What it is and Why it Matters
The Evidence
Objections to the Value Case
Driving Internal Acceptance of the Value Case
Sustainability as Innovation

Any executive who is seriously considering operationalising sustainability needs to be able to justify doing so. And not just any justification will do: it must work within the rules of that corporation's culture. Moral arguments tend to fall flat. So, to a lesser extent, do appeals based on such concepts as 'corporate social responsibility' and 'corporate citizenship.' When corporate initiatives are lumped under these categories, they tend to be treated as essentially philanthropic and accorded second-class status. Corporations are in the business of doing well, not doing good, the prevailing logic goes, and activities that emphasize the latter are best kept cordoned off from the real action. A winning argument must be a business argument. It must speak the language of 'shareholder value.' It must speak the language of profits.

The value case for operationalising sustainability does precisely that. It provides a business rationale for corporate executives to move forward. It does so by assembling and assessing the known facts, passing that knowledge through a rigorous business-logic filter, and incorporating the intuitions of the company's leaders into that uncompromising left-brained analysis. Intuition counts for something in the world of the value case. Not for everything, but something.

The value case for sustainability is not an airtight case and does not purport to be so. The reason for this is quite simple: that 'airtight case' does not exist. To date there have been only a handful of committed attempts to operationalise sustainability and the results have been inconclusive. An airtight case would require multiple examples of success and we do not have them yet.

There is a fair amount of evidence underpinning the value case, but it remains in no small measure theoretical. Which isn't to suggest that the value case has no value. People take action based on theories all the time. For example, companies have plunged into the brave new world of e-commerce without having a clear sense of its long-term business implications. Executives have done so equipped with a hypothesis (e-commerce is the wave of the future), a value case ('embracing e-commerce appears to be a sound strategy because it creates and provides access to entirely new markets'), and - importantly - the intuition that standing aside was riskier than giving it a go.

Sustainability hasn't inspired the same fascination (or maybe the word is 'hysteria') as the Internet, but there are real similarities between the two. Like e-commerce, sustainability is an emerging business strategy. Like e-commerce, sustainability is a path that many executives intuitively believe their companies should follow. As is not the case with e-commerce, however, these executives face an uphill challenge in persuading their colleagues that their intuition is sound. There is no bandwagon here, no sustainability craze like the Internet craze, and for a very simple reason ‑‑ a deteriorating natural environment and unravelling social capital aren't sexy. To make the case for sustainability inside their company, executives need to override people's understandable desire to have nothing whatsoever to do with that whole grim territory. Realistically, the only way to do this is by basing their appeal on reason and logic. They have to marshal facts and build a plausible argument. And this is where the value case comes in.

A 'value case' is not a 'business case.' A value case justifies further exploration in the form of pilot actions. A business case comes after those further explorations have been made. It takes the value case and 'drills down.' For instance, a value case about, say, expanding in Europe through acquisition would go something like: "We think there is value in a European acquisition because …" The business case would come later: "We believe it makes sense to acquire Z Company for $X billion because …" A value case is a plausible argument. A basic rationale. A confidence-builder. A beginning.

In the specific context of sustainability, a value case gives confidence that:

• Sustainability is worth paying attention to.
• Sustainability probably represents an opportunity to improve financial performance if it's done right - and may carry risks if done wrongly or ignored.
• There is sound business logic in investing in specific sustainability initiatives and strategies in order to learn what works and what doesn't.

In Ecos's opinion, the value case is a surpassingly important construct. Why? Because it is a critical lever of change, indeed perhaps the most critical lever of change we have in the campaign to steer our global society toward sustainability.

For years, environmental organisations and other representatives of civil society have been relying on two arguments to persuade corporations to embrace sustainability. The first of these is moral. Sustainability is presented as a duty arising from corporations' excessive power or as a way for them to expiate their guilt. The second argument is more pragmatic: our social and natural capital is collapsing and only corporations can reverse this.

