Practicing Good Green Governance Leads to Profits
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When it comes to a corporation practicing good green governance, it’s not about being altruistic. Nor is it solely about enhancing the company’s risk management, as a risk management program is viewed as a cost to a company (albeit a justified and worthwhile one). Being green can generate savings for a company (e.g., reducing energy consumption, raw materials, water, etc.) Far from being a cost, good green governance can directly contribute to a company’s bottom line and an increase in profitability.
But how can an investor know to attribute this profitability to green practices? Without plowing through a company’s financial statements and sustainability reports, they might surmise that profits came solely from a superior product or service, effective advertising, or something else. So how can a company best showcase to a broad audience that it’s good green governance contributed to its profits?
Defining Good Green Governance for a Corporation
Let’s begin by defining green governance. It refers to a set of principles and practices aimed at promoting environmental sustainability and responsible management of natural resources within a clear governance and decision-making framework. A green-minded corporation should integrate environmental considerations into policies, regulations, and actions throughout all divisions of its business. Green governance aims to balance economic and environmental practices to create a profitable and sustainable future.
The key aspects of practicing green governance are as follows:
- Environmental Protection
- Sustainable Development & Integration
- Transparency and Participation
- Accountability and Enforcement
- Climate Action
- Innovation and Technology
- Education and Awareness
- Short-, Medium- and Long-Term Goal Setting
- International Cooperation (with all stakeholders)
Practicing green governance requires a holistic approach that considers the interconnectedness of environmental, operational, and economic systems to balance human needs and the health of the planet with the company’s bottom line and valuation. That balance is what helps ensure a sustainable and prosperous future for all stakeholders.
So, how does this connect to profitability? When putting green governance into practice, it helps to have some real-world examples. Here are three.
Hewlett Packard Enterprise: Engaging Customer Input
For Hewlett-Packard Enterprise (HPE), demand for “greenness” came from its customer base. Customers increasingly questioned the carbon footprint of HPE’s products and services. According to GreenBiz, HPE’s sustainability team saw this as an opportunity to respond proactively rather than defensively.
The sustainability team tracked the content of the conversations it had with HPE’s customers over a 5- year period and capitalized on the data to help close deals. In those conversations, the company addressed its progress in energy efficiency, circularity, and other related features. The payoff was impressive: $1.3 billion in profit (out of $28.5 billion) in 2022, a 400% increase from 2018.
As the interest in discussions around sustainability in 2022 grew dramatically, the sustainability team was initially unprepared for the volume and the required time commitment. To address this, the team launched a program to train its salespeople on how HPE technologies can play a meaningful role in meeting sustainability goals and net zero targets, reducing carbon footprints, and measuring and managing ESG metrics in customer industries ranging from financial services to manufacturing.
In 2023, the company launched voluntary online classes for pre-sales, sales, and customer engagement employees, making them advocates for ‘sustainable IT.’ While the class is voluntary, thousands of employees have signed up.
United Airlines: Upgrading its Fleet
United Airlines stands out among its peers in an industry not known for its ‘greenness.’ As part of its Road to Net-Zero plan, according to its Corporate Responsibility Report, United placed orders for more than 400 narrowbody and widebody aircraft, with options to increase that number to nearly 700. The aircraft are expected to improve fuel efficiency by 17-25% per seat compared to older planes. Together with fuel efficiency efforts keyed to seat density, these more efficient aircraft should result in 20% reduction of its forecasted emissions which will help it reach net zero by 2050 without the use of traditional carbon offsets.
In fact, United was the first US airline to show customers an estimate of their flights’ carbon footprint when booking on a per economy seat passenger basis. In February 2023, it embarked on its transition toward more sustainable flying, highlighting the importance of transparency for its customers. Many fliers value this effort, and it is reflected in their choice of airline.
Goodyear Tire: Evaluating Energy Loss Assessments
Goodyear Tire is an industry that is not generally recognized as being green. Yet annually, the company performs an energy loss assessment within its overall manufacturing zero-loss assessment. It reviews different categories of energy losses that can occur in every area of its manufacturing facilities, including steam use, utility costs, heating and cooling, and electric use efficiency. Upon completion of the energy loss assessment, each plant identifies its greatest opportunity areas and sets its own goals, measured in BTUs per pound of production, to be incorporated into its global energy reduction goal. In its most recent five-year plan, Goodyear identified more than 530 energy efficiency projects that leverage a zero-loss culture to prioritize opportunities, target cost reductions, and increase efficiency. Goodyear’s savings in 2022 from energy efficiency projects was approximately $19 million, a 2.3% energy efficiency improvement from its 2019 baseline.
Showcasing a Company’s Greenness: Getting the Message Out
The above examples are just a few ways that sustainability initiatives have contributed to corporate profitability, each part of a larger environmental effort, including carbon reduction, water management, and recycling, to name a few. Importantly, each of them is also an example of leadership and governance attention across the company that were necessary precursors to making lasting change. Despite this, these companies, and many like them, often fail to get the recognition they deserve from the investment community because investors make bad assumptions based on the nature of their respective industries and public mistrust in what is being reported. These investors are missing the leaders among the laggards.
Many companies want to showcase their greenness in a credible and trustworthy way but find the current system of backward-looking, voluntary standards and the myriad of ESG metrics to be daunting, arduous, and costly. Furthermore, they are frustrated by the fact that some of their competitors loosely adopt ESG standards, leading to greenwashing, or selectively report statistics resulting in green hushing, which only broadens the distrust of rating agencies, many of which scrape sustainability reports for keywords and don’t engage with company leaders. Such ratings have low correlations (typically sub-40), leaving investors to question which one is right or better.
Public companies would be wise to consider a dual-listing on a green stock exchange as an additive, strategic initiative. Unlike ESG standards, a U.S. exchange is an SEC-regulated entity that enforces accountability and green stewardship. An exchange is the only enforceable mechanism providing investors with the trust and credibility they demand when sourcing green-minded investments. Unlike the passive role a company has with an ESG standard or ESG rating agency, a company’s role with an exchange is active. As such, the exchange provides a green seal of approval, a binary yes/no mark of its listed companies’ greenness, and facilitates the role of retail and institutional investors looking for a more straightforward and more trustworthy screening when choosing green-minded investments. Green companies are encouraged to continue their journey toward being green and to get recognized for it. Being green is about being responsible. It strengthens risk management and helps a company to be future-ready. And it can lead to profitability in ways that should be recognized and touted. The more all stakeholders recognize good green governance, the more they will demand it from their investments, goods, service providers, and employers, setting the stage for a sustainable future for future generations
By Shelley Goldberg, Green Evangelist at The Green Impact Exchange