At the Corner of Citizenship and Commerce

A new era for core business interest in environmental, social, and government issues

A hallmark of a new era is challenging longstanding and commonly-held conventions. It’s heartening that the historical perspective of tackling environmental, social, and government (ESG) issues as “nice-to-do-but-not-essential,” has all but evaporated among many cutting-edge organizations.  Businesses today understand that ESG issues can be vital to their success and that new perspectives on ESG issues are driving innovative solutions in key business areas.  A recent Deloitte survey, for example, found that two-thirds of global CFOs expect their role in ESG-related strategies to increase over the next two years.  And, in another survey, the number of S&P 500 companies issuing sustainability reports jumped from 19 percent in 2010 to 53 percent in 2011—and this trend is expected to keep rising.

These findings lead us to conclude that being a “responsible enterprise” is increasingly viewed as a smart business practice.  In short, it’s where citizenship and commerce meet.

Today’s leading enterprises are addressing ESG issues head-on because they see both the tangible and intangible value of integrating actions associated with good citizenship and sustainability into core business activities.  One survey involving 250 senior business executives, revealed three major drivers of their companies’ ESG efforts (the number indicates the percentage of respondents who identified each of these three as either very important or important: 1) 81% - bolster corporate reputation and brand; 2) 78% - mitigate increased regulatory scrutiny; and 3) 80% - meet higher community and public expectations.  Also noteworthy was that the larger the company, the greater the forecast for impact.  And this makes sense when considering that such companies (e.g., $10 billion+ revenue) operate across a broad range of industries and geographies where social and environmental issues are most acute and/or visible.

Clearly, a new era of accelerated interest in ESG has arrived—welcome!--and is stimulating dialogue about how ESG values can both inform the organization’s core mission and strategies and enrich the company’s culture. A LinkedIn poll conducted in late 2012/early 2013 with management and C-suite executives at companies with more than 5,000 employees showed that many responding organizations are transforming their cultures to more strongly reflect ESG values and align them with their core mission and strategies in the following ways:

• Actively measuring and mitigating ESG-related risks and improving transparency;
• Using advanced analytics to improve reporting, perceptions, and management of environmental and social risks; and,
• Aligning their business models with environmental and social goals and their performance management systems with desired outcomes.

Not only have we entered a new era, companies that treat ESG issues merely as compliance or PR levers may be missing a significant opportunity to be rewarded for the good work they do.  And there can be big payoffs in marketplace perception and the benefits that can be traced back to that.  Deloitte’s research, for instance, indicates that leaders on ESG issues are over 400 percent more likely to be considered leaders in innovation.


Cathy Benko
Vice Chairman
Deloitte LLP

Chris Park
Principal
Deloitte Consulting LLP

 

Sources:
Deloitte Dbriefs presentation, “The Responsible Enterprise: At the intersection of commerce and corporate citizenship
DUPress.com, “The Responsible Enterprise: Where citizenship and commerce meet” , http://dupress.com/articles/the-responsible-enterprise/?id=us:el:dc:dup263:read:cons

As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making
any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright © 2013 Deloitte Development LLC. All rights reserved.

Thinking Outside the Box When it Comes to Packaging

Achieving breakthrough improvements in sustainable packaging is more difficult than simply substituting virgin materials for recycled content. Many companies are seeking to improve product stewardship, achieve waste-reduction goals, and save money by re-thinking the value chain and developing “disruptive” improvements to packaging.  These improvements have the potential to not only reduce waste, energy, and raw materials, but also differentiate from other products and capture a new and growing market of consumers who prefer more “responsible” products.

Collaboration and creativity required

There is a range of packaging improvements that can be considered, from passive materials replacement to more radical supply chain redesign, as shown in Figure 1. Conducting a current state packaging analysis can help surface which improvement opportunities make the most sense.  A good place to start is with a Life Cycle Assessment (LCA) — a quantitative assessment of the environmental impact of packaging which illustrates environmental “hot spots” and improvement opportunities.  These studies can also be used to conduct scenario analyses to understand how a switch in materials or processes may alter costs and environmental impact.

More radical improvements require greater effort, but they have the potential for greater environmental and financial benefits. These disruptive improvements require a healthy dose of creativity and coordination across multiple groups including product development, manufacturing, merchandising, procurement, marketing and even suppliers — challenging each other to break free from traditional notions of packaging.

An example is Method’s creation of an “8x” concentrated laundry detergent. The product reduced overall packaging volumes by 36% compared to its 2x concentrated product, and reduced the average lifecycle carbon footprint by 35%. ^[1] Changes that affect the size, weight, or shape of a product should be coordinated with logistics & distribution and merchandisers, since they will affect how a product is shipped, stored, and displayed.

Realization of packaging changes often requires active collaboration and innovation with suppliers.  However, collaborating with suppliers can be tricky, and it’s helpful to learn from others who have been down this path. Click here to learn more.

