Love And Money: Sustainability Reporting Builds Healthier Businesses and a Healthier Planet
by Lee H. Goldberg

Anyone who's been part of a family knows having enough money is important, but it's not the only essential part of making a life that's worthwhile and fulfilling. The same goes for lots of other important parts of our lives. Who can put a price tag on clean air, a safe community, or the warm feeling of knowing almost everyone at the lunch counter when you stop in at the local diner for a slice of homemade pie? While this simple piece of wisdom has been ignored by the business community since well before Adam Smith described the foundations of capitalism, it looks as though the times are changing as some of the world's most successful companies are adopting accounting practices to bring social and environmental factors into the business equation.

Economists have been wrestling with the concept of "non-monetary accounting" for well over a decade, but the past few years have seen a growing number of companies begin to put these principles into practice by issuing "sustainability reports" along with their annual reports. Many of the same firms are also including factors like "worker satisfaction," "quality of internal communication," and "community impact" in their performance metrics. Surprisingly, recent studies indicate that companies who pay attention to these factors, traditionally referred to as "externalities" by the bean-counters, tend to be more stable and profitable over the long haul.

A recent study, jointly prepared by Standard & Poor's and a branch of the United Nations Environment Program, entitled "Risk & Opportunity: Best Practice in Non-Financial Reporting" * takes a detailed look at 50 of the best sustainability and environmental reports selected from a field of over 350. Interestingly, the overwhelming majority of the report's "Top 50" companies also have investment grade credit ratings. While the report is hesitant to suggest a direct connection between corporate ethics and long-term profitability, they do note that "it is striking that enhanced transparency and disclosure via sustainability reporting is so clearly linked to companies that display strong levels of credit quality, a widely-recognized indicator of operating and financial stability."

When you cut through the financial gobbledygook, they are hinting at what I've been trying to tell people for years. Companies that view their basic responsibilities to include caring for their workers, customers and the environment tend to be better managed than those who simply concentrate on maximizing next quarter's dividends. I like to think of the reporting practices used to ensure that the materials and processes used in a company are environmentally sound and provide an extra level of resolution to the tools managers use to monitor a company's health. If used properly, they can help spot potential problems and identify solutions long before they begin to affect the bottom line.

There's still a long way to go, however, as the S&P report notes that only a small fraction of the world's 50,000 major corporations have adopted any sustainability reporting practices. They also note that even many of the best reports still focus on compliance with existing environmental laws rather than voluntary programs, and it seems that even some of the most progressive management teams still don't fully grasp what the report calls "the evolving links between corporate governance and the triple bottom line agenda."

This bodes well for companies in our industry like Hewlett-Packard, Matsushita Electric, Philips, and STMicroelectronics that have been leaders and trend-setters in both environmental practices and reporting techniques. While no company can survive for long without good business practices, technical innovation, and strong marketing skills, the pro-active involvement in environmental issues that these companies display is rapidly becoming a strategic advantage that will affect both profitability and access to capital.

While we are still in the early days of non-financial accounting, it's already hit the mainstream and it's only a matter of time before it becomes as much of a standard business practice as those proxy stockholder voting slips that appear in my mailbox every year. Hopefully, we'll look back a decade from now and view this year as the time when companies began to learn to run their operations as if their kids' lives depended on it.

Questions? Comments? Tips on locating New Jersey diners with great homemade pie? Write me.

* Copies of the report Risk & Opportunity: Best Practice in Non-Financial Reporting are available to download from http://www.sustainability.com