Chapter 1: Business Is Investing More in Competing on Sustainability

This is part 2 of 11 from “Sustainability: The ‘Embracers’ Seize Advantage,” a report on the findings of the 2010 Sustainability & Innovation Global Executive Study and Research Project.


The Surprising Downturn Response

While many wondered whether the economic downturn would push sustainability off the corporate agenda, our survey results indicate that the exact opposite is true. In fact, a growing number of companies are now increasing their investments in sustainability. While in our first annual survey, conducted in 2009, only 25% of respondents said they were increasing their commitment to sustainability, in the 2010 survey some 59% said this was the case. “Unlike in previous downturns and recessions, people haven’t necessarily put sustainability on the back burner,” says Nick Robins, head of Climate Changes Center of Excellence at HSBC.

The numbers become even more striking when companies look ahead. Almost 70% expect their organization to step up its investment in and management of sustainability over the next year. Moreover, our survey shows that enthusiasm for sustainability is growing across all industries, particularly in commodities, chemicals, consumer products, industrial goods and machinery retail companies, as well as conglomerates.

Such enthusiasm appears to have survived not only the downturn but also the distinct lack of progress toward international agreement on how to combat climate change. Given Climategate and the failure of Copenhagen, many expected that corporate interest in and commitment to sustainability would decline, but companies continue to launch new sustainability programs every day.

Hal Hamilton, who co-directs the global Sustainable Food Lab with support from Massachusetts Institute of Technology’s Sloan School of Management, sees the downturn as prompting an even broader shift. “The ways of doing business that we’ve accepted are up for grabs,” he says. “We’ll all, inevitably, be thinking more about resilience — resilience to all sorts of shocks. And I rather like the word ‘resilience’ — sometimes it’s better than the word ‘sustainability.’”

The Universal First Moves — Waste Reduction and Resource Efficiencies

In some ways, sustainability is a repackaging of more traditional approaches to lean manufacturing and running an efficient organization. “In this type of economic environment, we are seeing the greatest opportunity in identifying opportunities for resource and cost efficiency,” says Roberta Bowman, senior vice president and chief sustainability officer for Duke Energy. And Bowman’s view is echoed by respondents to our survey, in which waste reduction and energy efficiency emerge as the top priorities, with respondents citing improved efficiency and reduced waste as the activities their organizations currently engage in most frequently.

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In fact, this “low-hanging fruit” is often used to make the initial business case for implementing sustainability strategies. For Clorox, it was an entry point into sustainability. “We had done the measurement on footprint and the groundwork on projects so that people could buy into the greenhouse gas reduction, solid waste reduction and water reduction goals,” says Beth Springer, executive vice president of international and personal care at Clorox. “They could see the path.”

For Johnson & Johnson, resource management is also an efficiency measure that contributes to profitability. According to its 2009 Sustainability Report, between 2005 and 2009, the company completed more than 60 energy-reduction projects, representing $187 million in capital investments, which it expects will collectively reduce carbon dioxide emissions by 129,000 metric tons annually and provide an internal rate of return of almost 19%. The projects have so far generated about 247,000 megawatt hours of cumulative energy savings a year.

During the same period, Johnson & Johnson made a 32% cut in both hazardous and nonhazardous waste. “It’s been better for the bottom line, especially in terms of energy costs,” says Al Iannuzzi, senior director of worldwide health and safety at Johnson & Johnson. “Waste is cost to the corporation … and, of course, the less waste you send out of your gates, the less expensive it is to make your product.”

Companies are also recognizing the benefits of driving resource efficiencies outside their own four walls and into those of their suppliers. Over the next five years, Walmart Canada expects to save somewhere in the range of $140 million just through waste and energy and package reduction. “It is very good for business to drive waste out of the supply chain, and over the next five years just in the Canadian operation alone, we estimate we will save somewhere in the range of $140 million just through waste and energy and package reduction,” he says.

Resource efficiency can move downstream into consumer behavior, as well as upstream into third-party producers’ operations. Unilever, for example, is producing laundry products that use less water in rinsing, generating considerable water savings for the people to whom it sells its products. Procter & Gamble also subscribes to similar logic. “One statistic demonstrates to us why this is the path to go, and this is the data that shows that if we got everybody in the United States to switch to cold water [for their laundry], we would prevent the release of 34 million tons of carbon dioxide, which is 7% to 8% of the U.S.’s Kyoto target,” says Len Sauers, vice president of global sustainability at Procter & Gamble, which has developed cold water cleaning technologies. “So, a meaningful improvement targeted at mainstream consumers is really the angle we wanted to take with strategy we set.”

