Apple underperforms Dell, HP, and IBM on Sustainability Performance

This industry comes with great responsibility and risks, both financial and non-financial. The industry leaders have been able to maximize their growth in revenue, profits and shareholder value while doing more with less and minimizing their dependency on finite natural resources, precious metals and increasingly expensive energy required to produce their products. These same leaders have experienced strong competitive advantages, better ROE and higher profits leading to strong earnings per share, PE ratios and total shareholder performance.

In 2008, the Computer & Peripherals industry experienced dramatic shifts in productivity due to necessity, which led to greater automation in conjunction with more efficient design of operations. This resulted in both a decrease of 30 percent in employment coupled with a 50 percent increase in productivity. The top 10 global companies in this industry employed 1.5 million wage and salary workers in 2008. The industry lost nearly 30,000 jobs in 2009, a 2% decrease. Apple was the only company with double digit hiring numbers; they posted a whopping 48% increase adding 11,400 new employees. The company has been a roll lately, growing to surpass Microsoft ($216.8 B) and Google ($159.2 B) with a market cap of $235.7 billion (as of 8/10/2010).

The Computer & Peripherals industry is expected to acheive positive growth in 2010 as the information technology sector rebounds faster than the rest of the economy, in large part due to higher profit margins, less debt and outsourcing in China and India. Industry Revenue in 2009 stood at $53.95 billion in the U.S., which translates into an overall 9 percent decline from 2008.

The top three sustainable performance leaders were IBM, Dell, and Hewlett-Packard. In 2009, IBM's Net Income growth was 49.8% compared to a negative overall peer group average. IBM's 2009 EBITDA Margin was 27.1 and more than 66% higher than the peer group average of 16.4. Lastly, IBM had the highest 2009 Return on Equity (ROE) in the industry at 59.3X, where the peer group average was dragged down by negative ROE from Seagate, NEC and Toshiba.

For the purposes of this story, the top ten leaders in sustainable performance and reporting are IBM, HP, DELL, APPLE, FUJITSU, EMC, NEC, TOSHIBA, LEXMARK AND SEAGATE.

Doing More with Less

Peter Drucker, the renowned management consultant said, "What gets measured, gets managed." I like to add, what gets managed gets optimized and that drives outperformance and competitive advantage. Here are some very specific examples of how leaders in the Computer & Peripherals industry are managing their use of resources, which is driving outperformance amongst the top companies.

Note: At the time of this story, Apple, Dell, & Lexmark had not yet released their 2009 CSR/Sustainability reports.

1. Resource Management and Increased Profit Margins

While the number of employees decreased the reduction in greenhouse gas (GHG) emissions, electricity, waste and water dropped significantly faster. There was a strong correlation with transparency in ESG and improvements in how they resources are managed leading to better profit margins and efficiency. The amount of GHGs dropped substantially by 14% from 13.9 million mtCO2e to 12.0 million mtCO2e, the equivalent of taking 380,000 cars off the road or planting 19 million trees. The biggest reducers were NEC (-38%), Fujitsu (-35%) and HP (-10%). Only EMC increased their total carbon footprint by 4%.

2. Expanding Operations While Reducing Electricity Use

In terms of Electricity which is typically measured and reported in Gigajoules (GJ), the top seven industry leaders consumed 100.2 million GJs in 2008 but this decreased to 97 million GJs in 2009, a 3% drop. Only EMC increased by 16% to 2.7 million GJs in 2009, while HP (-8%) and IBM (-5%) found ways to be more efficient even while both being over 6 times larger based on employees than EMC with their massive global energy demands.

3. Significant Reductions in Water Use To Hedge Against Future Risks

The industry's water footprint was no different, the top seven companies reduced the amount of total water used for any purposes by 4% from 118.5 million cubic meters in 2008 to 113.8 million in 2009 a net savings of 4.7 million cubic meters or enough freshwater to fill nearly 2,000 Olympic-sized swimming pools, which is very impressive especially when you take into account the large amounts required to run both their corporate operations as well as their manufacturing. The biggest savers were Fujitsu (-12%) and IBM (-5%), while Hewlett-Packard (+6%) was the only company to increase the amount of water they used from 2008 by 422,000 cubic meters to 7.6 million m³ in 2009. This is an area to pay close attention to as the price of water is projected to climb over the coming years to be reflect the growing scarcity of clean freshwater accompanied by a fast, increasing global population.

