The Business Case For Sustainable Development

8.1 OVERVIEW

Beth Beloff

BRIDGES to Sustainability

The key question asked by companies considering pursuit of sustainability practices is what is the business case - a profit or shareholder value case - that can create justification for allocating resources and the attention of corporate boards and executives. As was written in Walking the Talk (Holliday et al., 2002), companies tend to get involved in activities long before they can prove the business case for doing so.

But the case is emerging and, although the corporate response is fragmented and at many stages of maturity in the United States relative to other places in the world, there are many noteworthy efforts highlighted in this section of the book that are moving us toward that definitive business case (Fig. 8.1). Companies moving up the sustainability learning curve are recognizing that, from a business competitiveness perspective, by moving beyond traditional EHS concerns to include (1) social issues regarding the workforce/workplace and community, and (2) long-term issues, not just short-term ones, they can move from compliance and managing near-term risks to creating new business opportunities. This perspective contributes to the longer term survivability of the enterprise.

We have organized this section into four parts:

1. The 2004 Chemical Industry Sustainability Survey and related Focus Groups Summaries, conducted by PwC and BRIDGES to Sustainability, with the

Transforming Sustainability Strategy into Action: The Chemical Industry, Edited by B. Beloff, M. Lines, and D. Tanzil

Copyright © 2005 John Wiley & Sons, Inc.

support of AIChE, to capture a view of where the industry stands on the issues and practices related to sustainability.

2. An overview of sustainability and performance, which links the intangibles of sustainability to market performance.

3. Business case studies expanding on the areas covered in the survey, and written by sustainability leaders in major companies with chemical operations, including DuPont, Shell, BASF, GlaxoSmithKline as one major pharmaceutical company, and 3M as a major customer of chemicals.

4. Various other important perspectives on the business case for the industry by others - the investor community perspective, an investment analysis piece providing a cautionary tale regarding Dow and Bhopal and potential market backlash, the scientific and NGO community perspective, and a commentary on corporate governance and sustainability.

Again, here we are not attempting to be comprehensive. There are numerous other worthy case studies and perspectives that could well be highlighted. Our goal is to present a prism of various thought-provoking perspectives both from the heart of the chemical industry and from those related to it in one way or another as stakeholders. We hope this stimulates further discussion among industry groups about where to push the business case.

Figure 8.1. Corporate sustainability learning curve. (Adapted by Beloff from a conceptual model developed for The Stanley Works by BRIDGES to Sustainability and Convergence Consulting, 2004.)

8.2 2004 CHEMICAL INDUSTRY SUSTAINABILITY SURVEY (COMPILED BY PRICEWATERHOUSECOOPERS, LLP)

Andrew Savitz, Douglas Hileman and Michael Besly1

PricewaterhouseCoopers, LLP 8.2.1 Overview

Every industry in the United States is grappling with sustainability, or corporate social responsibility, and the chemical industry is no exception. During the first quarter of 2004, PricewaterhouseCoopers LLP (PwC), in collaboration with BRIDGES to Sustainability (BRIDGES), conducted a survey, two focus groups, and interviews of senior executives and managers in the chemical industry, which revealed the following.

1. Although certain chemical companies are seen as targets by advocates who believe their products are inherently dangerous and their processes essentially unsustainable, others are considered global leaders in addressing environmental, economic, and social concerns.

2. Although Responsible Care® raised the bar and provided a common framework for chemical companies on environmental stewardship, a large (and possibly growing) gap exists between leaders and laggards within the industry on sustainability.

3. Although Responsible Care® was a highly visible, industry-wide approach, sustainability is seen to be primarily a matter of shareholder value, hence an area for competitive advantage. This raises a question as to whether an industry-wide approach to sustainability is either feasible or advisable. On the other hand, it is possible that a major adverse event, regardless of the company involved, could taint the entire industry or create pressure for a retroactive industry-wide regime. In any case, it seems clear that laggards would benefit from this assistance.

In addition to this dilemma, sustainability, and the multiple driving forces behind it, are creating a wider and more diverse set of responsibilities for the chemical industry. Our research revealed these additional challenges:

1. Numerous respondents expect to use the Responsible Care Management Systems (RCMS) framework to implement and manage sustainability, but believe that no significant changes to existing programs would be necessary. As many analysts and some respondents have noted, Responsible Care® does not address many of the areas covered by sustainability.

2. Most respondents indicated that sustainability touches more on public relations than any other function. However, stakeholder engagement,

1The authors wish to thank Beth Beloff of BRIDGES to Sustainability for her assistance.

fundamental to the success of any sustainability program, did not appear to be high on the radar screen of most respondents. One conclusion is that responding companies are focused on the reporting aspect of sustainability, without sufficient emphasis on the engagement aspects. This may be a fruitful area for industry-wide collaboration.

3. The lack of metrics on social and economic elements of sustainability continues to be a challenge. This may also present an opportunity for industrywide collaboration.

8.2.2 Introduction

"Sustainable Development," "Sustainability," "Corporate Social Responsibility," are terms often used to describe the trend towards enhanced performance and reporting with respect to environmental, social, and economic indicators.

In response to the rapid development of sustainability as a business movement, PwC was approached by BRIDGES and the American Institute of Chemical Engineers (AIChE) to conduct a sustainability survey of the chemical industry in the United States. The results from this collaborative effort were to become an integral part of the publication, Transforming Sustainability Strategy into Action: The Chemical Industry.

The purpose of the survey was to:

• provide specific information on current attitudes, concerns, approaches, and activities in sustainable development concepts and practices;

• identify specific sustainability-related trends as they relate to the chemical industry; and

• stimulate a discussion on best practices for incorporating sustainability into the chemical companies' management frameworks.