Neither tack has worked in the past and we don't expect them to fare any better in the future - not, at any rate, so long as they are presented as sufficient unto themselves (add the value case, and that's a different matter!). Business has its own rules. It is, in the formal sense of the term, a 'game,' and the main (if not sole) objective of the game is to increase shareholder value. To receive the undivided attention of people who are playing the business game, an argument must hold out the promise of helping them 'win.' Moral appeals don't do this. Neither does the otherwise fetching image of the corporation as cavalry, riding over the hill to save the day.

The business game discounts, and often completely dismisses, appeals to guilt and duty. One might wish for a world in which corporations were more responsive to these cues, but as things stand the only way to make a persuasive case for operationalising sustainability is by tying it into profitability. And that begins with the value case.

Analysts have been arguing the value case for environmental sustainability for close to a decade. It first came to widespread public attention in 1995, when Harvard professor Michael Porter and the Swiss academic Claas van der Linde published an article in the Harvard Business Review which argued that innovative companies benefit from environmental regulation by responding in ways that lower product cost or improve product value. By learning to use their inputs more productively, the argument went, these companies foster a new kind of competitive edge: resource productivity.

This was by no means the entire value case but it was a beginning. Porter and van der Linde accompanied their argument with a number of anecdotal examples, which was the only type of evidence that existed at that point. The years since then have seen a steadily increasing volume of corroborative material, including:

• statistical and other technical analyses.
• the track record of stock portfolios screened for sustainability, and
• a constantly swelling pool of anecdotal examples and case studies.

In the following pages, we examine each of these in turn.

Statistical and Other Technical Analyses
A significant body of work is accumulating as academics and analysts examine the relationship between environmental (and sustainability) performance on the one hand, and financial performance on the other. In one oft-cited study, authors Stanley Feldman, Peter Soyka and Paul Emeer, writing for ICF Kaiser Consulting, found that "as a firm improves its environmental management system, the firm's financial risk … declines. The same holds true as the firm improves its actual environmental performance (as measured by the decline in toxic releases per unit of capital). Thus, expenditures for both management systems and pollution prevention can be justified on a purely financial basis - they can lower a firm's cost of capital by reducing risk." Another study, this one by Richard Read Clough of Duke University, found that "an environmental screen can actually enhance portfolio performance."

Findings like these have been the rule. In 2000, business school professors Joshua Daniel Margolis and James P. Walsh surveyed 95 of these studies and found that fully three-quarters of them showed a positive correlation between environmental (or social) and financial performance. And of the remaining 25%, a significant number showed no statistically significant correlation whatsoever.

To be sure, these studies are less than perfect methodologically. They tend to suffer from a common problem - the paucity of consistent and comparable data for measuring the social and environmental performance of companies. Still, the fact remains that the overwhelming majority of these studies have found a clear if crude correlation between environmental (and/or social) performance and financial performance. The methodological flaws are not so severe as to negate this finding. Sustainable-business analyst Ralph Earle sums it up well: "(S)tudies from academia and analysts present a consistent but weak body of evidence to support the Value Creation view."

Live Investment Portfolios and Indexes
Socially responsible investing (SRI) has an established history in the US. Most SRI portfolios employ screens that eliminate companies engaged in certain industries. As such, these portfolios are not particularly useful for people intent on analysing the relationship between sustainability and financial performance, which should compare companies in the same industries. Over the past five years, however, an investment style has emerged that is based on evaluating a universe of companies for their environmental and sometimes social performance, then either investing exclusively in (or over-weighting) those companies with superior sustainability performance. Sometime called "sustainable" or "best-in-class" investing, the performance of these portfolios provides further evidence of a positive correlation between environmental (and/or social) performance and financial performance.