A biopharmaceutical company found a way to substantially reduce packaging and fuel from transporting temperature-sensitive medicines. Working closely with hospitals and specialized carriers, the company switched from using cold packs and insulated boxes to a system of refrigerated trucks. The increased cost of using refrigerated transport was more than offset by the decrease in packaging material and weight transported. A pilot project carried out in just one city resulted in savings of roughly 100 tons of packaging per year, as well as reductions in fuel consumption. The change also made life easier on its customers, the hospitals and pharmacies, who no longer had to break down boxes and throw away dumpsters' worth of cardboard and insulation.

Potential rewards await those who think innovatively about packaging. Although most sustainable packaging solutions have focused on altering current packaging processes to accommodate more environmentally friendly materials, those who develop more transformative approaches to packaging could stand to gain even more. The process starts with a whole-scale assessment of the value chain and rethinking the role of packaging from the customer's perspective. Companies who take this step may be able to capture cost savings, increase brand awareness, and grow market share.

Interested in learning more?  Download the paper here.


David Linich
Principal
Deloitte Consulting LLP

[1] Method Laundry Detergent, http://methodlaundry.com/

This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor.

Deloitte shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright © 2013 Deloitte Development LLC. All rights reserved.

Market Data Suggests Sustainability Efforts

Help Drive Important Finance Transformation

Deloitte’s study last fall of CFOs strongly indicated that top finance officers see increased linkage between ROI and sustainability initiatives within their organizations—and across their supply chains.   The 250 CFOs surveyed (representing companies with an average of $12 billion in revenue, across 15 industries in 14 countries) further suggested that their involvement with sustainability efforts is deepening—two-thirds say they are “always” or “frequently” involved in driving execution of sustainability programs in their organizations.

In fact, Deloitte believes that ripples created by the growing need for sustainability metrics are now driving a tidal wave of opportunities for today’s finance functions.

For example, there clearly is a growing demand among investors and financial analysts for business-relevant, non-financial data that will assist the financial community in making more informed decisions about fundamental organizational value.  This includes increased emphasis among stakeholders for integrating material environmental and social factors into the company’s business strategy, how management of these issues will benefit the business in terms of competitiveness, and how risks within operations and the supply chain are being actively managed.

Finance has a critical, broadening, and evolving role to play in business performance, and, as sustainability emerges as a core business issue, that role will increasingly focus on resource management, sustainability risk analysis, and new market opportunities.

It is not an unfair statement to say that when looking back a few years from now, CFOs and other C-suite decision makers may say they owe a debt of gratitude to sustainability initiatives for helping transform how business value is captured, analyzed, and reported.


David Pearson
Chief Sustainability Officer and Global Managing Director, Sustainability
Deloitte Touche Tohmatsu Limited



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© 2013. For more information, contact Deloitte Touche Tohmatsu Limited.

Exploring the Strategic Market Value of ESG Information

Environmental, Social and Governance (ESG) performance is increasingly used to pinpoint winning stocks, and there is growing interest from mainstream investors in whether companies are managing ESG issues. This gives many companies compelling reason to believe that investors are paying more attention to ESG reporting, yet how companies approach ESG disclosure still varies widely.  The question becomes—what kind of information are investors seeking?  Our view is that the need goes far beyond merely enhancing communication about ESG branding and performance.  It includes identifying issues that are material to investors, such as risk management strategies.

 ESG issues—particularly in a turbulent economic environment—represent a growing class of financially material risks.  Labor disputes in emerging markets, large scale accidents, governance failures, violations of environmental laws—all of these and more are the types of “shocks” to the corporate system that can dictate whether a company lives or dies, prospers or gets acquired.  Why?  Because investor perception of a company’s preparedness to deal with the unexpected—and resilience in the face of difficult challenges—affects investment interest and decision making.  And ESG risks are hard to predict and may have a significant impact on companies and the stakeholders (employees, customers, suppliers) they depend on to remain profitable.

By most measures, the mere adoption of strong ESG practices has minimal impact on a company’s stock value. However, a positive ESG reputation can add a layer of stock price protection that we call the “ESG halo.”  Companies that demonstrate they are prepared for ESG shocks may be in a better position to mitigate these downside risks. ESG disclosure, therefore, can add value, because it helps the company demonstrate that it can manage risks and has the forethought to track ESG performance effectively.

Disclosure on how companies manage their ESG risks is critical, because it can help capture investor interest and establish the long-term value of ESG management.  In short, the value of how ESG has been managed is clearest after a crisis has hit.  Whether an incident is small and short-term or large-scale and catastrophic, it may not be so much direct losses from the event that erode investor trust as it is loss of confidence in management’s ability to anticipate problems and deal with a situation’s aftermath.

Transparency builds credibility in the marketplace and in the mind of the investor.  This is why we strongly recommend a disclosure narrative that goes far beyond the data and focuses not only on traditional ESG metrics but also on openly discussing potential ESG risks that your company faces—what they are, where they might originate, and what they mean to the company.  Many ESG risks are the unintended consequences, or impacts, of various activities your company undertakes or is associated with. Then you talk about what you are doing to own and manage the risks—both within the company and in the broader context of your industry and a worldview.

Investors are indeed paying attention, because they believe your company’s ESG performance matters to your stakeholders and that it is essential to manage your exposure to ESG risks. In the end, it is the underlying actions you take to craft and maintain your ESG halo that helps you to create value moving forward.