In February and March 2004, PwC surveyed senior executives and managers with responsibilities for overseeing sustainability at 35 chemical companies with major operations in the United States, to identify key issues and challenges facing the industry and to gain insight into how individual chemical companies are handling "triple bottom line" performance management within the context of Responsible Care®.

Additionally, BRIDGES and AIChE's industry-led center CSTP,2 together with PwC, organized two follow-up focus groups, consisting of representatives from nine companies and Dr. Terry Yosie from the American Chemistry Council (ACC). The purpose of these focus groups was to discuss our preliminary assessment of survey responses, gain more in-depth understanding on certain issues, and offer a forum for knowledgeable parties to raise relevant issues around sustainability that went beyond the survey instrument itself.

2The Institute for Sustainability's "Center for Sustainable Technology Practices."

8.2.2.1 Survey Design. To ensure that the respondents addressed the areas of sustainability - economic, environmental, and social - the survey presented three commonly used definitions for sustainability3 and respondents were asked to consider their responses in terms of those definitions. This was critical given the broad array of definitions and understanding related to the concept of sustainability.

The survey instrument consisted of 19 questions divided into four categories:

Company Specific: Current Attitudes, Opportunities & Risks

Company Specific: Current Policies, Practices & Metrics

Industry Specific: Significant Developments, Influences & Issues

Industry Specific: The Role of Responsible Care® and Other Guidelines

The brief survey was designed to highlight certain top line issues. The closed-end questions were developed by PwC and BRIDGES to elicit uniform, comparable, and measurable responses. However, respondents were given the opportunity to add their own narrative responses throughout. Prior to distribution, the questionnaire was reviewed by industry representatives, a process facilitated through the AIChE, to test relevance and survey mechanics.

8.2.2.2 Targeted Respondents. The target respondents were senior executives and managers with responsibilities for sustainability at chemical companies with major operations in the United States. The companies and contacts within them were identified by BRIDGES and the AIChE. Contacts were asked to forward the survey to the appropriate individual if they believed that they were not the most knowledgeable on the company's sustainability approach and activities. In addition, contacts were informed that the results of the survey would be nonattributable and that all company-specific information provided would remain strictly confidential.

The survey was distributed and administered as follows:

• 225 companies initially invited to participate via e-mail;

• target list narrowed to 75 preferred targets based on subsequent screening;4

• 35 responses received via fax or web submission.

8.2.2.3 Response and Limitations. Representatives of 35 chemical companies responded to the survey (Fig. 8.2). As with many surveys of this nature, companies that see themselves as leaders or early movers are more likely to respond. Therefore, the survey likely includes the attitudes and approaches of some of the most active

3(a) The World Commission on Environment and Development (Brundtland Commission) definition: "Development that meets the needs of the present without compromising the ability of future generations to meet their own needs." (b) The "Triple Bottom Line" definition: To minimize harm resulting from business activities and to create economic, social, and environmental value. (c) The Dow Jones Sustain-ability Group Index definition: "A business approach to create long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments."

4AIChE member companies with significant chemical operations within the United States.

Percent

Note: Nine respondents did not provide revenue data

Figure 8.2. Breakdown of responding companies (35 companies responded, representing over US $225 billion in annual revenues). (Source: PricewaterhouseCoopers, LLP.)

companies in this area. While every effort was made to reach a diverse sample group, the findings presented here may not be representative of all chemical companies operating within the United States. As such, we have made a conscious effort to avoid drawing broad, industry-wide conclusions, but rather have analyzed, consolidated, and presented the survey results as they were received.

8.2.2.4 Profile of Respondents. The 35 respondents are predominantly publicly traded, multinational companies and most are well known to the media and the public (Table 8.1). The responding companies represent approximately $US 225 billion in annual sales. Over 90 percent of the respondents operate and have assets outside the United States. The survey therefore collected information from companies whose primary or initial experience with sustainability may have been gained in jurisdictions outside the United States.

Finally, the respondents fall into two groups: those whose principle business is the fabrication, processing, and/or handling of chemicals ("Primary Chemicals" companies), and those for whom the chemicals business is one of a number of different businesses ("Specialty Chemicals" companies).

8.2.3 Survey Analysis and Follow-Up

A team of PwC professionals with experience in sustainability and the chemical industry reviewed the survey results and consulted with a panel of experts and practitioners from the industry for their perspective on what the raw numbers and responses indicated. We then developed our preliminary findings. We also identified additional issues where more structured discussion might elicit further insights and conducted two focus groups to better understand some of the findings and validate our overall conclusions.

TABLE 8.1. Survey Respondents

Primary Chemical Companies

Specialty Chemical Companies

3M Company (The)

Arch Chemicals, Inc.

Air Products and Chemicals, Inc.

Bayer Corporation

Burlington Chemical Co.

BP

Chevron Phillips Chemical Company

Cambridge Major Laboratories, Inc.

Dow Chemical

Cardolite Corporation

DuPont

Celanese AG

Eastman Chemical Company

Eastman Kodak

Eliokem

Elementis Specialties

Formosa Plastics Corp.

Lubrizol

EMD Chemicals

Methanex Corporation

Occidental Chemical Corporation

Monsanto Company

Shell Chemical Companies

Pfizer

PPG Industries, Inc.

Rohm & Haas

W.R. Grace & Co

Note: Eight companies declined to disclose company name. (Source: PricewaterhouseCoopers, LLP.)

Note: Eight companies declined to disclose company name. (Source: PricewaterhouseCoopers, LLP.)

The focus groups were convened in collaboration with BRIDGES and the AIChE's Institute of Sustainability, and involved industry representatives with both sustainability and chemical industry experience. These groups included individuals who had responded to the survey as well as individuals at companies who had not responded.