All the major portfolios Ecos identified in this category have either equalled or outperformed their investment benchmarks over the longest time period for which data are available. They have also outperformed their counterparts without a sustainability dimension. The specific funds include:

• The Dow Jones Sustainability Group Index (passive global large cap)
• SAM Sustainability Pioneer Fund (actively managed global small cap)
• Eco-Value '21 (passive US domestic large cap enhanced index)
• Storebrand Principle Global Fund (actively managed global large cap)
• The Sustainable Performance Group (actively managed global all cap)

These funds are all rather new. Ideally there would be longer time frames for measuring their performance relative to their investment benchmarks and 'un-green' counterparts. Nonetheless, as with the statistical analyses discussed above, the evidence with regard to sustainability-oriented stock funds and indexes, imperfect though it is, clearly supports the value case for sustainability.

In addition, when longer-term backtesting of SRI portfolios is conducted, the results tend to confirm the value-creation hypothesis. For instance, in a 1998 study, Laura Gottsman and Jon Kessler backtested model portfolios, i.e., portfolios of carefully matched stocks with only one difference - one portfolio had high sustainability performers and the others did not - and found that the data tended to confirm the value-creation proposition. Back tests are not highly regarded by investment professionals, who view them as lacking in transparency and easily manipulated. Still, they do provide further (if tenuous) support of the value-creation theory.

Anecdotal Examples and Case Studies
The final form of evidence consists of anecdotal examples and case studies. Anecdotal examples are incidental stories of how companies have created value by implementing sustainability-related strategies. Case studies are essentially anecdotes rendered more authoritative by a credible expert's determination that they warrant special attention.

Analysis by Ecos of the anecdotal and case-study material indicates that when operationalising sustainability creates value, it does so in one (or more) of four ways:

Margin improvement. Operationalising sustainability can raise operational effectiveness by:

• increasing sales margins, and
• improving access to niche markets.

Risk reduction. Sustainability can protect corporate (and brand) reputation and reduce risk by:

• creating new stakeholder relationships and improving existing ones,
• improving the corporate predictive capacity,
• reducing liability exposure, and
• generating greater community support.

Growth enhancement. A sustainability focus can help companies realise growth opportunities by:

• supporting new-product innovation,
• providing a framework for expanding into new markets,
• attracting and motivating employees,
• providing access to new resources for creativity and innovation, and
• helping the company build a leadership framework.

Capital efficiency. Operationalising sustainability can improve return on investment by substituting knowledge for material and by replacing products with services. This can reduce the amount of capital needed to generate a unit of earnings, thereby increasing returns on invested capital.

There are a great many examples of how companies have used 'strategic sustainability' to create value in these ways. Some are set out in a separate Ecos discussion paper (see The Ecos Essentials). Rather than reprise those examples here, we have chosen to focus on the experience of one company, DuPont, in using a sustainability framework to create value in these four areas. What follows is merely representative; the company has created value through sustainability in other ways as well.

Margin Improvement. Since 1990, DuPont Canada's energy conservation initiatives have reduced energy consumption per unit of production by 28 percent, producing energy savings of $12 million per year for the company. An aggressive program of packaging optimisation at a DuPont plant in Brazil saved the company $340,000 per year and reduced packaging waste by more than 100 tons per year.

Risk Reduction. At a DuPont facility in Texas, the company instituted a project with a high degree of community involvement to reduce dependency on deepwell disposal of manufacturing wastewater. The treatment facility that emerged from that process now returns 900 million gallons of clean water to the Guadalupe River for downstream reuse, including drinking water. It also reduced the site's Toxic Release Inventory (TRI) emissions by 50%. And all this happened while increasing the company's good will with the community.

Growth Enhancement. DuPont is actively exploring the opportunities associated with the so-called 'Bottom of the Pyramid,' i.e., the 4-5 billion people worldwide who are not part of the market economy. This is a huge untapped market, the scope and nature of which become clear when examined through a sustainability lens. In another example, DuPont Flooring Systems is shifting focus from selling just carpet fibre to a focus on life-cycle ownership, which has led to a significant increase in revenues from services.

