Triple Threat

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Quantifying the value of the knowledge gained by students and teachers in Intel’s Teach Program takes innovative accounting prowess.

Courtesy Intel Corp.

Corporate execs steal accounting secrets to measure more than money Traditional financial accounting practices guide companies making decisions about how to spend, invest and allocate resources among competing demands. Today, companies are trying to use lessons from accounting to make similar decisions about corporate social responsibility (CSR). But is triple-bottom-line accounting really possible? In 2008, carpet maker Interface Inc. (NYSE: IFSIA) announced its best second-quarter performance ever. Sales were up, profit margins were up, and the company was gobbling up market share. In large part, the impressive quarterly results were due to the company’s market-leading focus on modular carpets, which were first embraced by the green-building

community and are now landing in mainstream commercial and industrial buildings. But scan through earnings statements the company has filed—both recently and in years past—with the U.S. Securities and Exchange Commission, and page after page, there’s little indication that behind the 10-Q and 8-K filings Interface has undergone a major transformation in its approach to doing business. Interface’s story is well-known in sustainable business circles. A leader in the global rug and carpet business, Interface went public in June

BY CELESTE LECOMPTE

1983; 11 years later (1994) the company’s founder and chairman Ray Anderson had what is famously known as his “spear in the chest” moment after reading Paul Hawken’s “Ecology of Commerce.” In the years since, the company joined the nonprofit Global Reporting Index to track its triplebottom-line performance along 70 metrics, and continues to publicly report its progress: Waste reduction efforts have helped it avoid more than $372 million in costs since 1995; energy-efficiency initiatives dropped energy consumption 45 percent since 1996; and the company has increased training, slashed on-the-job injuries by 60 percent and steadily increased its donations to nonprofit organizations.

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MONEY So, if a company such as Interface is able to identify clear success—even demonstrating material-cost savings from its activities—why doesn’t its financial statements reflect its achievements?

BLIND LEADING THE BLIND Businesses use detailed frameworks for decision making, evaluation and understanding corporate performance in terms of financial data. The Global Accounting Standards Board, Financial Accounting Standards Board, the Securities and Exchange Commission and other regulatory bodies have established standardized, legal frameworks for what to measure, how to measure it, how to report it and how to interpret it. “Accounting is a way of creating a picture of something that’s real,” says Darrell Brown, a professor of Accounting Information Systems at Portland State University. Financial accounting selects data points from a sea of possibilities and manipulates them through mathematical equations; someone else looks at the output and interprets it. Throughout the process, companies, accountants and investors all make implicit assumptions about value and priorities. Thanks to the oversight of regulatory bodies, these assumptions are driven by decades of

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negotiation and consensus about what information the numbers provide regarding the current and future performance of a business. And there are tangible consequences when companies fail to meet those standards: They fail to find investors, perhaps, or to turn a profit. Ultimately, unfavorable results will shatter a company’s business. But for companies that aspire to maintain a “triple bottom line,” there are no such guidelines for metrics beyond money. “The notion of triplebottom-line accounting assumes or incorporates the idea in the nomenclature that there’s a standard,” says Jonathan Storper, an attorney and owner of Hanson Bridgett. “The reality is, there isn’t.” When it comes to crunching the numbers and interpreting the output on social and environmental data—no one has quite figured out how to do it yet. Unlike economics, which rely on a standard unit of currency across all categories, neither social nor environmental attributes are yet being described by a single standard unit. This poses a significant challenge to operationalize the data contained in most CSR reports. “Until we find a unit of measure that is fungible across all those attributes, we can’t do it,” says Brown. “In economics, we can say our goal is this: maximize profit,” says Brown. But when companies get to environmental or social arenas,

what, exactly, is it that they’re trying to maximize? For many companies, carbon is becoming the environmental version of “debt”—many companies can track and attempt to reduce carbon using agreed-upon accounting standards and practices. To some extent, the ongoing development of carbon-accounting systems mirrors the decades-long development of today’s financial standards; but so far there is no equivalent to the “Generally Accepted Accounting Practices” that govern financial markets. In part, carbon has gained currency as a proxy for environmental performance because of the nascent carbon markets developing worldwide. While the U.S. market remains largely voluntary, regulatory markets in the United Kingdom and elsewhere have helped create a clear cost-benefit scenario for measuring and managing carbon. “Once the price is set, it’s very easy for companies to get their heads around it and manage it,” says Dave Stangis, director of corporate social responsibility for Intel (Nasdaq: INTC). Setting a price, says Paul Herman, CEO and founder of HIP Investor, is critical to making sustainability part of how companies do business. “Companies are most inclined to do things that line up with traditional financial performance,” he says. “The code to crack is what is the short list of meaningful measures that also drive profitability.”