8.2.3.1 Survey Responses and Initial Observations. Our analysis of initial responses suggests the following insights.

Responses. Of the respondents, 83 percent rated sustainability of "high" importance to the company (i.e., rated 7 or higher out of 10), while only 46 percent indicated a "high" degree of integration of sustainability with business strategy (Figs. 8.3 and 8.4).

Initial Observation: Sustainability is Important, But Not Yet Integrated into the Business Processes. This response is not surprising. Even if senior management has articulated a vision for sustainability, it takes time and effort to convey it to the organization, and embed it into roles, responsibilities, and management systems. The immediate challenge is effectively to communicate the business case for sustainability to all levels of the organization and to develop programs to integrate sustainability into the business.

Responses. Of the respondents, 97 percent have written environmental policies, but only 40 percent have a written policy on sustainability - only human rights was less frequently addressed at 34 percent (Fig. 8.5).

56 Importance

9 10 High

Figure 8.3. How important is sustainability to your company? (Question 1). (Source: PricewaterhouseCoopers, LLP.)

Initial Observation: Sustainability Policies Lagging. Owing to prolonged industrywide focus on the subject, most companies have environmental policies. Sustainability, however, is not clearly defined by many companies, and written policies do not yet exist. Also, many areas covered under most definitions of sustainability may be perceived to be addressed already by existing policies, negating the need for a separate sustainability policy.

Responses. The highest ranked opportunities for sustainability included enhanced reputation, cost savings, and innovation, indicated by 65, 62, and 53 percent of respondents, respectively (Fig. 8.6).

5 6 Integration

10 High

Figure 8.4. How much is sustainability integrated into your company's overall business strategy? (Question 1a). (Source: PricewaterhouseCoopers, LLP.)

Environmental Ethics Equal opportunity Diversity Social (or community) Sustainability Human Rights

Figure 8.5. Does your company have a written policy that specifically addresses the following areas? (Check all that apply.) (Question 2). (Source: PricewaterhouseCoopers, LLP.)

Initial Observation: "Hard" and "Soft" Opportunities. The chemical industry is very familiar with cost savings related to environmental performance improvement. Sustainability offers many similar cost minimization opportunities. Damaged reputation has long been something to avoid, and it can easily be associated with top line performance. Companies are now beginning to appreciate the upside value of company reputation - and that sustainability performance can drive this intangible value.

Responses. Chemical companies use a variety of frameworks to manage sustainability. Of respondents, 62 percent use Responsible Care®, more than any other framework (Fig. 8.7).

Initial Observation: Variety of Management Frameworks. If most companies do not have written sustainability policies and sustainability does not seem well understood

Enhanced reputation Cost savings or operational efficiencies Innovation opportunities Increased market share Strategic partnering Attract & retain investors Abstract & retain talented employees Enhanced corporate governance Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage

Figure 8.6. What do you see as the greatest sustainability-related opportunities for your business? (Check the top 3.) (Question 3). (Source: PricewaterhouseCoopers, LLP.)

Responsible Care Management System

Compliance-focused management system

Quality System / Six Sigma

Green chemistry / Design-for-sustainabiiity

Ad Hoc I Silos

Sustainability Management System

Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage

Note: "Other" category includes integration Into various existing management systems/processes (including ISO 14001), business planning, local SD champions, SD committees, and Board of Directors.

Figure 8.7. How does your company manage sustainability? (Check all that apply.) (Question 5). (Source: PricewaterhouseCoopers, LLP.)

or integrated, it seems odd that 62 percent of the respondents say they manage their sustainability efforts through an RCMS.5 Despite the fact that Responsible Care® is cited as the dominant approach, companies differ considerably in terms of how they view sustainability, where it is located, how they manage and measure it. The question remains "Are companies managing their sustainability programs in a systematic way?", and the answer is not clear. The focus groups confirmed that Responsible Care® is not an ideal vehicle by which to manage this area. It is helpful for environmental issues, but less so for social issues and even less so for economic issues related to sustainability.

Responses. Respondents indicated that responsibility for sustainability is located in a variety of functions within their organizations. By far, the most frequent response was Public Relations (74 percent), with Environmental, Health & Safety (EHS) a distant second at 44 percent (multiple responses permitted) (Fig. 8.8).

Initial Observation: Possible Confusion on Roles and Responsibilities. These responses seem at odds with the fact that 62 percent of the respondents manage sus-tainability via Responsible Care®, and provides evidence of program fragmentation, which is typical for all industries in the early stages insofar as sustainability cuts across numerous corporate functions. Coordination and integration are proportional to the maturity of a sustainability program, and "Public Relations" and "Communications" are often the starting point of such programs, so it is no surprise that a high percentage of respondents cited these functions as having primary responsibility. One would expect that the management of sustainability would move out of the public relations - and even the EHS function - once it becomes more integrated within

5It may be that some companies are using environmental stewardship as a proxy for sustainability, which indicates a lack of understanding concerning the latter.

Communications / Public Relations Environmental, Health & Safety Research & Development Legal

Investor Relations Finance Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage

Note: "Other" category includes Board of Directors, Marketing, Human Resources, Government Affairs and Stakeholder Relations.

Figure 8.8. Within which functional area(s) is sustainability currently housed? (Check all that apply.) (Question 6). (Source: PricewaterhouseCoopers, LLP.)

the core of the company's business strategy. We note that many companies outside of the chemical industry have established cross-functional sustainability committees.

Responses. Just over half (51 percent) of the respondents now have a senior-level executive or executive committee with dedicated responsibilities to coordinate and promote sustainability. Another 14 percent indicated they expected to have this in place within two years, leaving just over a third (35 percent) with no plans to do so (Fig. 8.9).

