‘Being Green’ Hits the Bottom Line

In the late 1990s, I led a team of researchers at Ernst & Young’s Center for Business Innovation creating a model for measuring the impact of reputation and various other intangible drivers of organizational value. Since then I’ve analyzed hundreds of organizations to determine the impact of their reputations on their performance, quantifying the value of reputation in terms of concrete measures like revenues and market value. And the impact is surprisingly high – ranging from about 40 percent to more than 100 percent of market value

The models created for individual companies have been proven to be highly predictive over time. What time has also shown, looking back at all the models in aggregate, is how reputation has evolved.

Those analyses also determined the current and potential value of individual elements of each company’s reputation, for example stakeholder perceptions of product quality or innovation. While each organization was unique, looking at all of the research over time provides an archaeological view of reputation’s evolution. In other words, at any point in time a particular driver tended to rise above the others in terms of its general impact on value across companies and industries, only to recede after a few years and be replaced by a different driver.

When we first started measuring intangibles, “image” was the dominant factor, as it proved to have a larger impact on average than other intangibles. As we began to study reputation specifically, “trust” emerged as the weightiest characteristic. That was replaced by “strategy,” which gave way to “intellectual property” and then to “leadership.” The latter was the era when superstar CEOs had an outsized impact on value and, yet, trust in leadership was beginning to be questioned.

In those earlier days, champions of sustainability, then simply known as environmentalists, were considered “tree huggers.” That perception started to change in 2007, when the attention of corporate and institutional stakeholders started to move from leaders, per se, to the way their organizations operated. Today, the dominant factor in reputational value – in demonstrable impact on performance outcomes – is “Corporate Social Responsibility” (CSR), including, of the utmost significance, “sustainability.”

This became clear to me when, for a 2007 BusinessWeek cover story, we were asked to determine what would happen to Walmart’s market capitalization if it had Target’s CSR reputation. That analysis showed that Walmart’s value would increase by 8.4 percent, or $16 billion.

Just as sustainability is the prevailing reputational component on average today, our analyses also show that specific elements of sustainability tend to be more highly valued from one industry to another. Those that generally have the greatest impact include having high ethical standards, giving back to the environment, reducing carbon footprint, using recycled materials, and being committed to not harming the surrounding environment.

Stakeholders are voting with their employment, purchase and investment choices, and organizations are seeing a strong and positive impact on bottom-line performance as a result of implementing sustainability programs and communicating clearly about those efforts. It is true that companies can suffer if they greenwash their CSR performance. By the same token, companies that shy away from communicating about sustainability efforts are leaving potential value on the table.

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