Capital Efficiency. When DuPont's paint division started selling to Ford on the basis of the number of cars painted rather than the amount of paint sold, it both increased its margins (using less paint reduced the cost of goods sold) and increased its capital efficiency because it put the company in a better position to manage its inventory of paint, which reduced its need for working capital.

As for existing case studies, they consistently tell stories of modest financial success. This is hardly surprising, since case studies that demonstrated no value creation wouldn't have been singled out for scrutiny in the first place. Nor would companies with unsuccessful experiences volunteer them for case studies. Still, the fact remains that these examples, as recounted anecdotally and told in more formal case studies, do exist - and they are numerous. And that counts for something.

Summary
In summary, then, the sustainability value-creation case relies on three types of material: 1) statistical analyses, 2) the performance of recently-established live funds, and 3) an increasing body of anecdotal evidence and case studies. Taken on their own, the evidence offered by each of these categories is suggestive but not persuasive. When we bundle these three categories of evidence together, the value case becomes much stronger. It can fairly be characterized as 'less than conclusive but strongly suggestive.'

There are two sides to every debate, and debunkers of the sustainability value-creation case have some arguments of their own.

Objection #1: The value case has too many holes in it.
There is a great deal we do not know about how sustainability and financial performance interrelate. Current knowledge gaps include:

• How to quantify with confidence the financial impact of intangibles that are presumably affected by a company's sustainability policies, e.g., corporate reputation.
• How to measure overall corporate social and environmental performance, as well as many components thereof.
• The so-called 'cause/correlation problem.' Although there is mounting evidence that there is a correlation between environmental (and social) performance and financial performance, it is harder to show that the former causes the latter. Sceptics argue that it could just as easily be the other way around, i.e., that superior financial performance frees up funds for investment in sustainability-related programs. Another possibility is that good management simply shows up in both areas. Researchers have been unable to rebut these challenges conclusively.
• How to predict how consumer attitudes toward specific industries and activities will evolve. Why did the opposition to genetically-modified foods catch fire when it did? Why the widespread outrage at Nike for its sourcing policies while other companies were spared? Will there be a massive boycott against oil companies like Exxon/Mobil for their opposition to the Kyoto Protocol? What industries are next in the firing line? Automobiles? Guns? Mining? One can only speculate about the answers to questions like these ‑‑ there is no sound way to predict what will happen when. And this in turn reduces the reliability of assertions that operationalising sustainability reduces risk.

Do these limitations imply that the value case should be abandoned? Not at all. Remember that the value case is not intended to provide absolute certainty, but to provide a sufficient basis for moving forward in a gradual, judicious manner. There is an analogy here in the law, where there are different standards of proof for different stages in the proceeding. Early on, it is only necessary to make a prima facie case, i.e., to establish the basic plausibility of the argument. As things progress, the standard of proof becomes more rigorous. This is rather like the difference between the value case and the business case. The value case provides a sufficient rationale for moving forward: it does not pretend or presume to be conclusive.

Objection #2: Companies that have tried to operationalise sustainability have failed.
Sustainability was first taken up as a corporate strategy in the 1990s. Monsanto was one of the earliest adopters, publicly announcing its intention to make sustainability a core business strategy in a highly-publicised 1997 Harvard Business Review article. The strategy, to put it mildly, failed. Not only did Monsanto not succeed in operationalising sustainability, it effectively lost its license to operate due to its clumsy and ineffectual attempts to impose genetically engineered crops on the world community.

Interface, one of the world's largest suppliers of floor-covering materials, was another early adopter. Its CEO, Ray Anderson, has declared himself a convert to sustainability, having received what he calls a "spear in the chest" from Paul Hawken's 1992 book, The Ecology of Commerce. In its year 2000 annual report, Interface declared: "For Interface, sustainability is more than surface appearance, it's a belief that's built into our business models. It's an underlying corporate value, ensuring that every business decision is weighed against its potential impact on the economic, natural and social systems we touch." The company's commitment is genuine but its sales have been flat for the past three years and operating income has actually declined. Over the last decade, a period of remarkable growth in value for the stock market, the share price of Interface has gyrated wildly, but as of this writing it is lower than it was at the beginning of 1990. Interface's numbers make it less than a poster child for the operationalising of sustainability.