Initial Observation: Organizational Placement is Beginning to Reflect Importance of Sustainability. With executives increasing focus on sustainability, companies

Figure 8.9. Does your company currently have a senior level executive or executive committee with dedicated responsibilities to coordinate and promote sustainability throughout your organization? (Check one.) (Question 7). (Source: PricewaterhouseCoopers, LLP.)

are likely to comprehend the extent and depth to which sustainability affects their operations, compliance, risk profile, and competitive position.

Responses. Of survey respondents, 58 percent publish an external sustainability report, or plan to do so within a year. Other survey answers related to reporting the following (Figs. 8.10 to 8.13).

• 37 percent indicated they use triple bottom line metrics;

• 60 percent indicated they would make no changes to their program if Responsible Care® were expanded to include social and broader economic criteria;

• 74 percent indicated that sustainability is housed in Public Relations (highest among response options);

• 74 percent indicated they use continuous improvement metrics to track their sustainability performance. This comports to the 80 percent who indicated they adhere to certified Environmental Management Systems (ISO 14000 or similar) - where continuous improvement is a basic tenet;

• 29 percent indicated that they use stakeholder outreach and evaluation to measure the success of their sustainability program.

Initial Observation: Reporting Making Progress, But Major Challenges Remain. Although almost 60 percent are reporting, or plan to, only 37 percent of the respondents indicated they use triple bottom line metrics to report on sustainability, which raises a question of how the reports can effectively capture basic sustainability information.

Mechanisms to track & report continuous improvement Executive committee oversight Internal "recognition" programs "Triple bottom line" metrics External / third-party audit program Stakeholder outreach / evaluation Financial metrics for major sustainability initiatives

Other

226%

JVI%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage

Note: "Other" category includes Internal audits against company standards, Third party sustainability indices and external ratings.

Figure 8.10. How does your company measure (or plan to measure) success with respect to your sustainability program? (Check all that apply.) (Question 8). (Source: PricewaterhouseCooper, LLP.)

Yes (verified externally) 6%

No (not planning)

Yes (verified externally) 6%

Yes (not verified) 43%

Figure 8.11. Does your company issue a Sustainability Report? If so, is the report externally verified in whole or in part? If not, do you expect that your company will issue a report? (Question 9). (Source: PricewaterhouseCoopers, LLP.)

Yes (not verified) 43%

Figure 8.11. Does your company issue a Sustainability Report? If so, is the report externally verified in whole or in part? If not, do you expect that your company will issue a report? (Question 9). (Source: PricewaterhouseCoopers, LLP.)

Responses. Most respondents (89%) believed there would be more emphasis on sustainability in five years than today. Over half the respondents expected regulations to be an emerging factor driving sustainability in the chemical sector (Fig. 8.14).

Initial Observation: Sustainability - Here to Stay. To the EHS or sustainability professional, this is not a surprising response, but it may be to others within the organization. However, a survey of over 900 CEOs conducted by PwC in 2003 revealed that 79 percent of CEOs believe that sustainability is vital to the profitability of their companies, an increase from 69 percent in 2002.6

Responses. Respondents saw increased public right-to-know (71 percent), changing regulations for processes and products (68 percent) and globalization (62 percent) as the most significant developments that have influenced the chemical industry to consider sustainability (Fig. 8.15).

Initial Observation: Regulatory Requirements are Important Drivers for Sustainability, But Not the Only Ones. Although regulations play a central role in affecting company behavior, so do other factors, for example, increased transparency, competitive advantage, reputation, growth, and innovation. Globalization and regulation may be linked, as many of the biggest changes in regulatory schema are emerging from outside the United States, but will have a significant effect on chemical companies operating within the United States. Furthermore, issues related to regulatory compliance, environmental and sustainability reporting are becoming more complex for companies headquartered in one country, with business units

6PwC 2003 Global CEO Survey released at World Economic Forum in Davos, Switzerland.

Internal company derived standards / guidelines Certified Management Systems (ISO14000, OHHAS or other)

GRI reporting guidelines UN Sullivan Principles

UN Global Compact

OECD Principals for Multinationals

CERES Principles None

Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage

Note: "Other" category includes WBCSD eco-efficiency and Center for Corporate Citizenship Standards of Excellence.

Figure 8.12. Other than Responsible Care, what voluntary standards or guidelines does your company adhere to? (Check all that apply.) (Question 10). (Source: PricewaterhouseCoopers, LLP.)

and operations in others. Sustainability offers the opportunity to consolidate programs and reporting.

Responses. New regulations that address chemical risks throughout a chemicals lifecycle (53 percent) and requirements for intensive chemical management risk assessment processes (50 percent) were viewed as the most significant regulatory issues facing the industry over the next five years (Fig. 8.16).

Plan to develop a RCMS program that includes these issues

No change—we already include these issues in other corporate programs

No change—we already include these issues in our Responsible Care program

Plan to create an integrated sustainability function to bring these issues under one program

Plan to involve stakeholders in the process of integrating the program

Plan to develop more specific financial metrics to address these issues

Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage

Figure 8.13. If Responsible Care were to include provisions for social and economic responsibility, how would your company modify its current program to incorporate these changes? (Check all that apply.) (Question 15). (Source: PricewaterhouseCoopers, LLP.)

Less 0%

No Change 11%

Figure 8.14. In your view, will your company place more or less emphasis on sustainability in 5 years than it does today? (Check one.) (Question 11). (Source: PricewaterhouseCoopers, LLP.)

More 89%

Figure 8.14. In your view, will your company place more or less emphasis on sustainability in 5 years than it does today? (Check one.) (Question 11). (Source: PricewaterhouseCoopers, LLP.)

