Good guys finish first

By John Lorinc
Illustration: Dan Page

Skyrocketing energy costs and looming risks of climate change mean that responsibility — to society and the environment — is also about profitability

One doesn’t need to be an expert on climate change and energy markets to realize that companies with large vehicle fleets are hurtling toward a future of rising operating costs and increasingly onerous regulation. That’s why, several years ago, Canadian courier giant Purolator decided to start an experiment with delivery vehicles that rely on alternative fuels: gas-electric hybrids and hydrogen fuel-cell vans. The project began as a demonstration partnership with Azure, a hybrid-vehicle maker. But after almost a decade of steadily rising fuel prices, what began as little more than a feel-good PR initiative has morphed into something much bigger and more profitable.

Today, there is a strong business case for changing the entire3,000-van fleet to low-emission vehicles, says Serge Viola, Purolator’s national fleet and ground line haul director. As of late 2007, Purolator was operating 49 hybrids; the company is ordering 105 more this year, another 200 in 2009, and expects to replace the entire fleet within a decade. Viola says there’s a reduction of 35% to 40% in fuel consumption for each hybrid, plus a 15% to 20% savings on maintenance. Such a shift is a blend of sound economics and environmental stewardship. “You want to do things right,” he says, “but you have to make it viable at the same time.”

Such moves underscore a seismic shift occurring in corporate social responsibility (CSR). For years, progressive-minded consumers have been flocking to businesses that deal in socially and environmentally sustainable products and services. Organic and fair-trade foods are staple items on the shelves of supermarkets, which are falling over one another to reduce their plastic bag usage. Some clothing makers are selling apparel made from hemp or organic cotton. And products made out of recycled materials — everything from paper towels made from 100% recycled fibre to handbags fabricated from used tires — have gained growing consumer acceptance.

Meanwhile, some conservation-minded homeowners are in-vesting in thermal windows, high-grade insulation and energy-efficient appliances, while others are signing on with green-energy marketers such as Toronto’s Bullfrog Power. “If you call it green, you have a bit of a marketing angle,” says Grant Thornton assurance partner Jeremy Jagt, a Mississauga, Ont., CA whose client roster includes several clean-energy firms. Citing the example of wind farms, he notes, “You can market something like that to the public [by saying], ‘You can make a contribution to the environment by investing in my company.’ ”

Over the past few years, however, what’s become apparent is that a growing number of companies are looking more intensively at their operations with an eye to using CSR initiatives to improve their environmental and social track records, as well as the bottom line.

In some cases, such changes are motivated by regulation. Mining and oil/gas exploration companies in particular are facing intense pressure — from governments, advocacy groups and investors — to be far better environmental stewards. But increasingly, the drivers include a radical shift in the way companies are thinking about the environment in the era of climate change uncertainty. Firms such as Brookfield Properties are creating less wasteful offices — for example, setting up recycling programs or reducing wasteful lighting. There are even more profound operational changes, as is the case with Purolator.

With the scrutiny has come a push for better quantitative analysis in voluntary disclosure reports and third-party assurance of CSR data. Glossy brochures full of environmental bromides no longer cut it, while the absence of a detailed CSR re-port is now noted by advocacy groups and European investors.

Indeed, in February the Ontario Securities Commission slammed Canadian publicly traded companies for failing to provide detailed disclosure about their environmental liabilities such as chemical spills. The commission is proposing that firms include verifiable estimates about the cost of dealing with such risks as part of their financial statements, rather than merely relying on boilerplate disclosure.

For experts such as Gordon Richardson, KPMG professor of accounting at the University of Toronto’s Rotman School of management, such changes indicate that many firms are moving beyond PR-oriented CSR reporting into a new type of sustainable management. Seeking to reduce their emissions, they are making tough operational choices and adopting rigorous reporting standards. And those decisions are being rewarded in the market. “It’s the good performers who are pushing this,” he says. “They want a level playing field so the poor environmental performers can’t make false claims.”

About five years ago, Tridel president Leo Delzotto announced to his company that it would begin constructing apartment buildings very differently than it had been doing for decades. One of North America’s largest condo builders, Tridel recognized the need to make its apartments more energy efficient as a means of dealing with rising energy costs. Over the next three or four years,Tridel manager of research and development Rambod Nasrin led a push to come up with new designs and technologies that could be marshaled to make greener buildings. He scoured the market for new lighting, insulation and heating technologies. His group proposed new layouts for the apartments and motion sensors that would turn off garage lights when no one was present.

