Sustainability Proves Its Worth

Study points to considerable cash flow benefits from better performance.

By Mark Rosenzweig, Editor in Chief

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Effectiveness in using resources differs markedly among some major chemical companies and that difference has a significant financial dimension, according to a recent report "Sustainable Value Creation by Chemical Companies."

That report assessed the performance of Air Liquide, Akzo Nobel, BASF, Bayer, Dow, DSM, DuPont, Reliance Industries and Shell Chemicals over four years (2004–2007), both in absolute terms and factoring in company size.

Results showed dramatic differences among the companies. BASF and Air Liquide created the highest sustainable value and were the only two firms consistently producing positive results over the entire study period, says the report. BASF created almost €1.2 billion in sustainable value in 2007 alone and Air Liquid almost €900 million then — in effect giving them that much more cash flow than their competitors on average would have generated with the same amount of resources. Taking size into account, Air Liquid actually outperformed BASF and Bayer rivaled BASF. Bayer boasted a positive trend in performance over the period, as did DuPont. In contrast, Shell showed a negative trend.

DSM and Dow were at the bottom of the rankings, with both companies using their resources only about half as efficiently as the group's average. They, along with Akzo Nobel, didn't achieve a single positive sustainable value during the four years. Dow consistently ranked worst in performance. In 2007 alone, it posted a nearly €2.2 billion negative sustainable value.

". . . Differences in the performances of the companies assessed partially stem from differences in the product portfolio," the report admits, adding, though, "the effect of good environmental management can clearly be seen in the results."

A pan-European team authored the report: Frank Figge of the Queen's University Management School, Belfast, Northern Ireland; Tobias Hahn of the Euromed Management School, Marseilles, France; and Andrea Liesen and Frank Müller of the Institute for Futures Studies and Technology Assessment, Berlin, Germany. BASF provided financial support for the work but had no influence on its content or findings, the authors stress.

The team assessed the companies using the sustainable value approach developed by Figge and Hahn.

BASF and Air Liquide created the highest sustainable value.

"The sustainable value approach is the first method that assesses corporate sustainability performance based on the value created with the resources used. By extending a traditional valuation method applied in financial analysis, it assesses not just the use of economic capital, but also environmental and social resources. A chemical company thus creates positive (or negative) sustainable value if it earns a higher (or lower) return than its peers with the economic, environmental and social resources used. An analysis based on the sustainable value approach therefore establishes whether a company is successfully using its resources to create value in comparison with industry peers. In doing so, the sustainable value approach measures corporate sustainability performance in monetary terms. It establishes a link between sustainability and the value-based approach that is traditionally used in management practice and financial analysis," the report notes.

The study looked at 13 economic, environmental and social resources. These included total assets, water use, chemical oxygen demand of wastewater, hazardous waste creation, emissions of green house gases and volatile organic compounds and acidification potential as well as number of employees and accidents. It relied upon data publicly reported by the companies themselves.

"Companies have highly developed tools to measure their use of the resource economic capital. The sustainable value approach now allows them to measure the use of their environmental and social resources in economic terms," says Figge.

"Our study is based on economic theory and provides companies with an unprejudiced assessment of their performance. The results can be used by companies to find out where they stand compared with their peers and also to identify the individual strengths and weaknesses of their performance," he adds.

A pdf of the report is available at www.sustainablevalue.com.

The site also offers a link to an online "Sustainable Value Calculator." This leads you through the steps of a sustainable value assessment, allowing you to calculate how efficiently your company uses economic, environmental and social resources compared to a benchmark. It gives the result as a single financial value.

How do you think your company would fare?



Mark Rosenzweig is Chemical Processing's Editor in Chief. You can e-mail him at  MRosenzweig@putman.net.

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