to business of environmental, social, and governance programs. They supported the research of IO Sustainability and Babson College, who undertook the work under the condition that the research team would share findings based on wherever the research led.
Project ROI’s objective is to assess the business case for CR for the benefit of senior executives, boards of directors, and even Wall Street. The research has asked what, if any, potential ROI can
CR deliver? We have then assessed:
• What are the strategies, tactics, and practices likely to create ROI?
• What lessons should executives and managers take regarding their approach to and measurement of CR practices?
Our approach relied on analyzing existing research from credible analysts and institutions. The vast majority of our sources have come from academic and peer reviewed sources. In total we have investigated over 300 studies.
We have supplemented our research with interviews of executives and CR practitioners and from our experience advising, studying, and training hundreds of companies across industries.
The existing body of research tends to focus mostly on the experience of large, publicly traded
companies. There are several reasons for this:
(1) Transparency of financial results makes it relatively easier to measure the relationship between CR and financial performance.
(2) Many of the benefits of CR are related to balance sheet improvements, particularly relevant to publicly-traded companies.
(3) Privately held companies do not necessarily have as much pressure to deliver profitability on a quarterly basis.
However, the research we have reviewed is diverse and in the opinion of the authors often does apply to large privately held firms. We would project, as well, that the research has certain relevance for small and medium enterprises. This is an area that requires deeper investigation.
It is important to note that asking what returns CR brings to society is a crucial question. While
our research concentrates on the business case, it is important to underscore a key finding:
companies that commit to CR approaches that genuinely and authentically aim to optimize their impact and to generate positive benefits for society, stand the best chance of delivering financial and business value.
8 | Project ROI: Defining the competitive and financial advantages of corporate responsibility and sustainability Figure 1: The roles and structures of CR operations
The paradox companies face is that the left two columns – “Compliance” and “Engagement” – possess relatively clear structures, processes, procedures, policies, and management cycles.
However, their business case and potential for ROI are hard to define.
In contrast, the “Competitive Positioning” and “Innovation & Transformation” work streams can possess more straightforward business cases. Examples that relate to these areas from Verizon
and Campbell Soup include the following:
• Verizon’s Corporate Responsibility group and Wireless Business partnered with external stakeholders to design “The Coupe”, a mobile phone created specifically to address the unique needs of the disability and senior communities. The product launched in 2008 and sold 400,000 units, remained on back order for months, and moved to a second generation with “The Knack”, which quickly sold 100,000 units. In addition, Verizon Wireless also created a senior calling plan, which brought in 100,000 new customers.
Verizon Wireless spending by the senior segment increased by 100 percent from 2007 to 2008.4
• Currently Verizon is pursuing a strategy of deploying technology solutions to incubate innovative approaches that target social issues in underserved communities that might not otherwise be addressed by the business itself.
4 Boston College Center for Corporate Citizenship & McKinsey & Company, 2009
10 | Project ROI: Defining the competitive and financial advantages of corporate responsibility and sustainability at the equivalent of the carbon that would be sequestered by 104 acres of U.S. forest in one year, saving 14,245 gallons of gasoline, or removing 26 cars from the road. Campbell continues to invest in environmental compliance and sustainability initiatives, with that amount exceeding $17 million in FY2014. These investments have paid off, yielding savings of more than $77 million since 2009.6 One can assess the ROI for each of these examples using analytical tools commonly employed by managers. Yet, companies often find it difficult to embed these approaches in a clear system of strategic goals and objectives, management responsibility, and processes. It is even more difficult to weave all four work streams into a coherent whole.
Project ROI looks at the whole picture with particular focus on the Compliance and Engagement work streams. These represent the most difficult business cases to plan and measure. They are also necessary for companies to credibly execute strategies for the latter work streams.
6 Interview with Niki King, The Campbell Soup Company, 2014
12 | Project ROI: Defining the competitive and financial advantages of corporate responsibility and sustainability Table 1: CR Firm Value ROI Scorecard Enhanced market performance driven by a company’s total CR profile
The potential value CR can generate:
Reduction in the cost of equity
The potential value CR can generate:
• Good corporate governance and CR practices can reduce the rate of return required by the company’s ordinary shareholders in order for that investor to bear the risk of holding that company’s shares by up to 1%20 • Firms with a better CR performance tend to have a lower cost of equity capital21 • Investors expect higher returns – up to 1.4% annually – on stocks facing more environmental concerns than their peers22 10 Eccles, Ioannou, & Serafeim, 2011; Koh, Qian & Wang, 2014; Luo & Bhattacharya, 2006; Park & Moon, 2011; Perez de Toledo & Bocatto, 2014 11 For the average company in the S&P500 Index. Source: Park & Moon, 2011 12 Eccles, Ioannou, & Serafeim, 2011 13 Luo & Bhattacharya, 2006 14 Perez de Toledo & Bocatto, 2014 15 Koh, Qian, & Wang, 2014 16 Innovest Strategic Value Advisors, 2007 17 Henisz, Dorobantu, & Nartey, 2013 18 Wang & Choi, 2013 19 Brammer & Millington, 2008; Jacobs, Singhal, & Subramanian, 2010; Lev, Petrovits, & Radhakrishnan, 2010 20 Derwall & Verwijmeren, 2007 21 El Ghoul, Guedhami, Kwok, & Mishra, 2011; Sharfman & Fernando, 2008 (focusing on the effects of environmental performance) 22 Chava, 2011
Reduced cost of debt
The potential value CR can generate:
• Superior environmental performance compared to peer group yields lower cost of debt by 40-45 basis points (bp).27
• Moving from the bottom to top governance quartile doubles the probability of an investment-grade credit rating. An investment grade credit rating reduces the cost of debt by 8% or 800 bp versus a speculative rating, leading to a reduction of $38.4 million in annual interest expense compared to the median speculative grade firm.28 Firms with below average CR pay 7 to 18 bp more than better CR performers on comparable debt instruments.29
• Higher levels of CR performance are rewarded with lower bond yield spreads. Contributing factors that reduce credit spreads include:
• Community involvement (reducing spreads by 43.4% or ~ 40 bp for a AA-rated bond);
• Product safety and quality (reducing spreads by 30.3%);
• Increased employee dissatisfaction can increase credit spreads up to 88%.30
• Firms facing higher stakeholder environmental concerns than their peers pay higher interest rates on bank loans. Up to 25 bp in one study, or $1.5 million annually for the average sample loan,31 and up to 64 bp in another study.32
14 | Project ROI: Defining the competitive and financial advantages of corporate responsibility and sustainability How does CR drive market valuation and share price?
“No investor has ever asked us about our Corporate Responsibility practices.”33 The C-Suite executive quoted above appears to reflect a common experience. Another senior executive adds, “When we brief investors on our CR practices, they never have follow up questions or comments.”34 Recent research suggests this may change as analysts are beginning to make decisions and recommendations based in part on evaluations of CR performance.35 Yet it seems puzzling that active CR management drives up share price when few investors seem to express concerns or interest.
Deriving market and share price value from CR does not require investors to initiate queries about a company’s CR performance. Instead, sound CR management practices appear to
influence investors in three ways:
1) Integrating CR and intangible assets Investors appear to respond positively to firms that integrate their approach to CR with the investment and management of intangible assets such as talent, brand and reputation, and innovation.36
2) CR as a proxy for strong, well-managed companies with bright futures
Investors appear to treat CR as an intangible asset and proxy signaling firm strength,37 such as:
A sign that the firm’s future prospects are bright.38 •
An indicator of strong performance across: