From the July-August 2010 issue of Treasury & Risk magazine

Next Steps to Sustainability

Four years ago, the folks at PricewaterhouseCoopers set a new goal for reducing the company's carbon footprint in the U.S.: Slash it 20% by 2012. Clearly, however, accomplishing that objective required an all-out effort by PricewaterhouseCoopers, which has 30,000 employees in the U.S.

"We weren't going to get there by buying carbon credits," says Mike Burwell, CFO and operations leader at the $26 billion accounting firm.

For Burwell, the answer was clear. His finance team had to assume a role not usually taken in most organizations. It had to become a lynchpin of the effort. To that end, Burwell created a new system.

First, finance would vet all initiatives proposed by the three business units--audit, tax and consulting. That involved determining whether the moves entailed extra costs, if those additional expenses would be worth it, and how effective initiatives would be in helping to meet PWC's overall goals. Then, finance would use its own internal assurance and certification system to validate and measure progress.

The upshot: PWC is on target in meeting its goal. "This effort has required creating a new role for finance," says Burwell. "It means operating at the next level of sustainability."

Call it Sustainability 2.0. Over the past few years, many companies have set targets for reducing their greenhouse gas emissions. Those efforts have tended to focus on making changes to internal operations, everything from installing new lighting to recycling programs. Or they've used old-fashioned management techniques. While such efforts are necessary, some leading companies have come to realize they need to do more. "Companies are moving past the low-hanging fruit," says Andrea Moffat, senior director of corporate programs at Ceres, a Boston nonprofit that focuses on sustainability issues. "They're taking the next, harder steps to achieve their goals."

Of course, the ultimate concern is the potentially dire effects of climate change--the environmental dangers caused by an increase in heat-trapping greenhouse gases in the atmosphere, leading to an alarming rise in global temperatures. The first 10 years of this century were the hottest since record-keeping began in 1880, according to the Earth Policy Institute. The results, according to scientists, range from rising sea levels that cause widespread flooding to lower crop yields.

But there's also worry about government action. Although Congress has been slow to enact any final legislation, companies expect some form of cap-and-trade law, and they don't want to be caught unprepared. At the same time, they understand that time is of the essence. If they wait for government action, it may be too late to do anything about the potentially severe consequences that climate change could wreak not only on their operations, but also on their brand.

"Companies are concerned about their reputations," says Kathy Nieland, U.S. sustainability and climate change leader at PricewaterhouseCoopers. "That's one reason they're stepping up their actions to meet their voluntary commitments."

What, specifically, are companies doing? Their moves cover a wide array of strategies, from tying compensation to the achievement of sustainability goals to creating next-generation sustainability reports. But some of the most significant steps fall into a few categories.

Planning and Process
For some companies, the emphasis is on internal management processes. That means anything from including greenhouse gas reduction strategies in business planning to establishing a systematic role for finance.

Take PWC. Burwell knew the most efficient route to attaining PWC's sustainability goals was to get finance intimately involved in the effort. Finance, after all, was in the best position to evaluate initiatives and look for opportunities to cut costs or approve investments, where necessary. "Finance played a strategic role in this effort," he says.

To that end, Burwell gave each business unit a specific carbon-reduction target. Then departments presented him with their proposed initiatives for meeting those goals, so he could assess their potential effectiveness. Burwell could also identify which initiatives would work companywide and notify the appropriate leaders to make that happen.

And if the move involved spending more money, he could evaluate whether the investment was worth it. For example, after hearing a proposal from one business unit, Burwell decided to spend the money to install about 2,200 printers that allow double-sided printing throughout the company, thereby slashing paper costs. The machines replaced about 4,200 conventional printers. Equally important, he introduced a system for measuring progress, using PWC's own assurance services. He then discusses the results with each business unit at quarterly meetings.

Reducing its carbon footprint required a different path for London-based National Grid, a $21 billion utility. Two years ago, the company, which has a wholly owned subsidiary in Waltham, Mass., with 18,100 employees, set an aggressive target of reducing greenhouse gas emissions by 80% from 1990 levels by the year 2050. By doing such things as reducing the number of methane leaks in the natural gas distribution system, the company was able to cut emissions by more than 40% in just two years. But that next 40%, says Robert Teetz, vice president of environmental services for National Grid in the U.S., "was a daunting task."

The answer was to make greenhouse gas reduction one part of overall business planning. Each business unit head was required to come up with his or her own five-year plan to cut emissions and had to integrate those strategies into business and financial planning for the entire unit. As a boost to the effort, each business unit was assigned a so-called climate champion, responsible for developing climate-change initiatives. A team of senior executives assessed the plan to make sure "all the pieces fit together," says Teetz. And sustainability results, along with other plan components, were then tracked on a quarterly basis.

In addition, National Grid has taken the unusual step of coming up with a hypothetical price for carbon, in anticipation of government action, and executives factored that price into their investment decisions. For example, the company might be willing to buy a more expensive transformer if it has the potential to reduce emissions more effectively than a cheaper alternative.