Today, Tridel is building a dozen projects that will qualify for the Leadership in Energy and Environmental Design (LEED) standard for green design. In each, energy efficiency has been increased by 25% to 35%, which translates into reduced emissions as well as savings worth as much as $100,000 to $200,000 a year for an average high-rise condominium. Environmental design, Nasrin says, “is becoming the market standard. In the next five years, you’ll be hard pressed to find buildings not designed this way.”

Nasrin freely admits that consumers, while interested, aren’t exactly lining up for energy-efficient condos. Rather, Tridel’s shift is a case of a company retooling its business practices to confront the looming risks linked to energy and climate change.

For large firms, such changes also represent a means of demonstrating to investors, consumers, advocacy groups and regulators that they’re doing more good than harm. Pointing to the performance of the Dow Jones Sustainability Indexes, CSR experts also say that such efforts do bolster the bottom line and boost share price.

CSR has “really taken off in the past 24 months,” says Peter Johnson, PricewaterhouseCoopers’ director of sustainable business solutions in Toronto. There’s been a rapid run-up in the number of publicly traded firms issuing sustainability reports designed to position these companies as good corporate citizens. A growing number conform to international CSR disclosure standards, such as the Global Reporting Initiative. “CSR is a lens for how a company is managed,” adds Johnson. “If a firm is managing its social and environmental responsibilities in an open way, it’s assumed to be better managed than one just focused on commercial objectives.”

Those assumptions, as often as not, are made by shareholders pressing for operational changes and better data. This year, for example, 315 global investors representing $41 trillion in assets signed on to The Carbon Disclosure Project, requesting disclosure from companies around the world, including the top 200 TSX firms. “Investors want to know if companies have considered the [business] risks associated with climate change,” says Valerie Chort, a partner and national leader of Deloitte’s corporate responsibility and sustainability services in Toronto. “That’s driving a lot of disclosure.”

Chort also predicts that the availability of such data will only grow as the carbon economy, in the form of an emission credits trading system, matures into a genuine market. She says a number of financial institutions are developing funds to hold and trade carbon assets, and such instruments have begun to have a market value.

Richardson adds that latent environmental liabilities, particularly those linked to emissions and inefficient energy use, clearly have the potential to morph into onerous future expenses. “If standards are ratcheted up, these companies will be forced to spend.”

The rub is that environmental accounting is still very much an emerging field. “Accounting for sustainability costs is very difficult,” admits Christine Schuh, Canadian climate change services leader for PricewaterhouseCoopers in Calgary. “It’s a gray area.” With greenhouse gases, for example, firms are still trying to figure out how to allocate funds that are being used to invest in emission reduction technology. “When you reduce greenhouse gases, you’re increasing the efficiency of the plant,” says Schuh. “Is that considered an improvement or a compliance requirement?”

Lawyer Melanie Steiner, a senior manager with Ernst & Young’s risk advisory services in Toronto, notes that in a growing number of companies, the impetus for change begins at the board, which establishes a sustainability or environment committee to develop broad principles that are turned over to the CEO for implementation. Such governance initiatives, she adds, are linked to the risk-management ethos of the Sarbanes-Oxley era. But, Steiner notes, “innovative companies are looking at this in a more strategic way.”

Once corporate leaders have signaled their intentions, as happened with Tridel, buy-in from senior management becomes a crucial next step. “A new generation of CEOs is more interested in these broader issues. They take the board mandate and filter it down to all levels of the organization,” says Steiner.

Depending on the firm, those CSR directives may be focused on reducing workplace accidents, increasing community engagement or making operations more environmentally sustainable. Johnson, for instance, says some major retailers are pressing such policies down the supply chain, asking for assurances about labour standards or demanding less packaging. “Any company that has a brand or reputation that is front and centre in the public eye —those are the ones pushing ahead with this.”

Not surprisingly, Steiner points out, companies are adding lawyers, engineers, MBAs and other technical experts to their internal audit departments as they gear up to measure and confirm CSR initiatives. Some firms also retain outside consultants to audit their own operations or those of their suppliers.

