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“Green” Winners

The performance of sustainability-focused companies


during the financial crisis

As companies cut costs to get through the current global economic


slowdown, there is often a temptation to abandon recent forays into
sustainability. Yet a new A.T. Kearney analysis finds that companies
committed to corporate sustainability practices are achieving above-
average performance in the financial markets during this slowdown.
So before tossing out those sustainability practices and initiatives,
it might be wise to first determine the real value of the efforts —
especially the possible rewards for staying the course.

In the past few years, a decidedly an award is won for a track record of A recent
“imperfect” storm of scarce resources, social responsibility.
global warming debates, shifts in cus- As the financial crisis takes its A.T. Kearney
tomer demand and regulatory changes toll, and sustainability-related projects
have compelled many businesses to add costs, many companies are con- analysis reveals that
react to the sustainability challenge. sidering abandoning their sustainabil-
Some companies react strategically, ity initiatives. But before quitting during the current
adjusting the corporate strategy to sus- altogether, a note of caution. A recent
tain the human and natural resources A.T. Kearney analysis reveals that economic slowdown,
they will need to succeed now and for during the current economic slow-
the long term. Their initiatives are usu- down, companies that show a “true” companies that
ally transformational in nature, bring- commitment to sustainability appear to
ing a significant but potentially slow rate outperform their industry peers in the
show a “true” com-
of return. They are less costly (mostly financial markets (see sidebar, Research
investments in energy efficiency) and Methodology on the following page).
mitment to sustain-
often result in higher revenues through Indeed, in 16 of the 18 indus-
ability appear to
sales of green products and services. tries examined, companies recognized
Other companies take a more tac- as sustainability-focused outperformed outperform their
tical approach, viewing sustainability their industry peers over both a three-
first as an opportunity to improve their and six-month period, and were well industry peers in the
reputations. They make small efforts protected from value erosion.1 Over
such as upgrading an environmental three months, the performance dif- financial markets.
policy or rebranding existing initia- ferential across the 99 companies in
tives under the guise of sustainability. this analysis worked out to 10 per-
The efforts are deemed complete when cent; over six months, the differential
a sustainability report is published and was 15 percent. The figure on the
1
Sustainability companies are defined by inclusion in either the Dow Jones Sustainability Index or the Goldman Sachs SUSTAIN focus list.
driving sustainability practices from
Research Methodology the top down, and guarding against
risky or ill-advised actions via strong
The research sought to determine whether companies engaging in sustainable corporate governance practices.
practices may be protected from value erosion during a financial crisis by com-
The company began its sustain-
paring the performance of sustainability-focused companies against market indi-
ces over defined spans of time.
ability efforts more than a decade ago,
For the purposes of this study, sustainability practices refer to those geared and has since integrated sustainability
toward protecting the environment and promoting social well-being while practices at each stage of the value chain.
achieving shareholder value. Sustainability companies were identified based on Perhaps most admirably, the company
their inclusion in the Dow Jones Sustainability Index (DJSI) or the Goldman decreases operational costs while reduc-
Sachs SUSTAIN focus list. Collectively, these two lists contain 99 different com- ing its environmental footprint and
panies, with some appearing on both. delivers solid annual results. Despite
Analyses were conducted in 2008, for three months (September to November)
increasing production volume by 76
and six months (May to November). Performance differentials were calculated
in each industry by comparing the percentage point difference of average sus-
percent since 1998, the company has
tainability companies’ indexed performance to the market indexed performance. reduced its greenhouse gas emissions
Over the three-month period, the performance differential came to 10 percent; by 16 percent, energy use by 3 percent
over six months, the differential was 15 percent. and water use by 28 percent over this
period. Improved energy efficiency
saved the company approximately $30
following page illustrates the perfor- Planning for the long-term requires million in 2007, while optimized pack-
mance of sustainability-focused com- a five-year or longer outlook by strate- aging volume saved more than $500