Initial Observation: Risk Management is a Major Issue Going Forward. The extent to which the chemical industry effectively understands and manages risk will greatly depend on the nature of its interaction with key external stakeholders - especially the users of its products. Once again, regulatory oversight will play an important role here and, as such, we noted that this should be another topic of discussion for our focus groups.

8.2.4 Focus Groups' Perspectives

Two follow-up focus groups were convened, consisting of a total of nine companies, five of whom participated in the survey (Table 8.2). Dr. Terry Yosie of the ACC also participated.

Increased public right-to-know initiatives and public reporting of EHS performance

Changing regulatory requirements for processes and products

Globalization of business activities and responsibilities

Greater external stakeholder participation in government and corporate decision-making

Major accidents or incidents at chemical facilities

Re-examining security practices in the wake of September 11, 2001

Other

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage

Note: "Other" category includes the commitment of large-scale, benchmark chemical companies to sustainable development, product portfolio growth & innovation and distinct competitive advantage experienced.

Figure 8.15. What are the most significant developments or events that have influenced the chemical industry to consider sustainability practices? (Check the top 3.) (Question 12). (Source: PricewaterhouseCoopers, LLP.)

Introduction of regulatory programs that address chemical risks throughout a chemical's lifecycle

Requirement for intensive risk assessment processes in managing chemicals

Increased concern about exposure to unregulated chemicals used in a wide range of consumer products

Requirement to disclose toxicity information for large numbers of existing chemicals already on the market

Increased stakeholder involvement in the chemical management process

None of the above

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Percentage

Figure 8.16. Which of the following does your company believe will be a significant issue over the next 5 years? (Check the top 2.) (Question 13). (Source: PricewaterhouseCoopers, LLP.)

Other

During each focus group, our initial observations were briefly presented and we discussed questions provided to the focus group participants in advance. In addition to these questions, the groups also discussed other issues related to the survey results, sustainability, and/or the chemical industry in general.

8.2.4.1 Focus Group Perspective #1: Responsible Care® and Sustainability -Cousins, not Twins. Responsible Care® and sustainability are related, but different. Responsible Care® originated, in part, in the chemical industry's desire to reduce its negative public profile, and avoid additional regulations. Responsible Care® focuses on compliance. Responsible Care® also focuses on intra-industry sharing and collaboration on better practices. Sustainability, on the other hand, is broader, involving engagement with an array of internal and external stakeholders, not just on environmental issues, but on social and economic ones too. Sustainability allows individual companies to differentiate themselves in a competitive environment. Even as Responsible Care® expands to include more sustainability parameters, it is not

TABLE 8.2. Focus Group Participants

Company

Survey

Air Products & Chemicals

Yes

BASF

No

BP

Yes

Cytec Industries

No

DuPont

Yes

Eastman Chemicals

Yes

FMC

No

Rohm & Haas

Yes

Shell Chemicals

Yes

sufficient to drive or manage a comprehensive sustainability program. Linkages between Responsible Care® and sustainability exist, but may not be universally understood. Further, Responsible Care® is viewed as a subset of sustainability by many leading companies, but to others it may be viewed as the only path forward into the sustainability arena.

8.2.4.2 Focus Group Perspective #2: Gap Between Leaders and Others. Chemical Industry companies tend to be either advanced when it comes to sustainability, or struggling to understand and adopt sustainability. Leading chemical companies are primarily large, multinational companies, although not all large, multinational companies have yet arrived. Chemical industry representatives acknowledge that robust sustainability programs are lagging in the majority of small- and medium-sized companies, who may not have the necessary resources to fully understand or launch such programs.

8.2.4.3 Focus Group Perspective #3: Little Formal Measurement of Stakeholder Outreach and Engagement. Focus group participants confirmed our initial hypothesis that relatively few companies use formal stakeholder outreach or evaluation to measure success with respect to sustainability programs. Given that survey respondents identified Public Relations most often as a function involved with sustainability, this may be a gap - and may present opportunities - for sustainability programs. Further, focus group members noted that stakeholders may not understand the information that the companies provide. We note that this is not unique to the chemical sector.

8.2.4.4. Focus Group Perspective #4: Greater Understanding of the Costs and Benefits of Sustainability Needed. The focus groups confirmed the need to identify, categorize, measure, and assess costs and benefits associated with sustainability. The groups also identified a number of key impediments, including the fact that costs and benefits may accrue to third parties as well as to the company. The inherent imbalance between costs and benefits hinders faster adoption of sustainability.

8.2.4.5 Focus Group Perspective #5: Need for a Standardized Reporting Framework. Chemical companies are constantly bombarded by investors and other stakeholders seeking sustainability-related information. Most stakeholders do not understand or appreciate the cost of this effort, or the limitations on what companies can provide. Companies, the industry as a whole, and external stakeholders would each benefit from a standardized approach or format for tracking and reporting sustainability related information.

8.2.4.6 Focus Group Perspective #6: Need for Standardized Sustainability Metrics. The absence of standard metrics, especially social and economic, is hindering the development and reporting of sustainability initiatives. Significant difficulties exist in translating sustainability to meaningful, measurable performance metrics and standards.

8.2.5 Comparison to Other Published Surveys

8.2.5.1 SustainAbility Stakeholder Survey: February 2004. The United Kingdom based consulting firm SustainAbility published External Stakeholder Survey, Final Report for Global Strategic Review of Responsible Care® in February 2004. SustainAbility's survey was oriented towards stakeholder impressions7 of the chemical industry, and how the industry currently fares with regard to Responsible Care® and sustainability. The survey results highlight impressions from stakeholders that reinforce many of our findings. Findings and comments presented in SustainAbility's survey include the following.

