Sustainability strategies: The finance team’s role

What does “sustainability” mean in practice to finance chiefs in the US and Europe? We asked the CFOs of iconic furniture maker Herman Miller, shipping giant UPS, infrastructure builder Balfour Beatty, technology group ABB and power supplier EDF Energy to explain the bottom-line benefits of their sustainability strategies.



Can you give an example of how sustainability thinking has influenced your company’s overall business strategy, long-term goals or growth plans?

Greg Bylsma, Herman Miller: Care for the environment has been a cultural value at Herman Miller for decades, with our first formal programme statement in 1953. While we believe it’s an issue of responsible corporate citizenship, we’ve also always recognised it for its business value. Reducing waste, using less energy, designing for less material consumption – these are profit-generating concepts.

Over time we’ve become increasingly focused on embedding these and other tools and strategies in our business, with greater sophistication. In 2001, we moved all our product development to a design for the environment (DfE) protocol based on “cradle-to-cradle” principles [which focus on making industrial processes sustainable], so that today more than 50% of our product sales are DfE-approved designs.

More recently, in 2003, we adopted our “2020 Perfect Vision” goals, aiming for an operational footprint of zero by 2020. This means no landfill, no hazardous waste, no VOC [volatile organic compound] air emissions, no process water use, and 100% renewable energy.

In 2011, we reached an overall footprint reduction of 88%, recognising that the last 10% is going to be the most intransigent element in the equation.

Importantly, we’ve accomplished this progress while growing the business and sustaining profits, even during the dramatic events of 2008–09.

Kurt Kuehn, UPS: Fuel savings is certainly an important sustainability issue for us. We have invested in alternative-fuel fleets and routing technology systems that reduce the miles we drive, and have upgraded our aircraft to reduce fuel burn and also noise and emissions. As a result of our customers’ requests, we now have carbon calculation services, UPS carbon-neutral shipping options and eco-responsible packaging.

Duncan Magrath, Balfour Beatty: We’re working together to make sustainability an integral part of our culture and a recognised strength of Balfour Beatty worldwide.

We celebrated our centenary in 2009, and a sustainable approach means ensuring we’re around for the next 100 years and beyond. We have the global scale and breadth of activities across the infrastructure lifecycle to make a very positive social, environmental and economic impact, and this is at the heart of our long-term strategy.

Sustainability touches every aspect of our business. It affects our behaviours, impacts our costs, creates new business opportunities, sharpens our competitive edge and helps us contribute to our customers’ long-term profitability.

We recognise that we cannot sell more-sustainable solutions to our customers if we are not sustainable ourselves, and this is a key motivation in driving change through our business. We see the sustainability agenda as a huge business opportunity and a chance to help our customers to meet their own sustainability requirements. Demand for the development of green energy infrastructure and greener/zero-carbon buildings is increasing, and our customers expect us to deliver more-sustainable solutions for them.

Michel Demaré, ABB: Concern about climate change and global efforts towards a more sustainable, low-carbon energy supply system strongly influence our business strategy and growth plans. Our energy-efficiency portfolio, and our solutions for the renewable-energy sector and efficient and smart power grids, are crucial in the development of a more sustainable energy system. These are growth areas for ABB. About 45% of our offering is, in one way or another, related to energy efficiency. For example, ABB is the world’s largest supplier of electronic wind turbine components, and also supplies technology for solar farms, hydroelectric power stations and other renewable-energy systems.

Increasing pressure on scarce natural resources, such as clean water, metals and minerals, calls for solutions where industry and society “use less to do more”.

We have, in the past couple of years, established … a cross-divisional organisation that [will focus on key industry sector initiatives] and energy efficiency. [These] are core themes for ABB, and together they will represent substantial growth opportunities during the coming years.

Simone Rossi, EDF Energy: Our chief executive, Vincent de Rivaz, acted as a sustainability ambassador to the Prince of Wales in 2009 and 2010 and led an inquiry into the leadership skills needed for a sustainable economy. As a result of that, we’ve taken a lead role in setting up the Prince of Wales Sustainability Council.

Equally, since 2007, we have supported The Prince’s Accounting for Sustainability Project (A4S), which is playing a key role in ensuring that we are not battling to meet 21st-century challenges with, at best, 20th-century decision-making and reporting systems.