Embracers and Cautious Adopters: Two Views of the Business Case

However, while resource efficiency is a good way to start out on a sustainability strategy, our report reveals a striking difference between two groups of companies in how they are incorporating sustainability into their business operations — those whose activities are limited to short-term, strictly measurable investments such as resource efficiency and those that say they have established a business case for sustainability, have put it permanently on their agenda and maintain that it is necessary to remain competitive.

The philosophies, commitments, strategies and actions of these two broad groups of companies — those that have embraced sustainability (the embracers) and those that have not (the cautious adopters) — differ on many points. More embracers, for example, tend to have recognized the potential for sustainability strategies to deliver new customers for their goods and services as well as to increase their market share and profit margins in existing markets.

And when it comes to views on the relationship between sustainability and competitiveness, the views of the embracers diverge even more markedly from those of cautious adopters, with a far larger proportion of embracers seeing sustainability strategies as a means of gaining competitive edge than cautious adopters.

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Of course, being an embracer need not mean that a company is embracing every aspect of sustainability. Depending on their sector and business activities, companies can be embracers and drive the agenda of individual topics within sustainability.

Moreover, views differed among senior leaders when we asked them about the challenges of making the business case for sustainability. “Nobody’s asked me to talk about the business case for several years,” says Peter White, director of global sustainability at P&G. “From our point of view, it’s a done deal — it’s proven, let’s get on with it.”

By contrast, Kim Jordan, founder of New Belgium Brewing, points out that things such as “intellectual curiosity and collective community enthusiasm” are hard to value in monetary terms. “Even more difficult is the consumer side of this because consumers say, ‘This is really important to me,’ but when push comes to shove, when they’re standing at the beer aisle, there are a lot of things that come into play.”

Yet Jordan’s comment, while underscoring the difficulties of monetizing sustainability and measuring it in financial terms, also reveals another important trait that distinguishes the embracers from the cautious adopters. While all companies struggle with quantifying the return on their sustainability investments, in the case of the embracers, this does not dampen their enthusiasm. And while embracers are working to develop the kind of quantification practices that will help link their sustainability activities to the bottom line, they also demonstrate a characteristic not seen among cautious adopters — the readiness to take a leap of faith.

Besides being distinguished by their approach to sustainability, the embracers are also distinguished from the cautious adopters by structural characteristics such as size and sector. For a start, embracers tend to be found among large global or regional companies. According to our data, only 9% of the small companies (with fewer than 1,000 employees) that responded to our survey are embracers, for instance. Meanwhile, 34% of the companies with workforces of more than 10,000 are embracers.

In addition, embracers tend to be part of resource-intensive industries. While our survey found 23% of embracers operating within the service sector, it found a higher proportion (30%) in the product industry sector, where it is more common to find companies that see sustainability as necessary to be competitive and have developed a business case for pursuing sustainability. Product industry embracers focus more closely on efficiency and regulations, care more about the environment and are nearly 25% more likely to consider intangibles in their sustainability-related investments.

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That is perhaps unsurprising since heavy industries have larger environmental footprints than sectors such as media, technology, financial services and health care. Heavy industries must also tackle a business risk not faced by service industry companies, and that is the risk of losing their license to operate (or being unable to win a contract in the first place). And for companies in sectors such as mining, auto manufacturing and oil and gas, investments are substantial and they cannot pick up and move elsewhere.

That means they have to think long term and adhere to a broader definition of sustainability than some companies, paying attention to human and worker rights and community health and security. “For us, this is a key part of the business driver behind sustainable development,” says Tom Albanese, CEO of Rio Tinto. “It is the license for our asset base to operate.” Klaus Kleinfeld, CEO of Alcoa, agrees. Integrating sustainability into the company’s philosophy and operations is, as he has stated in Alcoa’s 2009 sustainability report, about “earning our license to operate each and every day.”

Long-term thinking is also something embraced by privately held companies. Consider New Belgium Brewing. It has invested in a water treatment plant, which has an anaerobic digester and a combined heat and power plant that recovers energy and methane and converts it into electrical energy. “It is not a two- to three-year payback,” says Jordan. “It’s an eight- to 12-year payback, depending on what happens to waste water plant investment fees and a whole list of costs.”