Shareholders Press Manufacturers to Disclose Their Sustainability Efforts

May 16, 2011

Customers are insisting that companies reveal exactly what'"going green' means.

For all those still skeptical whether the sustainability (aka "green") movement will ever produce new revenue streams, the evidence is in that at least one industry sector is doing exceptionally well by these initiatives; namely, those who audit or prepare corporate sustainability reports. According to Corporate Register, the number of companies producing sustainability reports (known variously as corporate social responsibility reports, or CSR) has more than doubled over the past three years, from 2,000 in 2007 to 5,000 in 2010.

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Steve Starbuck: "Increased awareness among investors and regulators of the reputational and financial risks associated with CSR and environmental sustainability places more pressure on companies to identify and manage these issues."
Much of the impetus for these types of sustainability reports comes from shareholders, notes Steve Starbuck, Americas leader, climate change and sustainability services, with Big Four accounting firm Ernst & Young. "Increased awareness among investors and regulators of the reputational and financial risks associated with CSR and environmental sustainability places more pressure on companies to identify and manage these issues." This trend, he adds, is gaining more traction as shareholders press corporate boards to vote in favor of environmental and social proposals.

For instance, in Lockheed Martin's 2010 Corporate Energy, Environment, Safety and Health Report, the aerospace manufacturer goes into detail about its 150 carbon-reduction projects. The company's "Go Green" program addresses key areas of the supply chain where sustainability efforts will pay off. For example, Lockheed Martin collaborated with one of its suppliers, computer giant Dell, on eliminating extra packaging by shipping in multipacks or recycled containers. Lockheed Martin estimates that it decreased waste to landfill by over 1 million pounds between 2009 and 2010 by insisting that its suppliers reduce excess packaging. "We are embedding sustainability practices into our DNA," says David Constable, Lockheed Martin's vice president of energy, environment, safety and health.

According to Ernst & Young, the percentage of CSR shareholder resolutions that won at least 30% shareholder support (which is considered a significant threshold by many corporate board members) has increased from 3% in 2005 to 27% in 2010. And based on a study by PricewaterhouseCoopers, it's those activist shareholders who are insisting that companies do a better job of disclosing what progress they are making toward improving their sustainability profiles.

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Replacing hazardous copper-beryllium alloys with stainless steel in the manufacture of its F-35B BF-4 aircraft is just one of many sustainability initiatives Lockheed Martin has undertaken.
Photo: Lockheed Martin
"Companies are increasingly expected to provide investment-grade sustainability data, and basic e-mail, spreadsheet or other do-it-yourself reporting processes won't provide the necessary discipline," says Doug Kangos, partner, PwC US Sustainable Business Solutions.

"Companies have a significant opportunity to improve their sustainability reporting, and investors are increasingly expecting the precision and the context that they've come to expect with financial reporting."

The most influential stakeholders of a sustainability strategy, according to a study conducted by KPMG, are a company's customers (47%), their employees (34%), the management team and their board of directors (34%), regulators (29%), competitors (20%), business or supply chain partners (17%) and investors (16%). More than half (55%) of U.S. companies have a formal sustainability strategy in place, according to KPMG, with the key business driver behind those efforts being enhancing brand reputation (37% of respondents).