From the November 2011 issue of Research Magazine • Subscribe!

October 26, 2011

Building Value That Lasts

Sustainability continues to gain traction and recognition.

Corporate sustainability is beneficial for both managers and investors. According to Dow Jones, corporate sustainability is “a business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.

“Corporate sustainability leaders achieve long-term shareholder value by gearing their strategies and management to harness the market’s potential for sustainability products and services while at the same time successfully reducing and avoiding sustainability costs and risks,” Dow Jones explains on its website.

In collaboration with Zurich-based SAM Indexes, Dow Jones has created a range of Dow Jones Sustainability Indexes (DJSI). SAM Indexes and Dow Jones evaluate multiple factors before including a company in an index. Key considerations include the following:

Integrating long-term economic, environmental and social aspects into business strategies while maintaining global competitiveness and brand reputation;

Meeting shareholders’ demands for sound financial returns, long-term economic growth, open communication and transparent financial accounting;

Fostering loyalty by investing in customer relationship management and product and service innovation that focuses on technologies and systems, which use financial, natural and social resources in an efficient, effective and economic manner over the long-term;

Setting the highest standards of corporate governance and stakeholder engagement, including corporate codes of conduct and public reporting; and

Managing human resources to maintain workforce capabilities and employee satisfaction through best-in-class organizational learning and knowledge management practices and remuneration and benefit programs.

The Dow Jones Sustainability Indexes are dynamic. SAM Indexes conducts a comprehensive annual Corporate Sustainability Assessment to determine which firms will be added to or deleted from the indexes. In 2011, 41 companies were added and 23 firms deleted from the Dow Jones Sustainability World Index, resulting in a total of 342 component companies.

Investors’ Perspective

Corporate sustainability performance is an investable concept, according to Dow Jones. Ideally, stakeholders — including investors — recognize and reward a company’s efforts. In turn, this “benefit circle” should “have a positive effect on the societies and economies of both the developed and developing world,” the research group says.

Dow Jones maintains that companies recognized as “sustainability leaders are increasingly expected to show superior performance and favorable risk/return profiles. A growing number of investors are convinced that sustainability is a catalyst for enlightened and disciplined management, and, thus, a crucial success factor.”

DJSI World’s annualized total return in U.S. dollars from December 31, 1993, through August 31, 2011, were nearly +11 percent on a one-year basis, about -2.5 percent on a three-year-basis, roughly -0.7 percent on a five-year basis, close to +4.0 percent on a 10-year basis, and +7 percent since inception.

A Range of Strategies

Companies customize their approach to sustainability within the broad framework. For instance, the Volvo Group is responsible for developing transport solutions that convey cargo and passengers as efficiently as possible, while contributing to the economic development of customers and society as a whole, according to John Hartwell, vice-president of investor relations. Hartwell reports that Volvo Group has identified four key areas within sustainable development: products, environmental impact, responsible sourcing, and a high-performing organization and company culture.

Business-management software maker SAP AG pursues a dual sustainability strategy, according Friederike Edelmann, director of that firm’s investor-relations department. First, the firm works to become a role model for how a large company can address sustainability both by policy and principles, and by using technology. Second, SAP strives to enable its customers to address sustainability using SAP’s technology.

“We became much more serious about sustainability about four years ago,” Edelmann explains. “That’s when we started receiving requests from some of the industries we serve for improvements to our applications designed to manage product safety (for instance, REACH for chemicals and ROHS for high tech), traceability (especially for the food industry), environmental tracking and reporting, and energy management, both in manufacturing and facilities”.

Health-care company Roche does not have a separate sustainability strategy, according to Dianne Young, the firm’s investor relations officer for sustainability, because it is inherent in the way Roche conducts business. She notes that the firm’s business is focused on the long term by nature due to the long development times for pharmaceutical products.

Consequently, Young says, Roche ensures it has sustainable practices in all aspects of the way it operates. This can be evidenced in the company’s mission: “Our mission today and tomorrow is to create added value in healthcare by focusing on our expertise in diagnostics and pharmaceuticals,” she explains.

Financial-services firm AXA Group places corporate responsibility both at the heart of its business and in its day-to-day interactions with its stakeholders, explains Helene Caillet, of the company’s external-communications department. “It is through adopting a responsible behavior in its operations, as well as through the development of responsible products and services, that AXA is able to most effectively participate in social, environmental and economic progress,” Caillet shares.

AXA Group’s corporate responsibility strategy “is embedded in the way we do business—a long-term business that helps to keep society in balance,” she adds. “In line with our priorities and our mission — helping people live more confidently — it is tied to a tangible reality.”

Implementation

Companies take different approaches to implementing their sustainability strategies. SAP started by conducting an internal study over three years ago and developed a list of sustainability opportunities it saw as being unaddressed in the marketplace. The company then talked to over 100 customers and partners to hear their views and presented the findings to the SAP executive board, which accepted their recommendations. At the same time, SAP’s customers were asking the company to elucidate its sustainability policy in order for SAP to be an approved supplier.

The process created a business opportunity, Edelmann notes: “We found that software tools weren’t very well developed to gather and collect information as part of a business process. There were no links to common master data, no organized workflow and little built-in reporting standards, so we identified several different opportunities to create or improve existing tools. As a result, we established our ‘enabler’ strategy to help customers use software to become more sustainable, and make it much easier to track and report progress, allowing for more time to focus on improvement.”

Roche carries out its sustainability strategy by following the following company goals, according to Young, which include:

•  Achieve 80-percent positive rating in each category in all internal/key external employment engagement surveys;

•  Increase number of female leaders in key positions by at least 50 percent; and

•  Reduce energy consumption and improve energy efficiency by 10 percent (as measured by gigajoule per employee)

In 2010, for the first time, all entities and regions of the AXA Group included a set of quantified and measurable corporate responsibility objectives in their local strategic plans, Caillet says. The company also identified the critical areas in which corporate responsibility can offer genuine added value at the local level. These local plans were then integrated into the group’s strategic-planning process, a move that sends a strong message about the new role corporate responsibility plays at the heart of the organization’s business activities, she notes.

Ongoing Efforts

Sustainability goals and practices continue to evolve. Hartwell reports that Volvo has decided to review its corporate social-responsibility policy during 2011. “I am convinced there is no contradiction in running a financially viable business, while contributing to societal development and creating long-term value,” he explains. “Our experience shows that conducting business with integrity truly builds brand equity, and strong relations with all our stakeholders. We are on our way to Creation of Shared Value (CSV).”

SAP expects that software development will happen across all dimensions of sustainability, including energy, carbon, water, social impact, safety, toxicity, health, and supply chain.

And Roche is working to expand access to its medicines in developing countries where there is a public health-care system in place and where the company can work with governments to generate access by applying long-term sustainable solutions. Because every country’s health-care system is at a different stage of development, the companmust consider each situation individually to determine the most appropriate combination of pricing, services and local involvement.

Stakeholder Responses

Company sources say that their stakeholders have reacted positively to the companies’ sustainability efforts. For example, Young says that Roche’s employees now focus on how the company listens to them, values them and promotes equality.

Investors are interested in the company’s employee engagement work to learn if it helps attract and retain talent that will drive future business. Government-clients focus mainly on how Roche can help them with their health-care budgets and with the development of health-care systems in developing countries.

Sustainability has very much progressed in recent years, and investor relations and other experts say it has become a core organizational concept that continues to gain importance as a business and organizational performance metric.

 

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