Risky business: The cost of NOT managing environmental impacts

Blog-Water-262080-editedThe natural resources we so often take for granted are in fact critically important to the very existence of our ecosystems and our economy.

Take, for example, a family-owned barge company which has ferried goods up and down the Mississippi River for the last 60 years. Water and weather weigh heavily on whether the company opens its doors every day, so the increased frequency of major water events like flooding or droughts must become part of their risk mitigation strategy. Similarly, building and construction companies need to weigh the cost/benefit of managing forests to minimize air, water, and soil quality degradation. As our global economies continue to converge, companies need to account for the fact that ecosystems are doing the same.

In January, we were joined by Betty Cremmins, the senior manager of CDP Supply Chain, as she discussed the CDP’s (formerly the Carbon Disclosure Project) reporting process and the many business benefits associated with it. Betty works with major corporations to support the integration of climate change and water disclosure and action into standard purchasing practice. CDP provides the world’s only global natural capital disclosure system, through which more than 4,500 companies from more than 80 countries and 207 cities report, manage, and share vital environmental information.

Companies that disclose to CDP are able to demonstrate:

  • Increased awareness of greenhouse gas emissions hot spots so that they can begin to reduce them.
  • Business leadership in understanding the risks from climate change, deforestation, and water scarcity.
  • How they are creating opportunities to innovate and generate revenue from sustainable products and services.
  • How they are future-proofing their business from climate change and water impacts.

Measurement, transparency, and accountability drive positive change in the world of business and investment and builds greater resilience.

Disclosure and transparency also have many lesser known benefits. For example, companies seeking to maximize performance should consider transparent reporting as a possible source of value and insurance-like protection against downturns that can occur during crises.[1] Additionally, in times of market crisis, transparent firms are easier to trade than those that do not report. One particular study looked at liquidity—the cost associated with acquiring or offloading shares of a company—and uncovered a variety of ways in which investors prefer transparent firms to opaque ones.[2]

The risk is high for companies who do not disclose information transparently. Information gaps between firms and investors can have a pronounced negative effect on a firm’s access to capital. In markets with relatively little competition, for example, highly opaque firms may have a 12.5 percent higher cost of capital than highly transparent firms. Opaque firms also suffer a significantly lower market-to-book ratio, indicating that they are not as highly valued as they might be.[3]

Corporate leaders are increasingly taking the long view necessary to address larger sustainability issues. The Center for Corporate Citizenship’s recently released research report, the 2014 State of Corporate Citizenship, found that companies investing in corporate citizenship over the long term achieved business goals in consistently higher numbers. The majority of executive respondents in the survey believe they feel positive pressure to produce long-term returns, contrary to a continued emphasis on short-term performance. In addition, executives predict an increase in the amount of ESG reporting they will do in the future. They identify reporting on environmental performance as one of the top five citizenship priorities and it is one of the factors they identify as contributing to business success.

Companies that account for and manage energy, climate change, water, and land use are those that are building long-term business resilience. Click here to listen to the on-demand webinar (Member's Only) to hear how yours can be one of them.

[1] Enikolopov, R., Petrova, M, & Stepanov, S. (2014). Firm value in crisis: Effects of firm-level transparency and country-level institutions. Journal of Banking and Finance, 46, 72–84.

[2] Lang, M, & Maffett, M. (2011). Transparency and liquidity uncertainty in crisis periods. Journal of Accounting and Economics, 52(2), 101-125.

[3] Armstrong, C.S., Core, J.C., Taylor, D.J., & Verrecchia, R.E. (2011). When does information asymmetry affect the cost of capital? Journal of Accounting Research, 49(1), 1-40.