Leading Sustainable Organizations
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Duke Energy, a Charlotte, N.C.-based electric power company that supplies and delivers energy to approximately 4 million U.S. customers, uses something it calls the Duke Energy Sustainability Filter to encourage innovation and resource efficiency throughout the company (see a one-page pdf outlining the filter from the company’s 2008-08 Sustainability Report).
Roberta Bowman, who has served as senior vice president and chief sustainability officer for Duke Energy since 2006, says that the filter is a lens through which every decision in the company is made. “It’s is the tool for conversation and decision-making,” she says. The filter employs a series of questions around four key areas: “connection,” “efficiency,” “balance,” and “grandchildren.”
The filter is one of the tools Duke shares with other organizations looking to evaluate thier own risks and practices from a sustainability standpoint. “There is an openness to sharing approaches and techniques that work,” says Bowman. “There is sharing and learning at an industry level, and also at a global industry level, from the World Business Council for Sustainable Development to Corporate Eco Forum.”
Bowman has been with Duke Energy since 1986 after eight years at Northeast Utilities. She spoke with Michael S. Hopkins, editor-in-chief of MIT Sloan Management Review, about how sustainability can become, as she puts it, “a discipline that allows us to see opportunities for efficiency that more traditional line of business or functional orientations might miss.”
How have the ways that you are thinking about sustainability changed in the past year or two, in light of the economic travail we’ve all been going through?
In the economically challenging environment that we’re in, there is really no room for activities that are not core to the business. We have had to do some triage of our corporate services and corporate programs and separate those that are “nice to do” from those that are “necessary to do.” And we have found that that has given us an opportunity to really showcase the business value of sustainability.
Some of the greatest potential benefits are in identifying opportunities for resource and cost efficiency. Sustainability becomes an approach, a language, a discipline that allows us to see opportunities for efficiency that our more traditional line of business or functional orientations might miss. We see through sustainability the opportunities for improvement that often lie in the seams of our organization.
How does that actually work? Do you have an example?
It’s really a matter of giving value to some of our environmental impacts or waste streams — things we may not have fully quantified before. So taking that lifecycle approach and understanding the true cost of our products and services from a value-chain perspective is helping us make different decisions, both in terms of usage and our purchasing practices.
One of my favorite examples deals with how we approach the start-up of one of our natural-gas fired combustion turbine plants. In the past, we had a very orderly and slow process. By asking ourselves, “how can we do this more efficiently?” — in terms of our use of fuel, our use of time, and the carbon emissions from natural gas — we developed a new “startup calculator” that has improved the efficiency of the startup process. In just the first six months we’ve used it, we’ve been able save more than $2 million at one of our combustion turbine stations. Most of that is in fuel efficiency, but we’ve also captured the carbon emissions that we’ve saved through that efficiency as well.
What did it cost to make that $2 million savings?
Creativity, innovation and new ideas. This was a procedural change.
In other words, the investment in time and effort and attention put into this procedural change is small enough that it’s not worth comparing to the $2 million that you’ve already netted out in six months?
That’s right. This was a matter of looking at our procedures and saying, “How can we make them more efficient?” There was really no capital investment. It was a matter of looking at our business through a different set of lenses.
I’m going to play devil’s advocate because I get pushback from people who say that those kinds of examinations of procedure for efficiency possibilities ought to be just good business. That people ought to be doing that all the time.
And I have to say, Michael, I completely agree. But that’s what’s giving sustainability an element of seriousness that it may have lacked before. Sustainability allows us to give visibility to some of the costs that may have been hidden, or inefficiencies that may have been missed, through a more linear approach to running the business.
My goal is to work myself out of a job. The day may come where we are so inclusive in understanding the full costs and benefits of our work that we no longer need to call it “sustainability.” But for now, we’re working to develop this more wholesome view of decision-making.
Does that mean that you can imagine a day when understanding the lifecycle of a product or the creation of a service is going to be so engrained in regular everyday business that we won’t need to call that sustainability?
Exactly right. The nature of taking in a variety of inputs and giving value to them will become part of how we do business. We will have a sense of value that extends “beyond the next quarter.” Again, this is just good management and good business decision-making, but sustainability allows us to overcome some of the boundaries of more traditional business decisions.
Among the various benefits that may accrue if a company is good on the sustainability front, which are finding their way into conversations most easily?
I think we are dealing with a transitional time in our stakeholder community. Let’s start with our investors, because in a publicly traded company our shareholders are key stakeholders. We try and stay ahead of what’s on the minds of both our investors and the people who analyze our performance. And, we are starting to see much more interest from the investment community in sustainability performance and measures.
In addition to the more traditional “socially responsible investors,” we are finding that some of our mainstream investors are now looking at sustainability performance as an indicator of overall business value. They’re acting on the theory that our sustainability measures — our efficiency with resources, our employee retention, etc. — are predictors of overall business profitability.
Is there any data you can throw against that, even if it’s anecdotal? Where are you drawing that conclusion from?
The number of surveys and requests that we are getting from the investment community gives me that feedback. One of the frameworks, the Goldman Sachs Sustain framework, is very explicit. That’s the real indicator of growing interest that I’ve seen over the last 12 to 24 months.
And you know, financial analysts are pretty competitive. They are always searching for ways to differentiate themselves and project future company performance. I would never suggest that sustainability performance is the only way or the primary way, but it is one way that is getting more serious study by the mainstream investment community.
Are there other benefits you’d identify from a focus on sustainability?
