Friday, May 18, 2007

Corporate Sustainability

Corporate sustainability reports are gaining ground with Fortune 500 companies. United Parcel Service, Inc. (UPS: NYSE) issued its first sustainability report in 2003 and Alcan, Inc. (AL: NYSE) was already on the bandwagon in 2002. Both are heavy fossil fuel users and therefore it stands to reason both would have rather large carbon footprints. The UPS report goes beyond carbon footprint, reporting on corporate philanthropy and its exemplary work environment.

I expect the practice to trickle down to smaller companies eventually. For example,
Visteon Corp. (VC: NYSE), the automotive supplier, issued its first sustainability report in 2006. Green Mountain Coffee Roasters, Inc. (GMCR: Nasdaq) even won an award for its sustainability reporting from the World Business Council for Sustainable Development. It really does not seem like such a great feat for a company with “green” already in its name.

All these reports are surprisingly detailed and come with glowing remarks about how hard the company is trying to make improvements. Yet what is the investor really getting in the end? Where do the environmental liabilities reside? Which are more critical - air pollution, water contamination, or carbon output? What is the threat to product development or sales growth if environmental regulations are imposed or made stricter? What is the impact on profitability?

These questions are left to the investor calculate on her own. One item running through most of these corporate sustainability reports is the so-called “Global Reporting Initiative.” The
Global Reporting Initiative was set up by the United Nations Environmental Program to give public companies guidance in preparing sustainability reports. The group is on its third round of standards just released in October 2006.

Admittedly, there is a great deal more to be done to disclose to investors enough information to really assess a company’s environmental risk. In the meantime, the crumbs in these sustainability reports can be helpful when coupled with financial reports. For example, UPS reports an increase in the number of meters of water consumed from 5.2 million in 2002 to 5.5 million in 2005. However, the number of meters per package declined to 1.62 meters per package in 2005 from 1.70 meters in 2002. Another little jewel in the UPS reports using 95.0 million gigajoules of energy in 2005 compared to 88.4 million gigajoules in 2002. Both of those two data points suggest progress in creating efficiency in the overall package delivery operation.

Likewise greenhouse gas emissions increased to 7.13 metric tons in 2005 compared to 6.6 metric tons in 2002, but on a per package basis UPS managed to bring the per package measure down to 2.12 metric tons of greenhouse has emissions per package carried from 2.16 metric tons in 2002. This looks more like leverage of fixed infrastructure rather than any real progress in reducing energy consumption. UPS appears to be just as dependent as ever on fossil fuel today as it was five years ago. There is no data on the amount of energy consumed by UPS that is renewable versus fossil fuel.

A review of each sustainability report would probably reveal the same kind of disclosures - impressive simply because there is a report, but well short of real accomplishments.

Neither the author of the Small Cap Copy web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.