4. Reduction of Waste Across Industry Leaders

And last but not least on my list is total waste produced, which was the one metric that increased by 1% from 569,155 tons to 576,515 tons, in large part the reductions of the other companies was offset by Hewlett-Packards (HP) large increase of 22% from 2008 to 2009. IBM (-16%) led the reduction with Fujitsu (-12%) and NEC (-10%) also contributing nicely to decreasing the amounts of waste they generate.

Sustainability Performance with a focus on ESG

We recently completed an independent benchmarking study on the top 1000 global companies ranked by Sustainable Performance Value using publicly available CSR and ESG information revealed some very interesting analysis; below are some highlights on the top 3 leaders within the Computer & Peripherals Industry: IBM, HP & Dell. These companies tend to adorn the top of most credible rankings and indexes, for example in the last Green Rankings conducted by Trucost, KLD Analytics and Corporate Register they placed as follows: Hewlett-Packard, #1, Dell #2 and IBM #5. Also, these three companies are included in both the Dow Jones Sustainability Index (DJSI) and the NASDAQ OMX CRD Global Sustainability Index (QCRD).

IBM was hands down the industry's top sustainability Champion in 2009 using 2008 ESG data because of exceptional transparency and performance in all ESG categories. The company earned a very high score in the Environmental category, as its 92% reporting of Environmental Performance Indicators was tied for 4^th highest of all global corporations. The inability to be transparent by using proper reporting methodology was a weakness of most corporations especially those new to Global Reporting Initiative (GRI) guidelines or CSR in general.

Hewlett-Packard was an industry Champion in sustainability in 2009 due to exceptional social, environmental and governance transparency, but performance must improve on specific environmental indicators such as hazardous waste production, GHG emissions and water usage. Still they lagged behind IBM for the 2nd year in a row.

Dell was a sustainability industry Leader in 2009 but the company lagged significantly behind IBM and HP in all categories. In particular, Dell reported only 56% of all Environmental Performance indicators, compared with 92% for IBM and 76% for HP.

Environmental Performance

(Note: GRI G3 Metrics are in parenthesis for ease of reference)

IBM's environmental performance was driven by its excellence in transparency, where they consistently outperformed their peers. For example, 100% of IBM's sites are certified by an environmental management system and IBM's emissions of NOx, SOx, and VOC's (EN20) are better than industry average.

HP's environmental performance was slightly above average for the industry, driven by 100% ISO-14001 certification of global sites and 80% waste recycling (EN22) . Improvement was needed in relative waste production (EN22). HP reported the most hazardous waste (EN24) of any company in the industry.

Dell earned above average scores on the metrics available, but the company's overall score trails that of the leaders because of incomplete disclosure. Relative to market capitalization, Dell consumed less water (EN8), used less energy (EN3, EN4), and emitted fewer greenhouse gases (EN16) than IBM or HP. However, Dell also produced more waste (EN22) than the industry's two top leaders, though it claims to have produced no hazardous waste. (EN24).

Dell was taken to the mat earlier this year for its definition of "carbon neutrality". The Report was restricted to its corporate operations instead of it manufacturing, distribution and supply chain. This controversy put excess focus on future reporting for Dell and the unwanted, tarnished greenwashing claims plastered blogs and news. Transparency is something not to be taken lightly, as that is the key for all corporations wishing to make a "green" or "sustainable" claim.

Social Performance

(Note: GRI G3 Metrics are in parenthesis for ease of reference)

Social performance focused on product responsibility, human rights, diversity & opportunity and responsible labor practices. The top ten companies received no red flags, four yellow flags and had one green flag under human rights reporting and performance. Hewlett-Packard led the peer group with 80% reporting and disclosure which corresponds with Hewlett-Packard's ranking of first in overall social performance. IBM was second with 76% disclosure and Dell place third with 69%.

IBM had above industry average Social Performance in 2008 due to excellent transparency and strong performance on key metrics concerning workplace safety (LA7), employee training (LA10), and donations to charity. However, IBM lags behind HP and other industry competitors in gender diversity (LA14), with women representing only 20% of senior management. Dell ranked highest in gender diversity with 25% of their senior managers being women and HP was second with 22%. Another negative impact of IBM's social performance score was the $6 million plus the company spent on political lobbying and donations (SO6), the highest reported amount of any company in the industry.

HP boasted a strong social performance score due to robust social policies and above industry average performance on workplace safety and employment creation metrics. Performance on charitable & political donations was slightly above average for the industry as was the percentage of women in the workforce and in management (LA14). HP's injury rates (LA7) are also among the lowest in the industry.

