Companies face increasing pressure from governments, competitors, and employees to play a leading role in addressing a wide array of environmental, social, and governance issues—ranging from climate change to obesity to human rights—in a company’s supply chain. Over the past 30 years, most of them have responded by developing corporate social responsibility or sustainability initiatives to fulfill their contract with society by addressing such issues.
Gathering the data needed to justify sustained, strategic investments in such programs can be difficult, but without this information executives and investors often see programs as separate from a company’s core business or unrelated to its shareholder value. Some companies have made great progress tracking operational metrics (such as tons of carbon emitted) or social indicators (say, the number of students enrolled in programs) but often have difficulty linking such metrics and indicators to a real financial impact. Others insist that the effects of such programs are either too indirect to value or too deeply embedded in the core business to be measured meaningfully: for example, it can be very hard to separate the financial impact of offering healthier products from the impact of other aspects of the brand, such as quality and price.
Yet many companies are creating real value through their environmental, social, and governance activities—through increased sales, decreased costs, or reduced risks—and some have developed hard data to measure even the long-term and indirect value of environmental, social, and governance programs. It’s not surprising that the best of them create financial value in ways the market already assesses—growth, return on capital, risk management, and quality of management. Programs that don’t create value in one of these ways should be reexamined.