Our response to this objection is that two data points do not an argument make. They prove only this - that operationalising sustainability did not work at all at Monsanto, and has not yet produced results at Interface. At Monsanto the reasons for failure are in hindsight clear: top management failed to drive the commitment to sustainability throughout the corporation, and the company was inept at stakeholder engagement. Its failure wasn't a failure of corporate sustainability so much as a failure of implementation and style. As for Interface, the lesson there is that operationalising sustainability isn't a panacea - but then, no one ever said it was.

Meanwhile other companies have made real strides in integrating sustainability into substantial portions of their operations. Collins & Aikman, a floor-covering company like Interface, has an aggressive eco-efficiency program and a commitment to replace its existing product lines with environmentally superior products, and its financial performance has been consistently excellent. The company's management is convinced that sustainability is a sound business strategy. DuPont has also had some success in operationalising sustainability, although on a still-piecemeal basis.

There is another factor to consider here. Sustainability has a learning curve and we are farther along it than we were in the '90s. As companies apply lessons learned from the past, their chances of success increase. Monsanto's blunders are unlikely to be repeated, at least not on the same scale. How companies did at operationalising sustainability in the '90s can only tell us so much about how they will do at it now and in the future.

Objection #3: The value case is beside the point - what is really required is to persuade Wall Street.
The argument here goes as follows: it is the attitude of the world's financial markets that drives corporate behaviour. When Wall Street becomes persuaded that operationalising sustainability is good for business, it will start incorporating that assessment into its evaluation of companies. This will cause the stock prices of companies with superior sustainability performance to rise and shareholder value will have been created. Until that comes to pass, operationalising sustainability cannot and will not create value. So why waste time on developing value cases and testing sustainability strategies? The real challenge is to 'sell' Wall Street on the proposition that operationalising sustainability is good for business.

This proposition puts the cart before the horse. True, it is important to persuade Wall Street, but investors don't lead the creation of value, they follow it. Not that the world's financial analysts never let down their guard - witness, for instance, the recent dot-com debacle - but when it comes to signing off on sustainability, they are as picky as tax auditors in a bad mood. They will settle for nothing less than truly compelling evidence from the results of real-world operating companies, and mounds of it at that. A value case does not suffice for them. Yet a value case is pretty much all we have at this point.

There is only one way to break this impasse. Corporations must take action on their own. Although the value case may not be a sufficient basis for commitment by Wall Street, that need not be the same for corporations. Businesses are forever trying out possibilities. It is an integral part of the growth and innovation process. And it is the value case that justifies these intermediate explorations.

Corporations do not have to wait for Wall Street's blessing. Nothing keeps them from plunging into the sustainability waters on their own and testing the value case for sustainability through cautious trial-and-error experimentation. If enough companies do this, it could well produce hard evidence of value creation, and a good amount of it at that. Then it will no longer be a matter of 'selling' Wall Street analysts. It will be a matter of simply showing them what has happened. The facts will speak for themselves.

It is one thing to believe in the value case for operationalising sustainability, and another to get buy-in on that proposition throughout one's organisation. A certain amount of resistance is inevitable and not inappropriate for a new idea. Some managers will worry about the impact of operationalising sustainability on the bottom line. Others it will make anxious because change unsettles them, and operationalising sustainability implies big changes. Still others will be concerned about turf issues. And some will feel that sustainability is for tree-huggers, not sensible people like themselves.

At Ecos, we have identified three basic strategies for countering this resistance.

Strategy #1: Measure sustainability performance whenever possible.
The more abstract the value case is, the less persuasive. Sustainability needs to be grounded in hard numbers. This means measuring it whenever possible.

