Review prepared by ISSP member, Faye Sinnott.
Soyka, Peter A. 2012. Creating a Sustainable Organization: Approaches for Enhancing Corporate Value through Sustainability. New York. FT Press. February. ISBN-13: 978-0-13-287440-3, ISBN-10: 0-13-287440-7.
Peter Soyka’s book, Creating a Sustainable Organization is a very thoughtful and well-researched book designed to help businesses and their management respond to the challenges and opportunities posed by today’s emerging environmental issues. In a nutshell it shows us that:
- Well-chosen eco-efficiency initiatives improve corporate returns
- There is a strong correlation between strategic sustainability management practices and firm value
- Solid environmental management practices and execution lead to lower costs of capital
- Improved employee relations, strong environmental policies and performance and products with benign environmental health and safety characteristics reduce risks, thereby reducing corporate costs of capital.
Soyka shares his perspectives on what is needed to realize these gains with documented studies. He writes from a deep sense of values, and states his view: “sustainability is a value set, philosophy, and approach rooted in the belief organizations (corporations and otherwise) can and must materially contribute to the betterment of society” and must recognize the “larger interests of the societies in which they operate.”
Reflecting on the conflicting challenges facing today’s executives, Soyka builds the case that sustainability offers an effective framework for aligning the entire firm to achieve a culture dedicated to value creation. This has the power to increase the revenue stream and underlying customer base, improve earnings and/or cost controls, and to adequately understand and manage risk. He identifies multiple trends suggesting that adequate access to capital will increasingly be contingent on the quality of a company’s commitment to and implementation of sustainability, although much has to happen for this to be actually realized.
This is both an excellent reference and a pragmatic manual. I recommend it highly.
More detailed content description is below:
Soyka succinctly summarizes the overall thrust of the book in the first chapter. Each chapter following begins with an explanation of its content and ends with a thoughtful analysis of trends and implications for the future. The last chapter pulls everything together. As such, the reader can constructively focus on a few areas of key interest. However, most will want to read it in its entirety. Knowing where Soyka is going adds to the understanding of how he builds his case, chapter by chapter
The book gives a brief history of the regulatory movement, clearly showing the reason why Environmental Health and Safety (EHS) and sustainability were at first departments for compliance at least cost rather than investments for advantage. While identifying legal compliance and worker safety to be a performance baseline, Soyka specifically addresses how sustainability should be a player at the corporate strategy table because sustainability has a role in the development of strategic value creation for the firm. To get there, and to be maximally effective, the conversation starts with the firm’s mission and core values and long range objectives. Sustainability opportunities and challenges are then mapped to them. Top executives must be visible in sustainability planning and follow-through, and supportive of developing aligned corporate infrastructures and all-functions engagement. Ideally there is on-going Board level involvement. Soyka notes, “if constructed well, a sustainability framework flows from, rather than conflicting with, an organization’s strategy, priorities and values.” He also notes that, assuming all legal requirements are met, the sustainability team’s talents should be harnessed to help create strategic, value creating opportunities for the firm. The value-creation lens is also useful for prioritizing sustainability projects, and those kinds of projects historically have been correlated with positive investor and analyst ratings and valuations. Soyka recognizes that this orientation will clearly ask current sustainability and ESH/ES&G directors to “step up their game” to play in the policy and strategic levels. (He also recognizes that integration into strategy may have an adverse effect on the open sharing of successful practices across firms, as is currently prevalent in the EHS/ES&G profession.)
He has a very thorough discussion on integrating sustainability into a company’s DNA, and some excellent guidelines, checklists and organization-wide considerations that should be addressed.
He’s very good at capturing the executive perspective on costs, assets, revenues and profit, and uses his deep understanding of organizations to suggest how a sustainability lens can help protect current revenues and find new revenue opportunities, as well as help improve products and processes.
Soyka then moves to some of the business and public related trends in our world society. He reviews concepts such as the social “license to operate,” harkening back to the generally understood obligation in English common law that everyone avoid doing harm to others, as well as regulations arising from Congressional actions. He reviews the rising public expectations for corporations to “play by the rules” and minimize harm, the role of NGOs and social media in amplifying issues and voices, and the clamor for more transparency. He points out the percentage growth of company assets in the intangible asset class compared to capital assets and its implications for investor consideration and for management’s. This discussion of various stakeholders’ perspectives lays the groundwork for a deeper treatment of the power of markets and why investors have an interest in the sustainability of their corporate investments.