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Minneapolis-based utility Xcel Energy (NYSE: XEL), prompted by a suit led by New York Attorney General Andrew Cuomo, announced in late August 2008 it would begin reporting the potential financial impacts of its carbon emissions. Xcel already files such information with the fastgrowing Carbon Disclosure Project, a voluntary reporting initiative for businesses that recognize the potential costs of their emissions should the U.S. adopt a cap-and-trade carbon market under the next federal administration. In its most recent report Xcel estimates, at the bargain rate of $9 per ton of carbon, its cost burden from carbon could top $603 million—more than the $577 million profit it reported in 2007. Most of the people interviewed for this article agreed the environmental issues that have gained the most traction across corporate reporting are those that, like carbon, can be easily expressed in monetary terms. Maximizing profit requires minimizing costs, and most environmental initiatives tackled by companies at the outset of a CSR program aim to reduce costs (including speculative carbon costs) while also reducing energy, water and solid waste. Carbon is just the most visible example. “Anything that falls in the conservation space, when you save money on transporting waste, packaging—reducing waste, energy use—those

PUTTING A VALUE ON ‘SOCIAL’ GOODS Environmental markets, while still nascent, are an emerging tool for companies attempting to put dollar values on their “green” initiatives. Water quality trading markets, conservation easements and other emerging markets try to quantify the value of the “ecosystem services” provided by undisturbed habitat, uncontaminated water and wildlife corridors. But when it comes to the “social” variables in the triple-bottomline equation, the idea of creating markets makes some practitioners squeamish, says Intel’s Dave Stangis. “There are now prices set for carbon,” he says. “But there isn’t a price set anywhere except in actuary tables for the price of a loss of life.” For Portland State University’s Darrell Brown, social issues are the poison pill for most attempts at triple-bottom-line accounting. Where most businesses can largely agree that reducing pollution, cutting carbon, and maximizing profit are good goals, in the social realm it’s hard to even find a common goal upon which anyone Dave Stangis can agree. Intel’s Stangis says he asks managers of the Intel Teach Program to identify specific goals for their program and begin measuring their performance from day one. Less broadly writ, it’s an approach that jibes with Brown’s assessment: “If we can identify the social good proposition, we can find an economically efficient way to achieve it.”

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are all great Finance 101 ROI stories,” Stangis says. Skip Lamb, vice president of finance at Interface, says his company is now focused on identifying new, innovative technologies that do more than reduce waste—that “close the loop” or “reinvent commerce” (two of the company’s “Mission Zero” goals). He cites the example of new machinery that shaves carpet fibers from their vinyl backings, allowing the company to collect waste from other manufacturers’ operations and incorporate it as raw materials into the manufacturing process. Such technologies are typically untested, with little data to support ROI estimates. Lamb says the company looks for projects that will create positive returns within three years—after all, you have to justify such efforts to shareholders, Lamb notes.

Courtesy Interface Inc.

APPLES TO APPLES

Interface invested profits into cutting-edge technology that allows the company to recycle even more carpet components.

Where companies have several needs—say, a new office facility in Southern California; a new, more efficient boiler system at a manufacturing plant in Ohio; and a lighting-retrofit for offices in Detroit—how can triple-bottom-line metrics help them set priorities and make decisions about how to allocate resources? For years, Intel struggled to get energyefficiency projects approved through the budgeting

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process—even if they showed a positive return on investment (ROI)—when they were competing with capital building projects. “We would lose every single one,” says Intel’s Stangis, who notes that conservation measures always result in positive ROI and should therefore be measured against one another. Today, Intel has a special capital-funding model that pits energy efficiency projects against each other, rather than against other investments. It wasn’t an easy process, though. Stangis says it took “a couple years of arguing” to establish a process that included buyin from the executive level and the budget team. While Stangis won’t say what percentage of the company’s overall budget is set aside for such projects, he says the model has enabled the company to undertake cost-effective efficiency projects. It’s been so successful that the company has now moved beyond just creating new budget categories to figuring out how to create similar models that weigh additional “sustainability” investments against each other. In the end, the company created a “framework” for evaluating projects, such as the Intel Teach Program that helps K–12 teachers integrate technology into their lessons, across six priorities. The priorities are weighted based on a survey of 44 Intel managers involved in such decision making. The rubric gives weighted scores to:

Courtesy Intel Corp.

O C T O B ER 2008

Having trained millions of teachers in more than 40 countries, Intel’s Teach Program aims to nearly triple its impact by 2011.

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MONEY environmental impact (24%), leadership positioning (20%), government regulations (17%), media visibility (15%), employee impact (14%) and return on investment (10%). Evaluators give proposed projects scores of 0, 1 or 2, depending on the category. To earn 2s across the board, a project would: provide a greater than a five percent reduction in waste, water or energy; position the company in the Top 10 of global businesses; position the company to “shape future governmental relations”; produce positive recognition from a media outlet (the model cites The Wall Street Journal as one example); make employees feel “proud” of the accomplishment; and have a 15 percent or greater ROI. Using the framework, Intel’s green-power purchasing program (which earns the company the title of the largest green power purchaser in the United States) earns a score of 80, with negative ROI and 2s in every other category but leadership, in which it earns a 1 (“positions the company among the Top 10 of all U.S. firms”). The program’s high marks give Intel targets for assessing renewable energy installations that could provide some of that green power on site. But the model doesn’t help Intel decide which projects to pursue when the projects are extremely different. For example, when comparing a waterefficiency system in India with a solar PV installation in Arizona, “all of the sudden the model starts to fall apart,” Stangis notes. “You’re making subjective judgments. And you’re outside of comparing ROI and ROI.”

