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02/15/2011

Novo Nordisk's Annual Report Stresses Value Creation In a Resource-Stressed Economy


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Corporations frequently report that one of their biggest frustrations is that their social and environmental sustainability initiatives are largely ignored by a mainstream investment community focused on short-term financial performance. At the same time, stellar short-term performance often masks hidden risks that are being ignored internally when sustainability goals are not imbedded in a company’s business model.

To counterbalance this short-sighted short-termism, and in the run-up to NYSSA’s Second Annual Healthcare Conference, it might be worthwhile to highlight the activities of Novo Nordisk, a global pharmaceutical company that has not only made a long-term commitment to sustainable practices but is also using a new way of reporting to raise the investment community’s awareness of the strong linkages between sustainable practices and value creation.

In its Articles of Association Novo Nordisk states that it is dedicated to triple-bottom-line results, striving “to conduct its activities in a financially, environmentally, and socially responsible way.” The company maintains that in all of its decision making it attempts to balance shareholder returns with the interests of all its stakeholders.

Novo Nordisk was one of the first global corporations to publish a sustainability report in 1997, and beginning in 2004 it was one of the first to publish an integrated report that highlights in one document both nonfinancial and financial results and performance targets. The goal is to use the integrated report not only as a communications tool with all external stakeholders but also to focus the company internally on best sustainability practices.

On the first page of Novo Nordisk’s 2010 annual report is a table of “Key Figures.” While financial performance is of course prominently displayed, so are sustainability performance indicators, such as the number of least developed countries in which Novo Nordisk sells insulin according to the differential pricing policy, employee turnover, energy consumption, and total waste.

In 2010 the company had already exceeded targets for energy, water, and CO2 consumption: It was using 20% less energy versus 2007 (having targeted to reduce energy consumption by 11% by 2011 compared to 2007); its water consumption was 37% lower than in 2007 (versus an 11% targeted reduction by 2011 compared to 2007) and its carbon footprint was 55% lower than in 2004 (it had targeted to reduce CO2 by 10% by 2014 compared to 2004). Although sales and production had increased over the 2009–10 period, this carbon footprint reduction came about as the company converted to 100% renewable power in its Danish operations and increased energy efficiency in all production facilities around the world.


Second Annual Healthcare Conference


What’s more, the letter from Novo Nordisk’s chairman makes a link (although it could have been made in more explicit terms) between these internal efforts to reduce environmental impacts and positive bottom line impacts. Noting that the company’s cost of goods sold fell to less than 20% of sales volume in 2010 he reports that “as the efficiency of our production activities has increased we have also reduced our environmental impact. We reduced energy and water consumed for production activities during the year and CO2 emissions from energy consumption fell 35% compared with 2009 levels.”

It would be desirable to see more detailed analysis throughout Novo Nordisk’s annual report of how its sustainability efforts impact financial results, especially when those efforts may have short-term costs but are deemed to have long-term payoffs for the company. Also more discussion of  how making sustainability a part of everyday business decision making creates value beyond cost reduction. But the creation of Novo Nordisk’s integrated report must be viewed as a public statement that the company is thinking about sustainability in a way that few companies are today.

Clearly, for example, Novo Nordisk’s serious commitments to drive waste out of the production cycle should be expected to have even greater positive results in coming decades as the real and rising costs of resource consumption impact the business models of every company in an increasingly resource-scarce and ecologically stressed global economy. Investors who take note of this commitment—a strong proxy for overall good management—will be extracting value that those who are looking only at the short-term will be leaving behind.

–Susan Arterian Chang writes on sustainable finance and is director of content development for Capital Institute.

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