Factoring Sustainability into Financial Decision-Making
This is Part Three of a five-part blog series, Aligning Profit and Environmental Sustainability. Each installment explores solutions to help businesses overcome barriers that prevent them from integrating environmental sustainability into their everyday operations. Look for these posts every Thursday.
This post also appears on Greenbiz.com.
A large, multi-national company likely spends hundreds of millions of dollars every year on new projects. How these projects are designed, constructed, and operated clearly impacts costs in the short-term, but also poses huge implications for a company’s “sustainability footprint” in the long-term.
A major challenge is that most corporate sustainability experts within a business are not involved in capital budget requests at the outset. A company’s financial leaders make investment decisions with upfront costs and projected revenues in the front of their minds. They are far less likely to take into account a project’s potential environmental risks and benefits. Not coordinating financial and sustainability decisions can lead to projects that are cost-efficient to build today, but may not hold up to sustainability pressures over their lifetime. For example, a company might invest in a factory that is inexpensive to build, but then realize that it’s in a location that locks them into buying only fossil fuel-based energy sources.
The lack of integration between financial and sustainability-related decision-making is a main barrier to scaling truly impactful corporate environmental sustainability. But as WRI found in its new working paper, Aligning Profit and Environmental Sustainability: Stories from Industry, there are companies who are starting to show us ways of overcoming this challenge.
Insights from AkzoNobel and Alcoa
Some companies, like AkzoNobel and Alcoa, are working to ensure that projects seeking large amounts of internal capital consider sustainability impacts from the beginning. For example, AkzoNobel, a global paints and coatings company, recently began balancing decision-making between the company’s Financial Controller and Chief Sustainability Officer (CSO). Capital budget requests that exceed $5 million must now be routed through both the Controller and the CSO. The CSO reviews requests against a set of environmental criteria and has the power to reject budget requests that do not meet the criteria or lack an acceptable expla¬nation for why the company’s sustainability factors were not considered. The CSO can also ask for additional justification before making a decision.
Empowering the CSO helps prevent budget requests that have not integrated sustainabil¬ity considerations and ensures that the company’s sustainability specialists are engaged in project development early on. This practice also helps align the com¬pany’s business strategy with sustainability goals. It will be interesting to watch how this practice impacts AkzoNobel’s ability to build facilities that not only hold up to today’s standards, but hold up to long-term performance and sustainability pressures, like increased resource scarcity.
A similar process occurs at Alcoa, a leading aluminum producer, where the CSO is one of a team of executives participating in the decision-making process for capital requests. This approach helps ensure that sustainability factors are considered at all stages of project development.
Aligning Profit and Environmental Sustainability Blog Series
Read other installments of our five-part blog series, "Aligning Profit and Environmental Sustainability."
4 Barriers to Overcome in Achieving Corporate Environmental Sustainability
Finding the Money: How Businesses Can Fund Environmental Sustainability Projects
Asking About Sustainability During Financial Planning
As a result of AkzoNobel’s actions, its sustainability team now plays a role in the very early planning stages of large capital projects. It can ask important questions such as:
Is this the right business to invest more money in, and how manageable are the associated social and environmental risks—like water scarcity or impacts on biodiversity?
Where can AkzoNobel site a proposed facility in order to use sustainable transport options for product distribution and minimize the company’s carbon and water footprint, while balancing location-related costs?
Where should AkzoNobel site a new facility so it has access to more long-term renewable energy sources?
What are the cleanest sources of power generation that can be used at the company’s facilities? How can the options be evaluated in the most transparent manner?
By assessing sustainability considerations early, the positive social and environmental benefits can be much greater than waiting until the final stages when only marginal changes are possible. By using this type of process, companies like AkzoNobel can learn from past decisions, including understanding the negative business impacts of not incorporating sustainability components like energy price volatility and future water scarcity into decision making.
As we’re already seeing with ongoing drought, sea level rise, and more volatile weather patterns, environmental risks can have huge impacts on business operations. More and more investors are starting to ask questions on how to prevent corporate investments today from becoming worthless or “stranded” due to environmental factors, such as the impacts of climate change. Corporate practices like those at AkzoNobel can help to ensure that capital spending is more aligned with sustainability pressures over the long-term—a policy that benefits both profits and planet.
- LEARN MORE: Tune in for our blog series, Aligning Profit and Environmental Sustainability, every Thursday. For more information, download WRI’s full report, “Aligning Profit and Environmental Sustainability: Stories from Industry.”