A4S has been instrumental in the establishment of the International Integrated Reporting Council, whose objective is to develop reporting standards that link governance and financial performance and the social, environmental and economic context within which it operates. By reinforcing these connections, integrated reporting can help business to make more-sustainable decisions and enable investors and other stakeholders to understand how an organisation is really performing.

Our entire business strategy is based on delivering secure, affordable low-carbon energy. We know that the production of energy is one of the biggest risks to the environment and are taking steps to reduce that impact.

In 2009, we published 15 sustainability commitments, which we will achieve between 2012 and 2020, covering: building a world-class culture, reducing carbon and waste, delivering low-carbon nuclear power responsibly, helping our customers, building a world-class culture and serving our communities.


What role should the finance team play in decisions about a company’s sustainability strategy?

Greg Bylsma, Herman Miller: One key role of any finance team is to assist the broader organisation in evaluating business alternatives. Developing and then implementing a successful sustainability strategy demands this.

Kurt Kuehn, UPS: Finance has representatives on both the steering and working sustainability committees, which means they are involved in every sustainability effort in the company. The treasury group also has been guiding the company policies we have around purchasing carbon offsets; and we are adding sustainability criteria to our purchasing procedures and cost models.

Duncan Magrath, Balfour Beatty: At Balfour Beatty, we believe that sustainability is a collective responsibility – everyone has a role to play, and that includes finance.

Finance teams are already playing a key role in helping to shape our response to the carbon reduction commitment in the UK. Measuring our carbon emissions is only the first step. Investment in better metering and opportunities to reduce energy use (and save costs) come next. Finance will play an important role in the decision-making process around this.

Finance also plays a role in the management of supply-chain relationships, ensuring that we only do business with businesses that share our approach to sustainability and that contracts are awarded accordingly.

Michel Demaré, ABB: Clearly, the finance team should and does influence the sustainability strategy. Successful sustainability management helps us identify and manage risk that could severely damage our business and our reputation – both having a financing and potential financing impact for the company.

Simone Rossi, EDF Energy: Finance is responsible for ensuring the business sets itself appropriate targets, which deliver increased value at acceptable risk, and that our performance is reported on accurately. As with any other business objective, our sustainability commitments are owned by the CEO and delivered by the business. In accordance with good governance practices, finance provides oversight.


How does the finance team integrate risk management practices into sustainability programmes?

Greg Bylsma, Herman Miller: First, I would point out that our enterprise risk management practices are corporate-wide and not purely a function of finance. That said, we have a risk steering team, as well as a quarterly risk forum group, that is made up of leaders from all areas of our business, including finance and environmental services.

The function of the forum group is not only to identify risks as they become apparent in the organisation, but also to ensure that there is an owner who is accountable to mitigate the risk. From a risk management perspective, clearly a key screening criteria is the potential financial impact created by the environmental risks identified in the review process.

Kurt Kuehn, UPS: Our risk management group is part of the finance organisation at UPS. We have a very iterative process that collects risk projections from hundreds of our managers. Sustainability issues, such as environmental regulation, climate change and market opportunities, are always on the lists that are compiled annually. Once risks are prioritised, finance works with other departments to address the risks.

Duncan Magrath, Balfour Beatty: At a macro level, sustainability can be a much more challenging issue to look at in terms of risk. Our risk management framework needs to ensure that we make the right decisions on project engagement. We examine a wide range of risks. For example, we are currently developing thinking around climate-change adaptation. How might a changing climate impact a project with a 25-year life?

Michel Demaré, ABB: We have embedded the assessment of sustainability-related risks in our enterprise risk management (ERM) programme, so there is day-to-day cooperation between sustainability experts and finance colleagues under the ERM umbrella, and they work together to identify and mitigate these risks.


What lessons have you learned about how to measure the social and environmental impact of your business?

Greg Bylsma, Herman Miller: There are many metrics competing for adherents, too often promoted by those with their own agenda and interests. But we’ve focused on those that can be measured by us, at an operational level, and are easily understandable by our employees and business partners. These metrics include volatile organic compound (VOC) air emissions, hazardous waste, solid waste to landfill, process water use and renewable-energy use as a percentage of total energy use.