panies in each industry compared to gic thinkers, including academics, million over the past 16 years.
peers. This performance differential policy experts, scientists and others.
translates to an average $650 million Essentially, this group is made up of Strong Corporate Governance
in market capitalization per company. people who understand how present- While the recent rash of corporate
Our findings suggest that investors may day phenomenons and trends—includ- scandals has reinforced the need for
reward “true” sustainability-focused ing legislation and regulatory changes, strong corporate governance, many
companies that demonstrate the fol- irregular customer demand, demo- companies had already instilled a
lowing characteristics. graphic shifts and environmental system of business ethics and self-
challenges — will affect the future checks, doing so well before enactment
A Focus on Long-Term Health marketplace. Their insights help build of legislation such as Sarbanes-Oxley.
Rather than Short-Term Gains the case for selective investments Corporate governance refers to poli-
Planning for the long term can be a in technologies, processes and even cies, processes and people that serve
challenge in a business climate domi- people that may not bring an immedi- the needs of stakeholders by oversee-
nated by quarter-to-quarter thinking. ate return but will position the busi- ing management activities. Boards of
For some, long-term planning means ness for sustained future success. directors, strongest when composed of
three-year forecasts and goals, leaving A global consumer packaged individuals free of conflicts of interest
them ill equipped to react to external goods company, featured on both the and a chairperson who does not hold
forces and capture emerging oppor- Dow Jones Sustainability Index and a dual role at the corporation, play
tunities. While private companies the Goldman Sachs SUSTAIN focus a key role in governance.
(and public companies largely held by list, believes that its long-term success Sustainability efforts typically call
sovereign or pension funds) are best depends on creating value for share- for a degree of transparency that com-
positioned to take a long-term view holders and for society. The company panies without strong corporate gover-
and invest accordingly, all companies views sustainability as not just a phil- nance are often not willing to grant.
with a long-term view are likely to anthropic endeavor but as a funda- Investigations into the sustainability
attract the “right” kinds of investors. mental part of its business strategy, efforts of suppliers several tiers up the
value chain and carbon usage data are conduct, communicating its standards such as environmental changes due to
a few examples of how the principles to suppliers and auditing them regu- geopolitical happenings.
of corporate governance are being larly to verify compliance. Compliance As with a long-term strategy,
applied to sustainability efforts. committees in the head office and in effective risk management requires a
For one leading media company, each division provide an internal check five- or 10-year outlook to consider
strong corporate governance has been for conformity to corporate governance how today’s trends and events might
fundamental to its business success. practices. The company has reduced its threaten tomorrow’s business. What if
The company adopted principles from carbon emissions by 13 percent since a key supply source or manufacturer
the United Nations Global Compact— 2003 while scoring in the top quartile spots movement away from open mar-
a strategic policy initiative through for corporate governance practices on kets? What if unrest or weather makes
which businesses align with universally the Goldman Sachs Sustain List. a key facility unusable? It takes a net-
accepted principles in human rights, work of experts studying the “risk
labor, environment and anti-corruption. Sound Risk Management radar” to help forecast and prepare
The Compact is embedded into daily Practices for such happenings, a willingness to
business practices and is applied to Prudent risk management practices grapple with the what-if questions,
supplier codes of conduct, company often evolve from the same approaches and investments in alternatives if
policies, and compliance procedures used to develop and execute long-term potential risks become reality.
for confidential reporting and auditing, strategies. Risk management requires A leading research-focused health-
among other areas. identifying areas of potential liability care company focuses on the sustainable
The company issues an annual cor- or weakness and crafting strategies to development of products and services,
porate responsibility report and widely avoid disruptive events from occurring using risk management techniques to
shares its code of ethics and business due to weak links in the supply chain, help determine future areas of need.