• Perceived weaknesses of the chemical industry include lack of transparency and engagement, lack of accountability and common metrics, a poor understanding of product risks, and a gap between the performance of large companies and medium-to-small companies.

• Responsible Care® has improved both the reputation and the performance of the industry, but it does not adequately address less technical issues related to sustainability such as communication and accountability.

• Respondents believe the public has a very negative general perception of the chemical industry, although their own perception is only slightly negative.

• Respondents believe that Responsible Care® has had a positive effect on industry reputation.

• Respondents believed that a broad array of issues - including product safety impact, product responsibility, climate change, clean water - are important to the chemical industry, but that the industry was not prepared to deal with these issues.

• REACH8 legislation in Europe, and the industry's opposition to it, continues to keep the industry center stage with stakeholders, and fuels negative public perception.

• The industry is seen by many stakeholders as reactive and secretive.

• Environmental issues are addressed more effectively than social issues (other than worker health and safety), and economic issues (such as economic development, education, and standard of living) are not addressed at all.

Stakeholders indicated that they want to engage in structured dialog; they do not simply want to be flooded with information. They also suggested areas for improvement to Responsible Care®, including

• more robust requirements for reporting and external engagement;

• requiring third-party verification of Responsible Care® implementation;

7Forty-one individuals interviewed.

8REACH (Registration, Evaluation, and Authorization of Chemicals) is a new regulatory framework that aims to simplify and streamline chemical regulation in Europe.

• improving traditional EHS operational performance; and

• establishing industry performance targets, goals, and timelines.

8.2.5.2 PwC 2002 Sustainability Survey. PwC conducted a sustainability survey in 2002, obtaining responses from 104 companies in many industry sectors. Fourteen of the respondents were from the chemical sector. Although the questions were not identical, responses from the chemical sector indicate similar attitudes towards sustainability.

Listed below are some of the key results of the 2002 survey:

• Forty-three percent had either defined, or planned to define, sustainability, and the same number rated the importance of sustainability a 7 or higher on scale of 1-10.

• Only 29 percent of the respondents had a formal policy on sustainability, although all respondents had environmental policies.

• Factors that influenced the decision to implement sustainability practices included:

• Enhanced reputation - 100 percent

• Industry trends - 91 percent

• Competitive advantages - 82 percent

• Innovation opportunities - 73 percent

• Maintain license to operate - 73 percent

• CEO/Board commitment - 64 percent

• Factors that influenced decision not to implement sustainability practices included limited Resources, and the lack of a clear business case.

• One-third of the respondents issued a Sustainability Report.

• One-third had a senior-level committee for sustainability issues/promotion.

• Sustainability activities being pursued included:

• Pollution prevention & waste minimization - 100 percent

• Community education and outreach - 93 percent

• Environmental management systems - 79 percent

• Corporate philanthropy - 79 percent

• Employee volunteering - 79 percent

• Direct investment in communities where company operates - 79 percent

• Almost all respondent (93 percent) believed that more emphasis would be placed on sustainability in five years time.

Reporting, and timing of reporting on sustainability, is about on track with previous results. In 2002, 36 percent of respondents published a sustainability report. Three of these used the Global Reporting Initiative (GRI) as a guide for their report, and one respondent obtained external verification for their report.

Of the six respondents to PwC's 2002 sustainability survey who did not produce a sustainability report in 2002, their responses and progress as of August 2004 are as follows:

• Three expected to publish a report within two years; as of August 2004, one of these had posted sustainability reports for 2002 and 2003 to their websites.

• Two expected to publish a report within five years. As of August 2004, one had published a report in 2002 but not in 2003.

• One had no plans to publish a report, and had not done so as of August 2004.

8.2.6 Conclusions and Path Forward

8.2.6.1 Conclusions. Survey results, the focus group discussions, and the authors' experience suggest several conclusions with regard to sustainability and the chemical industry.

• Sustainability is important to the industry and is likely to increase in importance.

• Stakeholders, chemical companies, and industry associations are all focused on sustainability. Areas of focus include:

• Transparency

• Common metrics

• Engagement

• Responsible Care® has been successful in elevating environmental performance within the chemical industry. It is a notable example of a voluntary industry-wide program where the industry appears to have gained credibility with stakeholders. Some within the industry are comfortable with this as a working model for sustainability program development.

• However, the linkages between Responsible Care® and sustainability are not universally understood. Many in the industry may misjudge its adaptability to sustainability. Although the majority of respondents reported that they have adapted (or plan to adapt) their RCMS to address sustainability, when the question arose during the focus groups, the consensus was that Responsible Care® and sustainability, although related, completely aligned. Sustainability extends beyond the traditional Responsible Care® focus on compliance into more opportunistic/competitive issues.

• Leading companies have learned how to successfully embed sustainability into their business operations and have been able to achieve significant competitive advantages as a result. Responsible Care® was developed on the basis of industry collaboration and knowledge sharing. As leading companies continue to build sustainability programs - and the competitive edge that comes with it,

- and as laggards move more slowly if at all, this gap will widen. Calls for industry cooperation, as with Responsible Care®, may not be returned.

• Metrics, data assurance, reporting, and communications are all critical aspects of improved sustainability programs. Responsible Care® does not fully address all aspects.

• Sustainability is not widely recognized as a core business process or as an important element of stakeholder commitment. Many key industry stakeholders, notably customers and investors, wield considerable financial impact. Therefore, many aspects of sustainability warrant the same level of organizational structure, oversight, and governance currently afforded environmental compliance or other control functions.

• Social and economic performance, and stakeholder engagement are evolving, from the areas of specific activity, to performance measurement, management and oversight, and communication and reporting of these issues.