In Chapter 6, Soyka explains that an investor is looking for future returns from his investment, and value general comes in three ways:
- Revenue must grow, so the company is worth more in the future
- Earnings must also grow
- Risk must decline or remain steady
Therefore, effective sustainability information should tell the investor something about the future. The practice of sustainability investing involves determining the financial value that each firm’s sustainability/ES&G activities creates (or destroys), and evaluating this impact along with the other customary financial and industry/sector criteria. Soyka then reviews key financial and reporting documents – from the 8-K to Sarbanes-Oxley to the FASB’s issuance of FAS 143/FIN 47 mandating a probabilistic analysis of future environmental liabilities – and suggests how the role of ES&G information should continue to grow, especially in the area of appraising resource and liability risks. He also takes a fairly deep dive into the role being played by voluntary disclosure under the Global Reporting Initiative (GRI), the United Nations Global Compact (UNGC) and the Carbon Disclosure Project (CDP) in developing relevant sources of information (much still remains to be done), and the significant growth of Socially Responsible Investing (SRI) and ES&G (and sustainability) investing.
There is a discussion on the definition of fiduciary duty for investment fund managers, and the 2005 and 2009 Freshfields Reports which determined that ES&G issues must be considered in the discharge of fiduciary duty, especially in the area of managing risk. The 2009 report noted that fiduciaries “will increasingly come to recognize the materiality of ES&G issues and the systemic risks they pose, as well as the long term costs of unsustainable development and its impacts on their portfolios.” This report, commissioned by the UN Environmental Program – Finance Initiative, holds more sway in non-United States markets than it does in the United States. This could change, especially if the U.S. Department of Labor issued a supportive interpretation of ERISA, or if there is action from the SEC to require or strongly encourage regular sustainability reporting by publicly traded corporations.
Soyka presents several detailed analyses of trends in sustainability reporting, the growth of large financial analysis organizations offering proprietary analysis including sustainability indicators, and the advent of financial reporting organizations – such as Bloomberg – including a set of consistent ES&G criteria, and in this case, based on the Global Reporting Initiative (GRI) reporting guidelines and including additional indicators by client request.
He then delves into studies designed to determine whether investments using sustainability criteria outperform those that don’t. His findings include:
- Positive investment screens and best-in-class approaches are most effective; rigid negative screening does NOT outperform, and may lag the market
- Climate change and regulatory concerns link to corporation default risks, and generally mean higher interest rates and costs and lower returns
- Investors are pricing in GHG emission intensities as if they will cause future cost escalations, resulting in lower returns
While credit market data is more limited than equity market data, the data that exists does suggest that the results may be parallel, that is, “sustainability posture and performance affect the return potential and risk of company securities.”
Most of Chapter 8 delves into issues related to defining, measuring and reporting sustainability performance. Soyka notes there are many data and reporting deficiencies and gaps that limit a firm’s ability to make their responses to sustainability issues as effective as possible. These same limitations hinder investor ability to comprehensively grasp and act on the factors that will separate the firms best positioned to adapt to sustainability challenges and opportunities from those less prepared. Soyka delineates the kinds of indicators that he believes will have the greatest effect for helping analysts assess companies. This includes such items as consistent, comparable, credible data on sustainability in the firm, and clear evidence of senior management control and engagement. The thread throughout is that there needs to be tighter integration of sustainability information and other more clearly financial and operating impact information. This presumes a tighter focus on sustainable value creation as a lens both for prioritizing sustainability projects and to drive the firm as a whole. The chapter recaps some of the efforts toward integrated reporting to date.
Soyka’s final chapter summarizes the challenges involved in understanding and effectively managing corporate sustainability. Central is his belief that effective sustainability management in the future will require a much more interdisciplinary, cross-functional, and strategic approach than has generally been the rule. This chapter describes a generalized approach, which Soyka believes can be applied to almost any company. He further describes several ES&G issues and the growing public concern about them that could result in significant regulatory activity, such as material/product restrictions under the REACH (Registration, Evaluation and Authorization of Chemicals) regulation of the EU, or mandatory ES&G disclosure imposed by the SEC, and a few others. This means the business environment may be much more dynamic and demanding than it has been. It raises the bar for the capabilities and personal characteristics of those who would lead sustainability efforts, either within companies or as advisors. Above all, Soyka believes that sustainability is rapidly becoming a core business imperative.