Financial performance improves when firms invest in environmental management practices.
That’s the clear message from recent research co-authored by Ivey Professor Robert Klassen and Markus Biehl from the Schulich School. Their study, based on Statistics Canada data from the manufacturing sector, looked at green investments and their impact on the bottom line. “We were trying to explore whether firms can be leaner and greener at the same time,” says Klassen.
Green investments were divided into three categories: pollution control, pollution prevention, and management practices. Pollution control includes “end-of-pipe” installations such as air scrubbers and water treatment plants. Pollution prevention includes technologies or processes that reduce pollution at the source. Management practices include training employees around environmental issues and monitoring environmental performance.
The study showed that investments in pollution prevention or pollution control had no impact, either positive or negative, on the firm’s bottom line. But investments in environmental management practices resulted in significant financial returns. “We were surprised to see such strong results on the management practice side,” says Klassen.
Klassen believes that effective environmental management tends to embed sustainable thinking into the culture of the firm. “Existing research suggests that the difference between average and great organizations is the way they use their people,” he says. “Our results reinforce that general observation.”
In another stream of his research on sustainability, Klassen looked at how manufacturing organizations think about social issues in their supply chain. Leading firms have adopted a “triple bottom line,” which includes social and environmental reporting in addition to financial. As firms struggle to better understand how social practices are linked to innovation and opportunity, Klassen wanted to find out how well they were actually doing in this area.
In one study, Klassen oversaw a large-scale survey of firms in the food, chemicals and transportation equipment industries. The focus of the study was how these firms managed social issues across four parts of the supply chain: internal workforce, suppliers, customers, and the broader community.
Klassen found that firms did quite well at managing social issues in some areas, but not in others. The employee group fared the best, followed by customers. “Companies have worked very hard in Canada to develop good wellness and health and safety practices for employees, and workforce diversity,” he says. “They also are taking care of their customers, particularly in areas like package integrity and product tracking.”
Social issues in the community get less attention, and suppliers are the most neglected of the four groups. Klassen found that most firms were lax in monitoring supplier practices and working conditions, and rarely audited suppliers to see if they were doing what they were supposed to. “This is an area that needs further development,” he says. “Firms tend to just hope that things will turn out.” This feeling may have some justification if a firm’s suppliers are located in Canada or Europe, where firms are highly regulated, but not in other parts of the world, such as Asia or South America.
From this study Klassen developed a self-assessment tool that can be applied at either the corporate or plant level. This tool enables firms to evaluate how well they manage social issues across the supply chain, and compare the results against industry benchmarks.
As an extension of this research, Klassen interviewed managers from five European multinationals. The idea was to gain insight into how they identify and understand social issues, with a view toward either mitigating a potential risk or exploiting an opportunity. An example of mitigating a risk is working with a supplier to reduce the number of accidents in its plant, which has both human and financial costs. An opportunity to expand revenue can result from collaborating with a supplier on designing a safer product.
Although firms are having difficulty gauging the impact of social management practices, Klassen found that competitive advantages are beginning to surface. For example, he interviewed managers from an agricultural products company that had been conducting social and environmental audits of suppliers in South America for about 15 years. “It had taken a long time to build up its credibility, expertise, and understanding of the linkages between various parts of the business, but the company had begun to reap some financial rewards,” says Klassen.
Many organizations are only just beginning to report on social issues as part of a triple bottom line for sustainability. The challenge is to build management capabilities to effectively deal with these concerns. Klassen encourages firms to think about structuring the management of social issues into the two areas of risk management and opportunity enhancement. “If you’re looking for a payoff next quarter or year, you will likely be disappointed,” he says. “Social issues management is a long term commitment. It involves people, and people take time to change and to see things in a different light.”Professor Klassen holds the Magna International Inc. Chair in Business Administration.
Reprint from Ivey Business Journal
[© Reprinted and used by permission of the Ivey Business School]