Robert Kolida, senior vice-president of human resources at Hudson’s Bay Co., says such changes don’t happen overnight. HBC issued its first CSR report in 2001-2002 and estimates it has found about $9 million in efficiency-related savings since then. Initially, the retailer’s sustainability program looked at low-hanging fruit, such as installing energy-efficient lighting and printing documents on double-sided paper. As the company be-gins to realize savings, its CSR initiatives — branded internally as Global Mind — continue to expand. Like many retailers, HBC is now working to reduce packaging by promoting reusable bags. Its trucks use cleaner bio-diesel fuel and HBC has opened a new Zellers store, in Waterdown, Ont., that has roof-top wind turbines.

The company, moreover, has set up internal reporting systems to encourage employees to bring forward other ideas to Kolida’s group, which spearheads HBC’s sustainability efforts. “It’s not something we’ll do this year and then we’re done,” he says. “Our managers have bought in to the Global Mind philosophy. That’s when CSR programs take off.”

Much of the attention, of course, is directed toward the natural resources sectors — forestry, pulp and paper, mining, and oil and gas exploration. Companies operating in these sectors, as Schuh says, “don’t want to see a big spill or a large operational failure that results in deaths.” The Exxon Valdez oil spill in 1989 was not just an environmental disaster; it swiftly decimated the goodwill and reputation of one of the world’s largest companies.

The resource extraction industry has come under heavy scrutiny for all the obvious reasons: unflattering accounts of corruption, dismal working conditions and environmental degradation linked to the conduct of Canadian mining and oil/gas exploration firms doing business in developing nations. In March 2007 the National Roundtables on Corporate Social Responsibility and the Canadian Extractive Industry in Developing Countries, established by the former Liberal government, issued a report recommending that companies pay far more attention to meeting CSR standards for mine closures, community engagement and fair wages or face losing federal export assistance.

Industry groups, in sectors such as pulp and paper, mining and forestry, are now trying to find ways of urging their members to adopt the recommendations and implement sectoral sustainability reporting standards, says Richardson. “It’s contentious because for some members, it’s not in their best interests to develop these standards.”

But Vince Borg, Barrick Gold’s senior vice-president of corporate communications, says meaningful CSR has to be “part of a company’s DNA,” not just an exercise in damage control or PR. He recalls that one of Barrick’s earliest CSR moves, back when the firm had only a few Quebec mines, was to offer university scholarships to the children of its employees as a means of encouraging them to stick with the company. The perk was about enlightened self-interest: the company had trained its employees and wanted to protect its investment. “It proved to be an effective means of retaining our skilled employees.”

Nearly two decades later, Borg says, Barrick has continued to take this approach with its mining operations in Latin America. The company goes out of its way to invest millions in the physical and social infrastructure of the communities where its mines are located — roads, schools, etc. That strategy has paid off in Peru, where there’s been growing labour unrest in recent years. Barrick, says Borg, hasn’t experienced any major disruptions and its mines remained open during a nationwide wildcat strike last fall.

Indeed, when Barrick officials recently held their quarterly conference call, investment analysts were curious about how the firm dodged the labour disruption bullet when so many other mining firms had experienced work stoppages. Borg points out that the company has never had to downgrade its annual guidance to investors — a prediction about production volumes — due to strikes. His point: being socially responsible is smart management, and investors will reward them for it.

“It’s totally quantifiable,” he says. “The goodwill [created] has affected the value of this asset.”

Of course, the financial benefits aren’t just apparent to investors, as Tom Farley, president and chief operating officer of Brookfield Properties, explains. Over the past five years, the real estate giant has systematically invested in improved heating, lighting, ventilation, water and waste-management systems in its office buildings. The firm installs hydro meters in its tenants’ premises and encourages them to cut their energy consumption. It installed low-flush toilets in one new development and is putting them into some older buildings as well. And in Toronto’s Brookfield Place an internal recycling program has increased diversion rates to an impressive 89%.

The financial benefits are now coming home to roost. Last year, the company realized a 15% reduction in hydro bills thanks to the installation of new chillers in one of its buildings — a $600,000 savings for its tenants. New lighting sensors: a $400,000 savings. Digitally controlled temperature and airflow systems: $450,000 a year. By reducing its tenants’ costs, the company is better positioned to retain them.

“The bottom line,” says Farley, “is that going green creates both environmental and financial incentives for the building owner and the tenants.”

John Lorinc is a Toronto-based writer