JUDGMENT DAY At Interface Inc., it’s not just CSR projects that have to pass a triple-bottom-line evaluation. All projects that are going to cost more than $5,000 get routed through the company’s Capital Expenditure Authorization system. In addition to general background information on what the project is and what it will cost, applicants complete an environmental assessment section with 17 different environmental criteria; a financial assessment rate of return payback period and cost savings; and a “narrative” section, which Lamb described in an e-mail as “a section on environmental justification that includes the seven steps to sustainability (eliminate waste, benign emissions, renewable energy, closing the loop, resource efficient transportation, sensitivity hookup and redesign commerce).” Environmental compliance teams review the evaluation before it’s routed through the finance department for number crunching. As a finance professional, Lamb is one of the last people to review an evaluation. “If it doesn’t past muster with our environmental group, it doesn’t get to me.” The approach sets a baseline, stops “bad”

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GENUINE METRICS In sustainability metrics, it’s impossible to avoid the impact of two major initiatives: The Kyoto Protocol and the Global Reporting Initiative (GRI). The Kyoto Protocol is the better known of the two, and it’s played a critical role in giving teeth to largely theoretical triplebottom-line accounting practices. But the GRI could become an equally toothy initiative if Massachusetts-based environmental consulting firm The Cadmus Group has anything to do with it. In May, the firm acquired Portland-based energy industry consulting firm Quantec, which has created Genuine Metrics, an open-source, Excel-based software tool designed to help companies translate the social and environmental impacts of business into the language of business: dollars. The GRI provides a good foundation for such analysis. While it is fundamentally qualitative, the GRI framework also attempts to quantify the risk involved in each metric. Genuine Metrics pushes those numbers to the next level. It ties a wide range of databases for categories such as wood, water and employee training to explicit values. In many cases, the model uses the economic concept of “rents,” which are essentially values estimating how much a resource (oil, employees, e.g.) depreciates (say, corporate travel) or appreciates (say, training) through normal business. The Genuine Metrics tool then helps companies crunch this kind of complex data into metrics that mean something. Jim Thayer, senior associate at Cadmus, says the tool showed Cadmus that its own sustainability programs (such as buying green power and providing subsidies for hybrid vehicles) couldn’t compensate, even if maxed out without regard for cost, for all of the company’s own resource-use impacts. Disappointing as it may be, that kind of feedback is a big win for the team, as it proved the benefit of statistical modeling for making business decisions. More info: www.cadmusgroup.com/strategic_environmen tal_consulting

projects before they start and encourages planning for “good” projects from the get-go. Lamb warned against relying too heavily on the numbercrunching aspects to understand the company’s approach to decision making. “I wish I could tell you that we have a totally automated scientific capital expenditure selection modeling tool, but we do not,” he wrote. “We really prefer the involvement of our associates in our capital requests.”

CREATING THE MOLD At Intel, associates take a team approach to decision making. Content experts bring different perspectives to the table and help the rest of the team ask better questions. Stangis points to the “cross-functional team” dedicated to the renewable energy program as an example. While the person responsible for buying all of Intel’s power brings a cost-sensitive perspective to the table, team members from the Intel Capital Group can advocate for riskier projects that may support one of its cleantech investments. The group approach may have long-term benefits. In the case of CSR reporting, bringing accountants, lawyers, environmental engineers, operations personnel and other employees to the table could help move the triple-bottom-line accounting theory closer to regulatory standards that can be embraced across the market. But what about smaller companies that don’t have access to multiple in-house experts across various disciplines? Jim Thayer, senior associate at The Cadmus Group, acknowledges that the detail involved in making sophisticated triple-bottomline assessments can make the task overwhelming for most small businesses. The Cadmus Group is working to develop an open-source tool for calculating financial implications of the way in which companies use human and natural capital (see “Genuine metrics”). Triple-bottom-line accounting can be simplified by establishing, and limiting, the scope of what companies will measure. Are social impacts going to be measured in terms of employee satisfaction (which Herman of HIP Investor notes is often tied to overall performance), community impacts and contributions, or broader public-policy indicators? Environmental impacts can be assessed by examining direct resource use, overall supplychain use, or even lifecycle assessments on the company’s products and services. Choosing the right approach means that companies have to decide what they want out of their sustainability declarations. “Why is it that you’re actually doing this?” Thayer says. “Is it part of the branding process, the ability to attract employees, an honest concern about sustainability? All of these things come into question.” ●