To learn more, read the article in the latest issue of Deloitte Review.


Eric Hespenheide
Partner
Deloitte & Touche LLP

Dinah A. Koehler
Senior Research Manager
Deloitte Services LP

As used in this document, “Deloitte” means Deloitte LLP and its subsidiaries.  Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.  Certain services may not be available to attest clients under the rules and regulations of public accounting.

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright © 2013 Deloitte Development LLC. All rights reserved

Collaboration with Suppliers to Reduce Risk and Help Drive Value

The following blog post is taken from David Linich's Deloitte Consulting LLP article from Supply Chain Digest, Labor Unrest in the Global Supply Chain – Major Risk or Untapped Opportunity?

..........

Labor riots.  Tragic fires in factories.  Droughts drying up rivers and closing major transport routes. Hurricanes shutting down operations and causing billions in damages and lost business.  Water becoming an increasingly scarce resource.  Energy prices increasing and becoming more volatile.  Bribery scandals.

The risks facing supply chain executives are mounting.  What can  be done to get ahead of these issues?  Leading companies have prepared themselves by understanding where they are vulnerable, and by recognizing the untapped opportunity that exists with improved visibility and collaboration with suppliers.

Improving transparency

Today's complex global supply chains require a higher degree of analysis and transparency than ever before. For starters, companies should set clear expectations for how suppliers operate and pop the hood on their operations to understand what’s really going on.

A code of conduct sets the standard for how suppliers operate. But for many companies, it may not be worth the paper it’s written on.  Proper training is important so suppliers understand the code and are able to deliver against expectations.

Once the code of conduct is in place, attention should shift to evaluation of performance. And it should not just be on direct suppliers, but rather, multiple tiers upstream.  If a problem occurs anywhere in the supply chain, downstream parties can be impacted. And thanks to social media, there's a good chance the public and the media will find out about the problem first.

Evaluating supplier performance should draw upon advanced analytical tools to ease the administrative burden and improve the insights delivered.  Evaluation should include both regular “point in time” analyses and real time monitoring of potential risk events.  Time and resources are limited, and it’s not feasible to monitor suppliers equally.  Fortunately, not all suppliers and product/material categories carry the same level of risk, and doing some preliminary analysis based on a host of criteria such as criticality of the supplier, level of spend, and location can help companies take a thoughtful approach to allocating their time differently based on the potential risk of suppliers.

For suppliers that pose a higher potential risk, companies should take a more active approach to the “point in time” evaluation.  These evaluations may include targeted surveys coupled with onsite audits.  For lower potential risk suppliers, it might be sufficient to evaluate a sample set each year through a questionnaire.

Value from collaboration

Engaging with suppliers can be an effective way to identify and help mitigate supply chain risk. But that's just one reason to do it. Even more important, it can help companies identify and capitalize on a wide range of cost reduction and revenue growth opportunities.

Mapping and analysis exercises such as lifecycle assessment (LCA) can uncover simple changes that yield timely benefits. For example, a leading beverage company performed an LCA and found opportunities to reduce its annual carbon emissions by 82,000 tons and save more than $40 million per year by making its shipping containers from durable, reusable plastic instead of fragile corrugated cardboard.

In other cases, tapping into opportunities requires active collaboration with certain suppliers. Although this may involve a bit more work, the results are often very worthwhile. In fact, a recent survey of roughly 1,000 supply chain executives found that organizations that engaged with suppliers at any tier were 38 percent more likely to achieve or surpass their expectations and have their initiatives result in cost reductions^[1].

Plus, teaming with suppliers to design new products and processes may lead to radical innovations. For example, a motor oil producer collaborated with a packaging supplier to develop an innovative 6 gallon bag-in-box container which replaces 24 plastic bottles on motor oil. This innovation resulted in 89 percent less plastic landfill waste and improved transportation and storage space utilization by 50%.  Such innovations can boost financial performance and get certain stakeholders (including employees, business partners, investors, and customers) excited about the company.

Effective collaboration requires trust and clear benefits for both parties. That's why it's important to design methods for sharing any monetary gains with suppliers. This can give them a tangible incentive for collaboration and implementation.

 Turning risk into opportunity

In modern business, a good portion of the work is often done by a company’s extended supply chain -- and is closely scrutinized by an increasingly connected world. Although this may create significant risks, it can also create new opportunities for improving  aspects of business performance. By working more closely with supply chain partners, companies can reduce the chances of supply disruption and help protect their reputation. But perhaps even more important, they can develop new innovations that  reduce operating costs, boost revenue, and make their business more sustainable and resilient.

Join us for our next sustainability webcast, Supplier Collaboration: Pracitical Steps to Help Drive Financial Value and Resiliency on February 4th at 2:00 PM ET.



David Linich
Principal
Deloitte Consulting LLP



[1] 2012 survey by Deloitte Consulting LLP, in conjunction with ASQ, Institute for Supply Management, and Corporate Responsibility Officer Association

As used in this document, "Deloitte" means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. Certain services may not be available to attest clients under the rules and regulations of public accounting.

This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication.

Copyright © 2013 Deloitte Development LLC. All rights reserved.

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