FIGURE: Sustainability-focused companies outperform peers

Industry average better Sustainability-focused companies better

Utilities 5% 7% ~ 6 months
Telecommunications 77% 9% ~ 3 months (positive)
Technology 5% 13% ~ 3 months (negative)
Oil and gas 12% 15%
Industrial goods and services 11% 23%
Construction and materials -8% -2%
Healthcare 12% 13%
Insurance 15% 21%
Financial services 17% 25%
Banks 4% 11%
Travel and leisure 5% 10%
Retail 10% 17%
Media 28% 33%
Personal and household goods -6% -4%
%
Food and beverage 8% 16%
Automobiles and parts 20% 33%
Chemicals 18% 30%
Basic resources 5% 10%
-10% -5% 0% 5% 10% 15% 20% 25% 30% 35% 40%
Indexed stock price performance percentage differential to market

Note: Indexed stock prices at ~ 3 months = September 8, 2008 and ~ 6 months = May 19, 2008 to current date, November 24, 2008. Percentage performance differential calculated by
taking the percentage point difference of averaged sustainability companies’ indexed performance to the market indexed performance over the market indexed perofrmance.
Sustainability companies include DJSI World 80 2008/2009 + DJSI 2008 Supersector Leaders + Goldman Sachs SUSTAIN focus list for mature industries.
n=99 sustainability companies Sources: Bloomberg; A.T. Kearney analysis
The company considers the implica- respond quickly to foreseeable issues. formance, what lessons can companies
tions of risks related to sustainability Ahead of the curve in reducing carbon learn during these challenging eco-
and develops plans to manage them. It dioxide emissions, this automaker is nomic times?
also has processes in place to flag iden- developing alternative fuels to reduce The primary take-away is to
tified risks, and reduces future risks by emissions and formed a dedicated examine all sustainability practices and
integrating sustainability practices into team to constantly assess markets, determine how genuinely committed
its global business strategy. competitors, technologies, politics, the firm is to them. If the commit-
laws, natural science and medicine. ment is less than complete—where
A History of Investing in Green What the team learns is shared across efforts are simply to improve public
Innovations the company to better understand the relations or catch up with industry
Green innovations—such as reducing future impact of present-day events. leaders—and there is little payback,
waste and emissions, using alternate The company strives to make every it might make sense to reduce or
energy sources, and producing natural new model more energy efficient than eliminate sustainability investments
products—have become something older models and competitor’s vehi- and redeploy this capital to areas that
of a “me too” cause in recent years. cles, and plans to use electric drive will help the company weather the
Yet companies with a history in green systems to reach a zero emissions goal current crisis.
innovations have reaped the most ben- for its vehicles. However, if sustainability is trans-
efits. And those that continue to make In North America, President forming the business, it makes sense
meaningful investments will continue Obama’s green policies will provide to maintain this commitment and,
to prosper, both in terms of business opportunities across industries for where possible, even consider increas-
results achieved and public perception. innovation in the areas of construction ing investments to improve future
For example, a leading global auto- and infrastructure, renewable energy, positioning. The most sustainability-
maker made sustainability a core and transportation. focused companies may well emerge
value and has therefore been able to from the current crisis stronger than
be opportunistic—using technologi- The Real-World Implications ever—recognized by investors who
cal innovations to create leading-edge With the apparent link between sus- appreciate the true long-term value of
automobiles and monitoring trends to tainability practices and financial per- sustainability.

Authors
Daniel Mahler, Ph.D., is a partner in the New York office and is the global coordinator of the firm’s sustainability practice.
He can be reached at daniel.mahler@atkearney.com.
Jeremy Barker, a partner in the Syndey office, leads the sustainability practice in Australia. He can be reached
at jeremy.barker@atkearney.com.
Louis Besland, a partner in the Paris office, leads the sustainability practice in France. He can be reached
at louis.besland@atkearney.com.
Otto Schulz, Ph.D., a partner in the Düsseldorf office, leads the sustainability practice in Germany. He can be reached
at otto.schulz@atkearney.com.

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