The Iceberg of Value

Companies embracing sustainability strategies can grow their "icebergs of value" above and below the waterline. They can mitigate impending risks and capture profitable opportunities.

What does a company gain by paying more attention to its impact on the environment and society? Simply put, it enhances its value. Making this assertion assumes we can assess the company's current value, integrate sustainability strategies with business strategies and then assess how much the company's value has been enhanced.

How Big is the Iceberg?

How can we assess the company's iceberg of value before and after this organizational transformation? There are two traditional approaches: the accountant approach and the stock market approach. By subtracting liabilities from assets, accountants use a balance sheet to calculate the size for the tip of the iceberg of value. The balance sheet represents the net book value of hard financial, built, and manufactured capital which can be counted and touched.

The stock market assesses the value of the whole iceberg of value-the market capitalization of the company. This value is determined by multiplying the value of each stock by the total volume of stocks. Market capitalization, like the accounting method, includes the hard balance sheet value of the iceberg tip. But, it also includes other softer intangibles or nonfinancial factors, such as a company's reputation and its relationships with important stakeholders-in other words, its human and social capital.

Accountants acknowledge this value in the balance sheet with a small allowance for "goodwill." As Figures 2 and 3 show, the marketplace's assessment of these extra financial assets below the waterline leaped from 17 percent of average company value in 1981 to
71 percent in 1998. Today, in 2008, these softer intangibles form at least 80 percent of company value.

Knowing What Lies Beneath

So what? Two things. First, executives are increasingly remunerated with shares or stock options, so they have a very strong, personal interest in the stock market's view of the size of the company's whole iceberg of value (not just their accountants' view of the size of its tip). Secondly, sustainability issues swirl around the increasingly significant bottom of the iceberg, advocated by stakeholders like those shown in Figure 4.

Historically, nongovernmental organizations (NGOs) and scientists were lonely voices in the underwater stakeholder chorus, singing the sustainability song and attempting to get corporate executives to join in. But the hard reality was those stakeholders were not important enough as singers in the corporate choir, so they did not receive serious attention from busy, hard-nosed executives. The important singers-the ones who receive attention from executives charged with enlarging the iceberg of value-are employees, customers, investors, and markets. In the last two years, these unlikely voices have joined the stakeholder sustainability chorus and they are belting out the sustainability song with renewed vigor. Smart executives and boards of directors are now compelled to listen with a different, more attentive ear to the once-marginalized NGOand scientist soloists.

To understand the significance of these new voices in the stakeholder chorus, we need to reframe the iceberg of value with a business case lens. Fundamentally, the business case for any business strategy has two parts: mitigating risks and capturing opportunities. The same is true for the business case for integrating sustainability into business strategies. Companies can protect nonfinancial value below the waterline by ensuring relationships with important stakeholders are enhanced, or at least not eroded. If important stakeholders are upset about sustainability issues and how the company is addressing its ecological and social impacts, that company needs to address the potential threat to its reputation and its social license to operate. By addressing the risk of unmet stakeholder expectations below the waterline, the company sets itself up to capitalize on the second part of the business case: increased profit opportunities above the waterline.

Icebergs Threatened by Climate Change

Looking further at risks, the sea of important stakeholders is roiling, driven by gale force winds of concern about the climate crisis and the energy crisis. These two crises are permanent and personal. Consumer concern has been fanned by the "Goracle factor" of Al Gore's An Inconvenient Truth film, talks and books. Generating further concern are devastating weather events such as Hurricane Katrina; rising energy prices; mainstream press articles about climate change, the Kyoto Protocol and post-Kyoto negotiations; and increased advertising of the ecological benefits of "green" products.

Not providing green products and services jeopardizes revenue from a critical mass of consumers who are voting with their wallets on sustainability issues. Economists like Nicholas Stern, former chief economist for the World Bank, are urging governments to take action on climate change now to avoid the worst global economic depression in the history of mankind. Energy-intensive companies that are heavily dependent on fossil fuels are most at risk when governments respond to economists' dire warnings and implement carbon taxes and hard caps on carbon emissions.

Through the annual Carbon Disclosure Project, large institutional investors are asking the largest 2,400 companies in the world to self-assess the risk to their "icebergs of value" from climate change. Investors are not trying to save the world so much as they are trying to protect themselves against risky investments. Markets like the European Union are implementing stringent environmental regulations on any company doing business in their markets. Companies risk losing market access if they fail to clean up their acts.

So, threats and risks are now getting the attention of executives. After all, not responding to the demands of consumers, economists, investors, and the market will erode a company's reputation and social value below the waterline. If executives feel that important stakeholders' expectations are unfair and unfounded, their personal opinion is interesting but irrelevant. Prudent risk management demands that if important stakeholders feel proactive corporate action on sustainability needs to be taken, then action needs to be taken, period.

Benefits Above and Below the Waterline

The good news is that if a company responds appropriately to stakeholders' concerns about pressing environmental and social issues like climate change, it positions itself to grow the hard financial capital above the waterline. It can clean up financially by cleaning up environmentally and socially. Research, involving hundreds of case studies, has shown that a typical large company that integrates sustainability strategies throughout its organization can increase profits by at least 38 percent over five years, fully costed. For a typical small-to medium-sized enterprise, the corresponding profit increase is at least 66 percent. How? The bottom-line, quantifiable benefits for sustainability opportunities include reduced hiring and retention costs, improved productivity, decreased manufacturing and operating expenses, increased revenue, and reduced insurance and borrowing costs. It's just smart business.

Companies embracing sustainability strategies can grow their "icebergs of value" above and below the waterline. They can mitigate impending risks and capture profitable opportunities. Smart companies will stay afloat. Laggard companies, stuck in their status quo, risk sinking. The fog is lifting and new strategic sustainability initiatives and imperatives are becoming clearer. Let's get on with it for the good of the planet and its people. And for profits, too.

*Footnotes