Well, the particular industry that we participate in is a regulated business. Seventy-five percent of our business is what I’d call the regulated electric utility environment, and so we are very sensitive to what drives our regulators and what they’re hearing from stakeholders.
Much like us, our regulators having to balance competing interests. Obviously, we share the goal of affordable electricity. But, they are getting input from a range of other stakeholders — the environmental community, global companies in our service areas, etc,. So they too are also having to become — whether they know it or not — “masters of sustainability.” We are really locked in to the same mission with our regulators. Helping to demonstrate that we consider the range of stakeholder interests and inputs as we develop our long-term resources plans is, I think, good business. It helps our regulators see that our planning is robust from a sustainability perspective.
And then, as I’m sure you’re hearing from others, sustainability is increasingly important from a recruitment perspective. I would say the generation coming into the workforce today gets sustainability intuitively, and they expect it from their employer.
The talent equation may be the most common theme of all that we hear, and yet there’s something that surprises me about it, which is that many companies don’t have any kind of metrically-driven way to measure what they might save by, for instance, retaining employees longer or engaging employees in ways that yield higher productivity. Admittedly these are hard things to count – but you can count what it costs when you have employee turnover. You can count what it costs to recruit for positions.
That’s a very interesting observation. What it says to me is this is an evolving discipline and you’ve got to “walk before you can jog” and “jog before you can run.” I think every year that we’re at it, we are getting smarter about the things we measure. I would be surprised if two years from now, that metric “blind spot” hasn’t been filled, because it’s an excellent question.
So is there work being done inside Duke Energy to try to put numbers on what it means to attract talent less expensively, attract better talent, retain the talent you have and not suffer turnover?
There will be after we hang up! Really, most of what we have is anecdotal. We spend a lot of our HR capacity being very intentional around the types of schools that we recruit from. To see how successful we are in landing the type of talent that we’re after, and whether sustainability played into that equation, would be a very interesting scorecard for us.
I want to switch to talking explicitly about the business case a little bit, which in fact you’ve kind of been talking about without using that language all along here. But here’s the explicit question that drives our inquiry into the business case: How does Duke Energy factor in sustainability considerations to either overarching strategic decisions or everyday business decisions, if it factors sustainability considerations in at all?
Part of our challenge is to demystify what sustainability is. It’s one of those words that I think if we had it to do over again, we would have chosen a different word.
We’re challenged to personalize it, to make it relevant, and to make it real. Every company has a different approach, and you start where you are and then continue to improve. One of the things that we did at our company was to interpret what sustainability means day to day at Duke Energy. And we came up with what we call our “sustainability filter.” Our filter has four areas where we ask ourselves a series of questions. We encourage every decision to think about these four things.
What are the four areas of that filter?
The first is a sense of connection and understanding the interrelationship between issues and opportunities. The second is the standard of efficiency , using resources wisely. Third is balance , addressing and appreciating competing interests. And the fourth is, in recognition of our CEO Jim Rogers’ so-called “grandchildren’s test,” just the word “grandchildren ,” which is assessing the ability of our decisions to withstand the test of time.
So that’s our sustainability filter. It’s the tool for conversation and decision-making that we started with.
With that foundation built, we are now looking at much more precise ways to build sustainability into our core business processes, whether that’s our integrated resource plan or our assessment of M&A candidates. Our goal is to really wire sustainability into our business. Whether or not people call it sustainability, I don’t care. It’s the approach, it’s the process, it’s the mindset, and it’s the recognition that we care about making balanced and robust decisions.
You talk about Duke Energy being on its own kind of journey. How do you think the business climate overall is doing on its journey toward sustainability?
I think that there’s a natural “sorting out” of how serious companies are. Economic pressures have forced some of that sorting, but others are becoming evident from whether sustainability is part of the true core of the company — the vision and value system of the executive team, the CEO, and the board. Depending upon who you read and who you believe, I think that it’s here to stay, because it is a predictor of performance and an opportunity-finder for improvements in the business. I can’t imagine going back to a more traditional, less robust way of looking at our issues and our opportunities.
Are there companies that you think of as models? I don’t mean models of perfection; I mean models from whom you have learned things.
Yes, there are a number of them. The company that seems to have gotten the most business value out of a commitment to sustainability is Walmart. I think they have used it as a strategy for transformation, not just in their business model, but in their company culture as well. So I admire what they have done; we’ve learned a lot from them.
We have also learned a lot from Dow Chemical. They’re a very different type of business than Walmart, but they’ve been at it for a while, and we have learned from some of their experiences in goal-setting and engaging employees and just wringing real value out of their approach. DuPont is another company that we’ve learned a lot from.
Obviously the chemical industry was operating under certain forces that may have pushed it down this road sooner than a lot of other industries, so that’s a good place from which to draw lessons.
Okay, last question here. I’m wondering whether, given this new way of looking at a business that you’ve described, do you think there are specific capabilities or characteristics that organizations need to cultivate or to nurture in order to really succeed in altered environment in the future?
I love that question for a lot of reasons, and I’ll give you two answers.
I think the challenges that we face in the future are interconnected. They are complex and they frustrate a traditional, hierarchical organization. I think the businesses that harvest the most value in the future will be good at operating cross-functionally. The companies that figure out how to do that well — to overcome their own organizational boxes — may have a competitive advantage.
My second answer to your question is about the competencies for the future. I find myself asking prospective employees one question: “do you play chess?”
Interesting. You’re going to have to elaborate on that.
Chess requires you to think three and four steps ahead, to play offense and defense, and to develop new strategies if you find one avenue blocked. I think the business world of the future is going to be much more like chess than checkers.