• The ACC's suggested direction for modification of Responsible Care® is likely to include many issues of interest to an array of stakeholder groups, beyond environmental issues.

• Rigorous sustainability performance, transparency, reporting, communication, and stakeholder communication will undoubtedly improve company and industry reputation. Significant cost savings are also available, including reduction in the cost of legal compliance and other commitments to external parties. This should continue to be a powerful driver for sustainability program elements, but it may be hindered by a fragmented approach to sustainability, by the lack of complete understanding of the true cost of compliance, or by the inability to recognize the potential for savings aggregated from several functions throughout an organization.

8.2.6.2 Path Forward. The chemical industry will continue to live, as they say, "in interesting times." Our survey results suggest that the industry is definitely on a path forward with regard to sustainability. The path will no doubt include changes to policies, programs, procedures, metrics, reporting, and stakeholder engagement. For leading companies, it will also include a fundamental re-thinking of the way business is conducted in almost every aspect.

The ACC's expanded RCMS will be a useful tool in pursuing sustainability, although it is not a panacea. Top-level commitment, clear vision of company mission, risk assessment, control activities, information and communications, and monitoring is essential. It is important to gain a thorough understanding of how RCMS supports sustainability - and how it does not.

The calls for industry knowledge sharing are likely to continue, particularly from smaller and medium-sized companies. More leading companies, with a full appreciation of the competitive advantages that sustainability can bring, are likely to be reluctant to share all their strategies and appeals. The chemical industry has a history of collaboration - Responsible Care® being a notable example - but later adopters should maintain reasonable expectations. We have suggested some areas where collaboration may be fruitful (see overview at the beginning of this contribution).

With the need for so many functional groups to be involved in the effective management of sustainability programs, coordination and communication within the company is the key to success. Mistakes and failures are inevitable, yet the leaders will persevere and will realize performance improvement and bottom-line benefits. Companies will eventually view sustainability as an integrated business process, and will clarify roles and responsibilities for functional groups. They will roll out more systematic programs, develop monitoring activities, and periodically re-think their approach.

As sustainability continues to grow in importance for the chemical industry, it will become increasingly important to measure the true costs and benefits. Frameworks now in their nascent stages will evolve to help companies focus on areas of greatest importance.

As a collaborative activity, the chemical industry should look to develop a common framework or standard for sustainability reporting and responding to stakeholder inquiries. As part of this effort, the industry should continue to monitor other emerging external reporting frameworks, such as the Global Reporting Initiative, One Report®, and the Corporate Responsibility Exchange, which all seek to standardize reported information and may be helpful to both the industry and its stakeholders.

8.3 SUSTAINABILITY AND PERFORMANCE: AN OVERVIEW9

Karina Funk

Massachusetts Renewable Energy Trust

The dust of the recent economic implosion has yet to settle. Capital assets and fortunes have been dreamed up, liquidated, and lost more times than any industrial-size paper shredder can handle in a lifetime. Analysts and investors will bear for years the burden of ignoring the high debt loads of many of the now-fallen giants of technology. Former executives and employees of now defunct companies will continue to battle in the courts for years. Fewer CEOs stay with their company for the long term,10 while the media and the public have hotly debated whether corporate returns have kept up with hyperbolic CEO pay.11 The number of business failures has been

9A previous version of this article appeared in Sloan Management Review, Winter 2003.

10Five years ago 22 percent of Fortune 100 CEOs had been with their companies for over 35 years compared with just 10 percent today (Spencer Stuart, 2004).

11For example, Forbes.com reported that 36 percent of CEOs at large companies in the United States, who have held the position for three years or less, have delivered annualized total returns of 15 percent or more to shareholders (Gillies, 2002). By contrast, the Institute for Policy Studies and United for a Fair Economy report that the CEOs of the 23 large companies under investigation for accounting irregularities earned 70 percent more from 1999-2001 than the average of CEOs among large companies, while shares of these companies lost 73 percent of their total value (Klinger et al., 2002).

increasing - over 73,000 per year on average in the last 10 years, compared to 19,000 per year in the previous 30 years.12 And corporations seem less able to predict their true earnings.13

Not surprisingly in the current economic environment, investors have begun to watch closely information related to how sustainable a business is, and many companies are voluntarily stepping up to this demand by issuing sustainability reports and engaging with a growing group of socially and environmentally responsible investors. Yet the word "sustainability" is quite politically charged, particularly within the lexicon of business. When, as is commonly the case, the term is limited to encompass environmental management or social equity, sustainability is often perceived to be at odds with fiduciary responsibility and unlinked to business strategy. This narrow view of the term, however, ignores the role that innovation, human capital development and strategic execution have to play in creating sustainable businesses.

This article attempts to make a business case for sustainability by adopting a broader view of the term, defining it as organizational characteristics and actions that are designed to lead to a "desirable future state" for any given stakeholder. For investors, this desirable future state would surely include sustained revenue growth over the long term. However, stakeholders alongside the investing public include consumers, employees, and regulators. All of these stakeholders value sustainability in some sense - whether it is diversity in the workforce for stakeholders in the talent market, innovation and risk management for stakeholders in the capital markets, or pollution prevention for stakeholders in the community. On the firm level, a desirable future state would include maintaining viability and profitability as well as consistent environmentally and socially responsible practices. In this broader view of sustainability, the convergence of innovation, adaptation, and unpredictability makes for a fertile environment for growth, for the bottom line, and for the evolution of sustainable businesses. Companies that actively manage and respond to a wide range of sustain-ability indicators are better able to create value for all stakeholders over the long term.