Dell earned an above average Social Performance Score due to extremely comprehensive Human Rights policies and strong performance in diversity metrics. The company had the highest percentages in the industry of women in the workforce and women in management (LA14). However, the company also had the highest reported injury rates (LA7) in the industry. The company also spent over $2 million in political lobbying in 2008 (SO6), far more than the average for the top global leaders in sustainability.

One area of noticeable risk falls under product responsibility, where 5 out of the 8 performance metrics were either not reported on or the answer was "no" to important questions like: "Does the company have appropriate internal communication tools (whistle blower, ombudsman, suggestion box, hotline, newsletter, website, etc.) to protect customer health & safety? The type of simple fail safe policies that could help avoid disasters like the deepwater BP oil spill in the gulf.

This risk is magnified by a recent study by Deloitte. According to Deloitte LLP's fourth annual Ethics & Workplace Survey, one-third of employed Americans plan to look for a new job when the economy gets better. Based on this group of respondents, 48 percent cited a loss of trust in their employer and 46 percent say that a lack of transparent communication from their company's leadership are their reasons for looking for new employment at the end of the recession.

Hot new firms like GreenNurture, based out of Tempe, Arizona, recently featured in a June 2010 Wall Street Journal article, are tackling this issue of employee engagement especially around environmental issues head on. They offer a turnkey platform for reporting and assessment; employ a user-friendly graphics interface to measure progress (borrowing principles from social media) and link to a rewards-based system with partner RecycleBank. They even have created a data-driven widget that tracks a company's progress on their sustainability goals. It's called the Green Action Index, or GAI.

Governance Performance

The governance performance dimension evaluates board functions, board structure, compensation, vision & strategy and shareholder rights. The one area every company struggled with was shareholder rights. The issue of shareholder rights raises up a red flag for not just the industry, but also the top 10 and even its top 3 sustainable performance companies: IBM, Dell and HP. Compensation also was consistently low for all three segments. The overall reporting transparency measure by accurate and complete disclosure for over 70 quantitative and qualitative metrics topped out at only 70% for Hewlett-Packard, followed by 69% for EMC and Lexmark, this was a surprising area were IBM (67%), Dell (63%) and Apple (62%) all lagged behind two intermediate adopters of sustainability reporting and performance measurement.

IBM's 2008 Governance Performance was one of the industry's highest due to comprehensive policies covering board structure and functions. IBM's board was more independent than the industry average; however it also had a relatively low number of members with relevant experience in the industry or with a strong financial background. The company has released a sustainability report for an industry-leading 18 years, but curiously it has not signed the UN Global Compact while many competitors have.

HP's performance in Governance was better than average due to metrics that show an experienced and independent corporate board. HP has also been a signatory of the UN Global Compact longer than any company in the industry and has published a Corporate Responsibility Report for the past 7 years.

Dell earned a below average Governance Performance Score with mixed performance in different categories. Metrics show the corporate board to be relatively experienced and independent, and the company earned a top Executive Compensation score for policies linking CEO pay to total shareholder return. However, despite having published a Sustainability report for 10 straight years, Dell earned a below average Sustainable Vision & Strategy score for failing to sign the UN Global Compact and not hiring an external auditor to audit sustainability data.

Conclusion

In summary, the Computer & Peripherals industry represents $602.4 billion in market capitalization and collectively consumes the amount of electricity and water along with producing waste and pollution equivalent to a city like Denver, Colorado. As an investor, I would play close attention to the companies that made improvements in this industry as they will experience more productivity, efficiency and competitive advantage relative to their peers, which will offer strategic investment opportunities. I would also look at the companies that are not reporting, improving or even going backward as they will be faced with divestment from public and private investors alike, especially as more transparency makes those facts known via social media networks. As an employee, it is encouranging to see how some of the leaders are consistently progressing towards more diversity, better processes and tools for employee safety and quality.

Be wary of the firms who do not disclose on the same governance metrics that peers are reporting as they are either hiding something or not as concerned with the rights of all stakeholders in the company, just a few insiders. Many of the other companies in the Top 10 for the industry like Apple, Lexmark, EMC, Seagate and Toshiba have the potential for strong sustainability performance due to strong financial metrics, but incomplete reporting of environmental and social metrics prevented the companies from earning a competitive score.

My next industry analysis will focus on the Software industry with companies like SAP, Microsoft, and Adobe leading the sustainability pack

Michael Muyot is President and Founder of CRD Analytics, a leading independent sustainability investment analytics firm based in New York City. You can contact him at mmuyot@crdanalytics.com to share your views on any of the subjects in this post.