Research tells us that sustainability and financial performance are positively related. But the direction of influence is debatable and the relationship is not linear.
Do sustainability activities improve financial performance, or does financial performance give firms more resources to invest in sustainability? At what point does further investment in sustainability destroy company value?
The Network for Business Sustainability has released a report that gives CFO's and CEO's a way to assess CSR projects and to see how they compare to other company projects that are competing for capital.
Dr. John Peloza and Ron Yachnin analyzed 159 studies, published from 1972 onwards, and found three categories of metrics.
They also recommended sustainability valuation resources that help managers put these metrics into practice. This report summarizes their findings and recommendations.
The importance of metrics
Over the last 30 years, researchers, consultants, managers, NGOs and investment brokers have developed a myriad of metrics that attempt to put a dollar value on sustainability. Critics argue that the business case for sustainability should (and does) run beyond the single bottom line.
Still, there are some very good reasons for putting financial metrics to sustainability initiatives:
- First, financial metrics turn abstract concepts into a common corporate language. Investing in sustainability usually means choosing from a menu of options. For example, do firms invest in recycling and energy conservation, or sponsor a local charity? Alternatives have to be measured against some standard.
- Second, sustainability investments are like any other business expenditure-managers are expected to clearly quantify how their programs affect the bottom line. Programs that are not financially quantifiable are subject to the vagaries of public opinion, changes in leadership and the ebb and flow of financial cycles (Epstein & Roy, 2001).
- Third, financial executives and analysts are often reluctant to fund sustainability investments-not because they doubt their importance, but because there is not enough hard data to justify the expenditure.
A Spectrum of sustainability metrics
Broadly speaking, three categories of metrics are relevant to sustainability. These are listed below and expounded upon in the rest of this report.
- Financial: The end-state metrics with which the market evaluates performance, e.g., return on equity from a profitable sustainable product line.
- Operational: The metrics related to sustainability activities and their direct bottom-line impacts, e.g., tonnes of waste recycled into manufacturing inputs, and subsequent decreased raw material costs.
- Strategic: Metrics that reflect a firm's improved position strategically to create value and manage risk, e.g., satisfaction rate with a community engagement program that helped fast-track the regulatory approval process to build a new plant.
Most of the tools that Peloza and Yachnin reviewed fell into either Category 1 or Category 2 because they are easier to conceptualize and implement than Category 3.