12From the 1950s through the mid-1980s, the number of annual business failures in the United States, was fairly constant at fewer than 20,000 firms a year. Beginning in 1982, the rate has increased to the point that the rate of business failures exceeds 80,000 firms a year. One might argue that this is because there are simply more businesses being launched. Yet, the failure rate per 10,000 listed businesses has also dramatically increased, rising from 43 from 1950-1979 to 91 from 1980-1997 (Mankin, and Chakrabarti, in press; Council of Economic Advisors, 2000).

As evidenced by the number and amount of special items being reported in the S&P 500 over the past 18 years. The number of firms taking "special items" for restructuring charges, inventory write-downs, and asset write-downs, has risen significantly. The number of S&P 500 firms taking special charges has increased more than fourfold, from 68 in 1982 to more than 300 in 2001. (Source: Cap Gemini Ernst & Young Center for Business Innovation analysis, August 2002.)

BOX 8.1 DOES "SUSTAINABLE" MEAN FOREVER?14

The concept of sustainable development has received widespread attention (if not agreement) in the international community in the past decade. Early momentum for the concept was supplied by governments (especially in developing economies), NGOs, multilateral organizations, and has since begun to attract serious consideration from the private sector.

In the business world, the most relevant elements of sustainability have to do with environmental and social responsibility - within which lie issues such as reducing materials and energy intensity, concern for consumer and employee health, and being a "good steward" in the community in which a company is involved. But just as organisms survive not by living forever but by propagating their species, sustainable business must be a dynamic state. The opportunities of sustainable growth must be emphasized as businesses evolve and adapt according to economic realities. Limiting our scope to merely a time dimension assumes that sustainability is a zero-sum game. The convergence of innovation, adaptation, and unpredictability make for a fertile environment for growth, for the bottom line, and for the evolution of sustainable business. Proactive response to regulation, building customer loyalty, as well as attention to the relevant intangible indicators are all things that, through one feedback loop or another, may be translated into value creation (Reinhardt, 1999).15

8.3.1 Intangibles and Value Creation

Since the year 2000, the European Commission (Clark, 2000), the U.S. Securities and Exchange Commission (Blair and Wallman, 2001), and the U.S. Financial Accounting Standards Board (Upton, 2001) have all commissioned studies on the importance of intangibles in the economy. All conclude in no uncertain terms that the drivers of wealth creation for business and the economy are less about physical and financial assets and more about intangibles such as intellectual property and employee talent. While conventional accounting and financial metrics yield some insight into a firm's market value, forward-looking sustainability indicators - anything from confidence in a company's management to research leadership to the management of environmental liabilities - are becoming more relevant to a business's overall value proposition.

As a result, a good deal more effort is being paid to codifying the nonfinancial and intangible aspects of businesses. In France, their Nouvelles Regulations Economiques mandates (among other things) reporting on human resources, community, and labor standards. And in the United Kingdom, the government requires ethical, social, and environmental information of occupational pension funds' investment policies.

14Funk, K. "Performance - and Sustainability - Over the Long Haul," Cap Gemini Ernst & Young Center for Business Innovation white paper, June 2001. See Funk (2001).

15Reinhardt argues that working with regulators can also be used as a competitive weapon (Reinhardt, 1999).

A Value Creation Index (VCI), created by Cap Gemini Ernst & Young, attempts to not only quantify nonfinancial performance, but also to link key intangibles to a company's valuation in the market (see Section 6.2.2 for a discussion of the VCI). The results clearly reveal the importance of business assets that most companies do not measure, manage, or disclose. Social and environmental responsibility were among the top intangible factors identified, but the VCI offers a far broader picture of the elements of sustainable business. In the chemicals industry, a VCI model (Box 8.2) reveals that the top four indicators that are highly correlated with the market value of equity of these companies are related to innovativeness, strategic alliances, leadership, as well as to environmental and social responsibility.16

Wall Street is gradually becoming aware of the importance of measurement and disclosure of nonfinancial elements of a business. Although analysts may not speak of sustainable development, 50 percent of oil and gas industry analysts surveyed by Cap Gemini Ernst & Young confirmed that regulatory compliance on environmental issues, community service, and lawsuits do indeed impact the value of a firm.17 In this case, it is clear that attention to environmental and socially responsible performance can mitigate the downside risk of corporate liabilities. Of those same oil and gas analysts, 68 percent believe that intangibles related to employees impact the value of a firm (http://www.cbi.cgey.com/) - and insofar as things such as employee satisfaction, diversity of workforce, workplace turnover, and productivity have anything to do with a firm's performance over the long term, sustainability lies firmly within the context of overall corporate strategy.

8.3.2 Sustainability in Practice

Managers are discovering that the intangible indicators that gauge sustainability can also be indicators of efficacy - that is, how well a company is run. From the management of corporate liabilities to new market ventures, a sustainable business strategy can improve all segments of corporate activity. Indeed, some argue that environmental management in particular is a good proxy for gauging overall management capabilities at both the strategic and operational levels. Matthew Kiernan, founder of investment advisory firm Innovest, believes it is a robust metaphor because the environmental problem is more multifaceted than most, as it touches all aspects of a firm's operations from product design to finance, and also holds implications for a wide range of stakeholders from the government to investors to community citizens (Kiernan, 2000). Perhaps more significantly, environmental problems are relatively "young" issues; addressing them demands strategic foresight, superior

16Our analysis of actual nonfinancial performance as correlated with market value revealed the following value drivers: Innovation, Quality, Customer, Management, Alliances, Technology, Brand, Employee, Environment. Multiple, statistically independent measures are used as inputs for each driver in order to ensure a robust model.

17Cap Gemini Ernst & Young Center for Business Innovation, Measures That Matter study. Survey of S00 sell-side analysts, 275 buy-side analysts, as well as interviews with portfolio managers. Summaries of these studies

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