The Greenest Part of Your Business Can Be Your Financial Statements

13th in a series of excerpts from the book The HIP Investor (John Wiley & Sons, 2010). See other articles in the series here.

Land, labor, and capital—these three factors of production form the basis of economics theory, as well as the basis for debates over which economic system is most appropriate. Without land, we could not grow food or timber or harvest other resources. Without labor, there would be no one to do the work. Without capital, there would be no financing for equipment or facilities to get the work done.

In today’s economy, the land’s resources are becoming more stretched, labor is becoming overworked, and capital is seeking more transparency about how it will be used. Therefore, new constraints to our economic system functions are emerging.

Just as technology, at different points in time, has meant a mainframe computer, a desktop computer, a laptop computer and now mobile devices like iPhones, so must the traditional factors of production morph as society innovates and advances. Each element of the economy, whether agricultural, industrial or information-based, can be more HIP. Napoleon Wallace, an alumnus of UNC’s Kenan-Flagler School for MBAs sees “land, labor and capital” equating to a triple bottom line of “planet, people and profit.”

For example, GE (NYSE: GE ) has multiple business units encompassing 80 “ecomagination” products, which totaled $18 billion of revenue in 2009 . That is about one in ten dollars of corporate revenue. Those products, which have grown from 17 products representing $6 billion in revenue in 2004, realize both incremental human impact and profit. CEO Jeff Immelt has set a goal of $25 billion for GE’s eco-product revenue.

GE’s more recent “healthy-magination” strategy for solving human problems is launching new products that increase access to, and affordability of, health care. Both strategies yield business value from quantifiable improvements, either in Earth factors, like energy and water efficiency, or from Health factors, like longer duration and better quality of life.

“Ecomagination is a business initiative to help meet customers’ demand for more energy-efficient products and to drive reliable growth,” says GE’s annual report. It also reflects the company’s commitment to “invest in a future that creates innovative solutions to environmental challenges and delivers valuable products and services to customers while generating profitable growth for the Company.” This connection between human impact and profit makes it easy to see how HIP creates shareholder value.

For GE, this is also illustrated in its growth by business unit. Growth rates have been higher in its health and infrastructure business units, and lower in financials and entertainment groups (which GE has been divesting).

Businesses that reframe their market share, customer segmentation and managerial accounting systems in terms that go beyond mere financials can better understand how drivers of human impact link to financial value. Manufacturer DuPont says that revenues generated from “nondepletable resources” will double to $8 billion; it has already reached $7.4 billion.

At Campbell’s Soup (NYSE: CPB ), the company highlights growth categories for its soups, segmented by “milligrams per serving of sodium.” Interestingly, the revenue split is 30 percent “healthy” (less than 480mg/serving), 20 percent “mid-range” and 50 percent the remainder (above 700mg/serving). Grouping products by salt levels shows how a key driver of health relates to the top-line financials. Campbell’s exceeded 30 percent of revenue from “wellness” food products in 2010.

Enhancing overall understanding of both the financial statements and the leading-indicator impacts allows staff, managers, and executives to better operate and innovate to be more HIP. Procter & Gamble (NYSE: PG ) is already repositioning its market evaluations to be integrated with traditional financial metrics, according to Clifford Henry, Associate Director of Global Sustainability.

In 2008, Office Depot (NYSE: ODP), a $14 billion retailer, sold more than 6,100 products with green attributes across its North American stores, up from 5,200 the year before and 4,000 in 2006. It is now rolling out a Shades of Green labeling systems for customers, says Melissa Perlman, Manager of Public Relations. Each “green” product attribute will be rated dark green for the most eco-friendly, bright green for the middle ground, or light green for a slight positive impact. The attribute will also explain the benefit to customers, such as “diverting materials from landfills.” The Office Depot customer portal shows how customers can identify the proportion of their spending in each of the dark, bright, and light categories.

With this online tool, Office Depot will be able to calculate the aggregate customer purchases and growth rates that comprise its own revenue, potentially on a day-by-day basis. Thus, executives and managers can also monitor and manage green revenues and profits, as well as the customers who buy the products.

Similarly, Interface (Nasdaq: IFSIA ) Inc. has live tracking of costs related to energy, waste, water, and other ecometrics and sociometrics. On its Web site, the company enables anyone to check on the results by facility, and in total, with more than $400 million in cumulative avoided costs.

Interface proactively manages the inputs and processes that contribute to higher human impact, and the subsequent financial results—improvements directly aligned with increased profitability.

Leading companies using these tools can consistently outperform those who are not. They can more easily report on progress, as well as decentralize accountability throughout the organization. In the next feature, we will discuss how executive management can embed accountability at all levels of an organization – from Board to front-line – to maintain consistent financial and impact performance.

To navigate this series, please use this table of contents.

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HIP Investor supports Spring of Sustainability.  For three months, the Spring of Sustainability will feature 100 “stars” of sustainability, from Jane Goodall to Bill McKibben to Van Jones, in free interactive teleseminars throughout the spring of 2012. Live events will also be held in cities across the globe.

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R. Paul Herman is CEO and founder of HIP Investor Inc. Herman is the author of “The HIP Investor: Make Bigger Profits by Building a Better World,”  published by John Wiley & Sons in 2010. Herman is a registered representative of HIP Investor Inc., an investment adviser registered in California, Washington and Illinois.

NOTE: This feature, excerpted and adapted from the HIP book, is not an offer of securities nor a solicitation. The information presented is for information and education purposes, and is not an investment recommendation. Past performance is not indicative of future results. All investing risks losing your principal. The author may invest in the companies mentioned above, and several are included in the HIP 100 Index portfolio. Details and full disclosures are at www.HIPinvestor.com

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