Kurt Kuehn, UPS: With more than 400,000 employees in 200 countries, the job of collecting data is very complex. We have invested in specialised sustainability software to help us. We follow international sustainability reporting standards, such as the Global Reporting Initiative, the Carbon Disclosure Project and the World Resources Institute’s Global Water Tool. These are helpful to give structure to our measurement. But ultimately, we create metrics that are reflective of our business model and industry so that we can monitor our progress against goals and drive improvement.

Duncan Magrath, Balfour Beatty: First, it’s not a perfect science. Measuring environmental impacts, such as carbon and waste, is more straightforward than community-based measures, such as the impact of our operations on local communities. It takes time to generate good, quality data, but that should not act as an excuse for not getting started.

We have also used the opportunity of implementing new systems to capture better-quality data at source. For example, online expense forms will capture the number of miles travelled by train so that we can measure our direct impact on the environment more accurately and timely.

We have recognised the importance of transparency around our sustainability programme and have opened up to both external measurement, through a variety of metrics, including the Dow Jones Sustainability Index and Business in the Community’s Corporate Responsibility Index, and to assurance through an external third-party auditor.

Michel Demaré, ABB: We have a comprehensive set of performance indicators to measure, control and report on our social and environmental impact, using the commonly accepted Global Reporting Initiative standard. An obvious learning is that the more the indicators and sustainability practices are integrated into business operations, the better you can control your impact. Sustainability cannot be an add-on; it must be integrated in the day-to-day business. In our own operations, we will move more towards resource optimisation targets, which will have the effect of reducing scrap and energy use. Overall, sustainability is a natural factor in our day-to-day management, as it is such an important driver of our business development.

Simone Rossi, EDF Energy: One thing we are very much aware of is that there is a lot to learn. We didn’t get it right straight away, and we’re still learning.

Unlike typical financial reporting (which has a 500-year history), there is little in the way of reporting standards. We recognise that having internationally accepted reporting standards, such as those being developed by the Integrated International Reporting Council, are vital to consistency and transparency.


Can you quantify some of the business or financial performance benefits resulting from your approach to sustainability?

Greg Bylsma, Herman Miller: Many of the advantages are self-evident, in terms of waste avoidance and customer attraction. In terms of actual dollars, when we roll up the impact of recycling revenue, energy savings, diverted landfill costs and so on, net of all related staff time and programme spending, we currently estimate an original savings benefit to Herman Miller in excess of $4 million annually.

Kurt Kuehn, UPS: Some of the notable successes: Improving fuel efficiency of our fleet through telematics and routing technologies that enabled UPS to avoid driving 63.5 million miles in 2010 with an associated emissions avoidance of 68,000 metric tonnes. UPS actually delivered more packages with less fuel per package in 2010. An initiative to reduce engine idling eliminated more than 39 million minutes, which translated into fuel savings of more than 260,000 gallons (and avoidance of 2,640 metric tonnes of CO2). Lighting upgrades to more energy-efficient fixtures has had an estimated annual energy savings of 30 million kilowatt hours between 2010 and 2007.

Duncan Magrath, Balfour Beatty: It is still early days for the business as a whole in our sustainability journey.

We measured the value of sustainable goods and services to our business for the first time last year – by that I mean recognised green building schemes such as Leadership in Energy and Environmental Design in the US and Building Research Establishment Environmental Assessment Method in the UK. Worldwide, we estimate that one-fifth of our revenues are sustainability-related and expect this to grow in coming years.

On a project level, we have many examples of how sustainability contributes to the business in terms of winning work and reducing project costs. For example, the A421 road project [in the UK], completed at the end of (2010), incorporated thousands of car tyres as lightweight fill, as well as hundreds of thousands of tonnes of power station ash, high levels of recycled asphalt and recycled glass for drainage trenches. These alternative materials reduced project costs by well over £3 million [$4.8 million as of November 2010] and avoided more than 70,000 tonnes of embodied carbon – the sum of carbon used to produce any given product.

Michel Demaré, ABB: Our success is directly measured by our top line. Internally, we also save energy, which is driven by global targets, and every cent saved on energy use goes to the bottom line. It’s simply good for the business and good for us financially.

Another measure is the financial benefits of our sustainability programmes; for example, carbon emissions at ABB sites in Switzerland have fallen by 60% since 1990, thanks to ongoing building retrofits and factory upgrades that also save the company, on average, $2 million per year. There are many similar examples throughout ABB.

