The New Accounting Practice that's Saving Lockheed Martin, Chevron and the DOD Millions

Although the term “sustainability” has become something that most businesspeople associate with marketing or maybe compliance, at its core sustainability is as much about saving companies as saving the earth: it all boils down to maximizing resources and minimizing risk. Until recently, however, sustainability initiatives at most companies have tended to start with the sustainability director, who takes a good-for-the-environment idea and tries to build a good-for-business argument around it. That approach is fundamentally flawed according to Yann Risz, vice president of strategy and environmental finance for Environmental ERP software company Enviance. Instead, Risz suggests starting with the day-to-day operations of business–what the procurement folks deal with daily, for example, or the sales force–and looking for ways that sustainability initiatives might address some of the company’s pain points. Risz has been thinking about the subject nonstop for the past several years as he developed the company’s environmental finance tool and began to roll it out to many of Enviance’s compliance software customers, including Lockheed Martin, Chevron and the Department of Defense.
“If you want to scale sustainability you don’t start with sustainability and incrementally change it to make it business-friendly,” he says. “You start with understanding the average day of a procurement officer – he has five minutes to listen to you, so you need to understand what he needs and give him something he can understand in that time.”
A recent Gartner case study on Enviance’s work with Lockheed Martin shows just how effective that approach can be. In the course of that work, Enviance analyzed 2,000 environmental factors that are relevant to Lockheed’s business and found that only ten were material from an environmental point of view. In fact 10 environmental factors accounted for 96 percent of the company’s environmental impact, and much of them were not direct Lockheed impacts but factors that could be traced further up the company’s supply chain.
“As CFO, maybe that’s interesting but what does that mean to my job?” Risz says. “What’s the financial exposure linked to those factors? We estimated that 35 percent of Lockheed’s EBIT [Earnings before interest and taxes] was associated with energy-related commodities in its supply chain. Now that gets the CFO’s attention. Suddenly it’s not the crazy green guy talking, but the business guy going hey we have 35 percent earnings exposure here, so we’d better deal with it.”
Marrying environmental impacts and finance doesn’t just help to reveal financial risks associated with environmental exposures, it also helps companies pinpoint where they should be spending their sustainability budgets to get the most bang for their buck. In Lockheed’s case, for example, seven of the top ten environmental factors were energy-related while waste and water–both traditional targets for sustainability departments–were of relatively minor importance. That knowledge gave the company the opportunity to reconsider capital investment of water and waste projects, and reprioritization of longer-term project planning. Accurately accounting for environmental risks and benefits also helped Lockheed pinpoint more than $30 million in potential savings.
Lockheed isn’t the first company to marry finance and sustainability. WalMart was an early leader in this realm, as were Procter and Gamble and Unilever. However, although these early adopters attempted to link supply chain sustainability initiatives with financial returns ($1 billion in two years, in P&G’s case), they lacked the sort of granular data that would enable the sort of change in strategy that Lockheed is undertaking. Puma came closer when it issued its environmental profit and loss statement for its global supply chain, which revealed that approximately 94 percent of its total environmental burden lay in its upstream supply chain.
As notions around sustainability mature, more and more companies are embracing this new form of environmental accounting. Risz says Enviance has worked with companies in various sectors, including fast food, oil and gas, and banking, and the idea is really beginning to gain traction. In Italy, the company recently worked with Unicredit Bank, for example, to determine the financial risks associated with the bank loaning money to coal companies. “We were helping loan officers understand when they make loans to the coal industry, what is the impact their loans have and how they should assess the risk behind these loans,” Risz explains. “There are environmental risks there, but also reputational.”
The bottom line? If you want to get [all the various stakeholders in a company] on board with sustainability initiatives, you  have to appeal to their KPIs [key performance indicators, the metric upon which many companies base annual bonuses],” Risz says.

Source: www.forbes.com by Amy Westervelt