With the help of Ecos and others, DuPont has developed a metric for doing this. It is called shareholder value-added per pound of production (or SVA/lb). DuPont CEO Chad Holliday describes SVA/lb. as  "the shareholder value created above the cost of capital …On a simplistic basis, shareholder value can be created with both material and knowledge. The higher the SVA/lb, the greater is the use of 'knowledge intensity' and the lower is the use of 'materials intensity' to create economic value." In other words, more value is creating using less stuff - a key criterion of sustainability. DuPont has evaluated the SVA/lb for all its business units and some of its businesses have set targets for increases in SVA/lb, i.e., they have committed to shifting toward greater knowledge intensity over the coming years.

As noted earlier, there are still significant gaps in our capacity to quantify the contributions of individual corporations to sustainability. Measuring sustainability is an early-stage science, maybe in some ways an art. But some broad metrics do exist - SVA/lb, for instance - and others are being developed. In the meantime, the challenge for executives is to work with the metrics that are available to turn sustainability into something that their colleagues will recognize as being a legitimate business framework ‑‑ the sort of thing that, like Six Sigma, they can learn about and apply to their benefit.

Strategy #2: Use sustainability filters.
Metrics aren't the only way to ground sustainability. Filters are another, less rigorously quantitative way to do so. Like metrics, filters take sustainability out of the realm of abstraction and make it a tool managers can work with.

DuPont uses a filter called the Ecos Value Screen, which assesses the contribution of a given sustainability strategy to margin improvement, risk reduction, growth enhancement and capital efficiency. When the filter shows that actions pursued in the name of sustainability do not create value in at least one of these areas, Ecos recommends re-examining them with a view toward either increasing their value (as defined by the Value Screen), or dropping them entirely. To get off to a strong start in operationalising sustainability, it is important to limit one's initial explorations to projects that are deemed very likely to generate value.

Strategy #3: Incorporate sustainability into the business planning process.
It is also very important for sustainability to be integrated into the business planning process at the business-unit level. The benefit of this is that it normalises and legitimises sustainability initiatives by taking them through the same established process as other business projects.

There are many ways to do this. One option is to require every business plan to include specific proposals for a) developing and testing potential sustainability strategies, b) measuring the success of those strategies, and c) if warranted, applying those strategies further down the road. This is best done linked to a corporate strategy with targets. And the most effective way to really drive the message home is to link compensation directly to managers' performance against sustainability-based goals.

The bottom line to all this is that sustainability does not yet have a clear bottom line. Operationalising sustainability is a work-in-progress. There is a value case - a plausible rationale for believing it can create shareholder value - but we are still in the proof-of-concept stage. The value case is a 'maybe' - perhaps a 'probably.' It is a hypothesis that must be tested, no differently from how scientific hypotheses are tested - through trial-and-error experimentation. And it is corporations that must do the testing.

Does this entail some risk? Of course. Every business decision does, and this one is no different. Here, the risk is that resources will be expended unproductively, perhaps because the underlying concept is flawed, perhaps because of faulty execution. This sort of risk is built into the innovation process. Companies willingly accept that risk all the time - for them it as a standard aspect of doing business. They understand that in investing in innovation, they are investing in the future.

In the business context, sustainability is best seen, at least at this juncture, as a subset of innovation - as an area of potential opportunity. Given the 'strongly suggestive' character of the value case for operationalising sustainability, taking judicious steps to explore its potential seems a quite reasonable risk and not at all out of line with the other risks corporations routinely take on as part of the innovation process.

As for the potential rewards, they are basically two. The first fits entirely within the rules of the business game: operationalising sustainability could open a window onto new business opportunities. As for the second reward, it is more personal. Executives who show the way in operationalising sustainability may end up being remembered by future generations as the leaders of a conceptual and strategic revolution that pulled off the unlikely ‑‑ and heroic ‑‑ achievement of creating a world that works.