Simone Rossi, EDF Energy: Our approach to sustainability will increase value and competitive advantage for EDF and EDF Energy through:

  • Earning stakeholder trust and confidence.
  • Shaping, not simply responding to, new regulation.
  • Increasing our share of the growing decarbonised electricity market.
  • Supplying decarbonised electricity to emerging transport and heating markets.
  • Realising cost and operational efficiency gains from cutting waste.
  • Increasing employee and customer engagement, acquisition and loyalty.
  • Earning a leadership corporate reputation.

     


 

BIOS

Greg Bylsma
Bylsma has been CFO of 107-year-old US furniture design firm Herman Miller since 2009. Before that, he spent more than four years as the company’s corporate controller, working extensively within the financial management and reporting function. Herman Miller designs furnishings and related services aimed at improving the human experience. It became a public company in 1970. Net sales in fiscal year 2010 were $1.319 billion.

Kurt Kuehn
Kuehn was named CFO for the transportation, logistics and shipping company UPS in 2008. He is a member of the UPS Management Committee, a group of the company’s most senior executives who are responsible for the day-to-day management of the company. He is responsible for all activities related to accounting, finance, auditing, financial planning, taxes and treasury. He also is the liaison to the investor, finance and analyst community.

Duncan Magrath
Magrath is a chartered accountant and an engineering graduate. He was appointed to the board of global infrastructure services group Balfour Beatty as CFO in 2008 after joining the firm as deputy finance director in 2006. Before that, he was the director of investor relations and financial strategy at Exel plc, following a number of senior financial roles in the UK and the US.

Michel Demaré
Demaré was appointed CFO of Swedish-Swiss power and automation technology group ABB in February 2005 after three years as vice president and CFO of Baxter Europe, part of US healthcare group Baxter International. Before this, he had an international finance career with Dow Chemical Co. between 1984 and 2002.

Simone Rossi
Rossi joined UK utility EDF Energy in April 2011 as CFO after spending 18 months in the US as CFO of Constellation Energy Nuclear Group in Baltimore. Before that, he spent five years at Edison in Milan, Italy, as head of strategy, and subsequently as a director with responsibility for planning, control and IT.

Where's the value in sustainability?

Leading companies recognize that successful sustainability performance translates to successful business performance as they reap both tangible and intangible benefits from their sustainability efforts. What are some of the benefits?

Company and brand reputation – Environmental and social performance of a company is an important consideration for many consumers in their buying decisions, and for many prospective employees, especially young people with the education and skills needed in today’s global economy.

Cost savings – Reductions in energy, material, water and waste translate directly to the bottom line. Using a sustainability lens to look at the entire value stream – from product design, through supply chain, operations, distribution to customer end use – is key to maximizing the opportunity for savings.

Competitive advantage – Companies can differentiate themselves from competitors, win customers, and add top-line value by offering products, services or business solutions that lower costs, or increase the efficiency, effectiveness and sustainability performance of their customers. 

Compliance and risk management – A company’s “license to operate” is contingent upon its standing in both the local and wider business community. In this age of global communications and social media, successful companies will be those that consider the potential impact of a broad array of environmental, social and governance issues on their ability to meet their goals.

Investor relations – Long-term value creation is the true essence of sustainability. Many investors with a long-term perspective consider performance against environmental, social and governance criteria to be a proxy for effective management and the ability to generate favorable returns over the long haul.

The role of finance

Management accountants have an important role to play in sustainability.

Strategy and risk management – Today’s CFOs play an important part in formulating and executing strategy, and monitoring risks. While a sustainability strategy may be a starting point, leading companies are developing strategies that are sustainable, embedding environmental, social and governance (ESG) principles, including effective risk management, into their culture.

Performance management – Developing key financial and nonfinancial performance measures (KPIs) and monitoring performance against established metrics is an important role of the finance function and essential for strategy execution.

Financial analysis – Management accountants have the skills needed to provide objective analysis of the business case and returns associated with investment sustainability efforts. They can also provide accurate measurement of elements such as energy usage, GHG emissions, water, waste, recycling or other metrics.  

Reporting – A growing number of companies are reporting on their environmental, social and governance activities in stand-alone reports. Leading companies are beginning to look to integrated reporting as a comprehensive model for reporting on the drivers of business success and linking ESG performance to financial performance. 

Information quality – The finance function has the skills, systems, and controls to ensure the quality, consistency and credibility of any content that is disclosed to shareholders or other stakeholders.