For American Electric Power, a Columbus, Ohio-based utility with $13.5 billion of 2009 revenue, the emphasis is on external processes for tapping the insights of everyone from investors to customers. For the past three years, AEP has worked with Ceres to convene annual meetings where its top executives meet with shareholders, customer, employees and others. They discuss public policy and regulatory issues, energy efficiency and, says Sandy Nessing, director of sustainability, "the future of coal." In addition, AEP holds smaller meetings with a variety of stakeholders, such as people who live near its power plants.

Boosting Buy-in
In other cases, the focus is on winning buy-in from employees and executives alike. "We want people to take real ownership of these efforts," says Suzanne Fallender, director of corporate social responsibility strategy and communications at Intel, the Santa Clara, Calif., semiconductor giant with $35.1 billion of revenue in 2009.

One solution is to link pay to hitting specific emissions-reduction goals. This year, for example, National Grid introduced a new formula that ties incentive compensation to companywide attainment of greenhouse gas-reduction goals for all executives who head emissions-reduction plans, as well as top managers in procurement and accounting. "Their compensation actually is at risk with respect to achieving their objectives," says Teetz. Over the next two to four years, the program will be expanded to the entire organization. Though it's too soon to tell what effect the effort has had, "We can see that this issue is being taken very seriously by our executives," says Teetz. "When money is at stake, people will do what it takes to drive their objectives."

Intel has taken that one step further. All of its approximately 79,000 employees in plants and offices in 48 countries receive variable compensation, with at least some portion of pay tied to meeting performance goals. In early 2008, the company launched an experiment to tie operational goals, one of the three components of variable compensation, to the achievement of environmental metrics. For the first iteration, it included one metric--increasing the energy efficiency of products. Although that's a "small" part of overall compensation, according to Fallender, "It's something employees are watching closely." In 2009, the company included another metric, reducing the carbon footprint. To help office employees identify ways to reduce energy use, Intel launched an intranet site with a social media component through which people could share tips. Since then, there's been a 6% reduction in office energy use.

Of course, creating an engaged workforce involves more than pay. At Intel, for example, the code of conduct includes a provision that employees take into consideration the impact of their actions on the environment. That's emphasized in yearly training sessions. In addition, about a year and a half ago, the company introduced regular meetings at which employees with responsibility for sustainability performance in such areas as IT and environmental health and safety can share experiences and insights.

As a result, some IT employees, on their own, assembled a team to develop a carbon-reduction strategy that includes such steps as using more teleconferencing and cutting energy used by data centers. They also created a video, which they posted on the company Website, about how other employees could take similar steps. "We're creating a green culture in the organization," says Fallender.

More comprehensive and open reporting is another tactic used to support next-level activities. One tack involves a new hybrid called integrated reporting. As the name suggests, it refers to a report that integrates information about finance and sustainability into one document. For now, only a handful of leading-edge companies produce such reports. According to a study of the world's 250 largest companies conducted by KPMG in 2008, 79% issue stand-alone sustainability reports, but just 4% integrate that data into their annual financial reports.

About a year ago, AEP decided to stop issuing separate sustainability reports, something it had done for the previous three years. Instead, in response to suggestions from investors, sustainability director Nessing decided to experiment with producing an integrated report. "It made perfect sense, since [environmental, social and governance efforts] are tied to our overall performance," she says. To that end, AEP produced a report that discussed issues the company considered to be material to its sustainable operations. For example, it described not just new technologies for, say, carbon capture and storage, but the financial ramifications and risks of those technologies. "It's a way to connect the dots," Nessing says.

With no guidelines and few models to follow, however, she calls the first report a work in progress. For example, this time around, while finance, treasury and investor relations formed part of a core review team, the effort was spearheaded by the sustainability department. But finance will probably play a more direct role next time. And although the first report didn't include an income statement, instead referring readers to AEP's 10-K, the next one will. "This was our best first shot," says Nessing.

The other tack involves disclosing details of product ingredients and their potential environmental effect. Take consumer products manufacturer S.C. Johnson, a privately held company with more than $8 billion in annual revenue whose brands include Windex and Pledge. In 2009, the Racine, Wis.-based company launched a project to disclose all 169 chemicals in more than 200 home cleaning products, along with an explanation of each ingredient's purpose. The information is available on its Website, as well as through a special toll-free number and on product labels. By 2012, the site will list dyes, preservatives and fragrance ingredients as well. That's considerably more extensive than an industry initiative launched in 2008 that suggested manufacturers disclose chemicals.

Enlisting Customers
Perhaps the ultimate strategy is to cut emissions by customers. "We see a lot of work on the customer side," says Moffat. Case in point: San Francisco, Calif.-based gas and electric utility PG&E, which had $13.4 billion of revenue in 2009. With 18% of total residential energy use going to home electronic devices, the company launched an ambitious effort in 2008 to work with such manufacturers as Dell and Hewlett-Packard to develop energy-efficient computers. PG&E also teamed up with Wal-Mart, Best Buy and other retailers to teach them about the products' benefits and how best to sell them. In addition, PG&E offered what spokesperson Katie Romans calls an "upstream rebate" to manufacturers, with the understanding those savings would be passed down to retailers and customers. "We're providing incentives to manufacturers to drive the next generation of energy-efficient products," says Romans.

At the same time, of course, the program not only helps customers save energy, it also cuts the company's own carbon emissions. The bottom line: While they're not easy, next-generation corporate efforts to become green can be a proverbial win-win for everyone.


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