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Valuing social responsibility programs
Companies face increasing pressure from governments, competitors and employees to play a leading role in addressing a wide array of environmental, social and governance issues in company’s supply chain. But do they create financial value? Gathering the data needed to justify sustained, strategic investments in such programs can be difficult, according to McKinsey Quarterly authors Sheila Bonini, Timothy Koller and Philip Mirvis.
Nevertheless, many companies are creating real value and some have developed hard data to measure even the long-term and indirect value of environmental, social and governance programs. The most widely known way that these programs create value is by enhancing the reputations of companies – their stakeholders’ attitudes about their tangible actions.
It has been clear that financially valuable objectives – such as better regulatory settlements, price premiums, increased sales, a reduced risk of boycotts and higher retention of talent – may depend, at least in part, on a company’s reputation for environmental, social and governance programs that meet community needs and go beyond regulatory requirements or industry forms.
Growth
The authors highlighted five areas in which these programs have a demonstrable impact on growth, as follows:
Returns on capital
The authors have seen companies generate returns on capital from their environmental, social and governance programs in several ways – most often through operational efficiency and workforce efficiency.
Risk management
Companies often see environmental, social and governance issues as potential risks and many programs in these areas were originally designed to mitigate them – particularly risks to a company’s reputation but also, for example, problems with regulation, gaining the public support needed to do business and ensuring the sustainability of supply chains.
Today, companies manage many of these risks by taking stands on questions ranging from corruption and fraud to data security and labor practices. Creating and complying with such policies is an extremely important part of risk management, though one that isn’t likely to be a source of significant differentiation.
Management quality
CFO’s and professional investors often see high-performing environmental, social and governance programs as a proxy for the effectiveness of a company’s management. The authors observed that these programs can have a strong impact in all three areas that investors typically consider important:
Assessing value
Companies can directly value the financial effects of many such programs, even in short term; the impact of environmental programs, for example, can often be measured quickly with traditional business metrics such as cost efficiency. Companies that understand the pathways to value and identify the short- and long-term effects of environmental, social and governance programs will succeed in defining a few targeted metrics to assess them.
Read the full article on McKinsey Quarterly