Making sustainability work in a downturn

Shareholders expect companies to generate profits, but, increasingly they also want companies to make a positive contribution to society whilst minimising negative effects on the environment.

This approach to business – balancing economic, social and environmental interests is commonly referred to as corporate responsibility (CR) or sustainability.

As the sustainability concept is embraced by a stakeholder group encompassing employees, regulators, customers, suppliers, NGOs, media and the community, businesses’ response to sustainability is imperative to enhance and safeguard their reputation and value. Globally, Boards and CEOs are giving more attention to the sustainability agenda, and their concerns include stakeholders’ increasing influence, CR ownership, cost, range and impact of CR initiatives. However, the impact of the economic downturn, adds a new spin to this as it forces businesses to either demonstrate the value of their CR initiatives or reduce their spending.

CR portfolio – allocation & responsibilities

PwC’s analysis of the CR activities of Malaysian public listed companies (PLCs) against multinational corporations shows that PLCs focus over 60% of their CR activities on the people-related dimensions (i.e. community and workplace), with much lower priority on environment.  These people-centric initiatives usually demonstrate limited returns on investment (ROI) to the shareholder as compared to marketplace and environment initiatives. However, they may not be reporting people-centric ROIs simply because of their struggle with quantifying the impact of these initiatives.
In Malaysia, CR stewardship is commonly assigned to Corporate Communications. Whilst they are passionate and can drive stakeholder engagement, a common complaint of theirs is the difficulty of economically justifying CR investments to their CEO. The challenge to companies is who to assign responsibility of the agenda to due to its breath and impact on diverse stakeholders.

Stakeholders – reporting for impact?

Recognising the increase in stakeholder influence, leading companies engage their stakeholders through dialogues, surveys and panels to gauge perceptions and understand agendas. Companies have extended traditional financial reporting to sustainability reporting, which reflects the views and concerns of stakeholders. Stakeholder engagement is increasingly added to credible third party assurance for added transparency of sustainability reports.
Our assessment of the state of CR reporting in Malaysia shows PLCs are just starting to recognise the need for reporting as compared to other emerging CR markets. Nearly 70% of the KLSE Top 100 have some form of CR reporting on their website or annual report - but few have stand-alone sustainability reports or use global reporting frameworks, such as the Global Reporting Initiative guidelines.

CR spend – how much is good enough?

Almost 200 UK companies belong to the PerCent Club, whose members are committed to investing a minimum of 1% of their pre-tax profits to their CR initiatives, even in a downturn. In Malaysia, businesses are eligible for tax deductions of up to 7% of aggregate income for approved donations and can leverage on a range of other “CR-friendly” tax incentives in the form of deductions, exemptions and capital allowances.
Based on a recent survey` of the effects of the current economic downturn on sustainability, 90% of CEOs still consider a sustainable business strategy crucial, with efficiency aspects being the top priority. Efficiency-related savings can be derived from energy reduction, waste management as well as office, operations and product-related reductions. The consensus is that priority will be given to those CR initiatives that demonstrate ROI and green impact. For example, when the NY Times building installed a lighting management system, their 70% electricity savings amounted to $315,000 and 1,250 metric tonnes of CO2 a year* .
With sustainability barely making CEOs’ agendas and reporting at a basic level, it is difficult for CEOs to find quality data on their CR initiatives so they can make informed decisions on CR strategy and investment. But a downturn increases the urgency of optimising ROI. If CEOs are pressured into cutting CR budgets, the question as to which initiatives will be a difficult one. Good data, on the other hand, will enable them to balance the demands of shareholders against other stakeholders.

` A survey by 2degrees, October 2008 covering 66 organisations including Bank of America, Crest Nicholson, McCain, Cisco, Bovis Lendlease, Co-op, CB Richard Ellis, BASF, Coca-Cola, British Land, Monsoon, Sony
 * www.ecogeek.org, 14 November 2008

Sustainability agenda – a CEO’s response

To remain competitive and build a sustainable business for the future, leaders must develop a credible response to the sustainability agenda. These action points will give you a head-start:

  • Assess and refine your CR portfolio to ensure your CR effort and spend yields acceptable returns
  • Engage your stakeholders to prioritise CR initiatives for more relevance and impact
  • Establish a CR management framework and assign responsibilities to monitor and drive the sustainability agenda across your organisation

In this harsh climate, the need to do good remains. However, with limited resources, optimising the economic, social and environmental impact of CR investment is critical to balance the needs of different stakeholders while demonstrating real returns. Understanding and taking on the sustainability agenda could help Malaysian companies survive the now and build businesses for the future.