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Sustainability for CEOs

These days, many companies recognize the need to address sustainability in some form, but they do not have a clear …

These days, many companies recognize the need to address sustainability in some form, but they do not have a clear idea about what they need to address, how to address it, or even how to define sustainability as it applies to their businesses. Generally speaking, the term “sustainability” in a business context refers to the set of issues business leaders need to consider in order to not only drive ongoing growth in shareholder value, but also preserve the long-term viability of the natural and social environment in which their business operates.

Whether or not business leaders believe they have a moral obligation to consider the environmental and social impacts of their business, it is becoming increasingly clear that they have a strategic obligation to consider the business risks and opportunities that are evolving as customers, employees, regulators and even shareholders come to see sustainability as a mainstream concern.

This growing attention to environmental and social issues among a broader set of mainstream business stakeholders has created a feedback loop: Businesses impact the natural and social environment in a variety of ways, but these environmental and social issues, in turn, now also impact the business environment. Sustainability- linked issues such as energy consumption, greenhouse gas emissions, water use, land use, waste management, toxicity and others all affect cost structures, competitive advantage and opportunities for and risks to growth.

Consider the ongoing debates about whether the chemical BPA (bisphenol- A), found in many reusable plastic water bottles and baby bottles, might have some negative effect on human health. The controversy swirling around BPA has scrambled the competitive landscape for plastic bottle manufacturers. Wal-Mart announced a decision to pull baby bottles made with BPA from its shelves. Canada went a step further and banned BPA from baby bottles altogether. Sales flourished for companies that are out in front of this issue (like stainless steel bottle maker Klean Kanteen). Other bottle manufacturers, like Nalgene, had to rapidly implement numerous product line changes as they try to phase out the use of BPA.

For CEOs, the lesson is clear: Factoring sustainability concerns into strategic decisions isn’t just about preserving natural resources or social wellbeing it’s also about ensuring longterm profitable growth.

Green Story vs. Green Strategy

In the rush to develop a reputation for sustainability, too many companies put the cart before the horse. They speak loudly through a green PR campaign about fledgling sustainability initiatives that hardly merit such exposure.

Talking green before actually going green can create all sorts of problems. In this information-rich world, green claims are analyzed, dissected and potentially refuted almost instantaneously through blogs, bulletin boards, social networking sites and conventional mainstream media.

What’s the risk? A number of years ago, Mobil Chemical found itself sued by seven states over its claim that its Hefty® trash bags were biodegradable. First, the bags required sunlight (a scarce commodity in landfills) in order to break down. Second, when the bags did ‘biodegrade,’ they only broke down into smaller pieces of plastic. Mobil settled the case the following year, paying fines and agreeing to stop making such claims. The case not only cost Mobil money, but also generated negative publicity that damaged the brand.

In a more recent instance, a development of newly built “green” luxury homes was set on fire outside of Seattle in March 2008. By making sustainability claims while simultaneously building in an ecologically sensitive area near the headwaters of a salmon habitat, the developer may have attracted the ire of the Earth Liberation Front (ELF), an environmentalist extremist group blamed for the fire.

The truth is that transparency trumps spin. Green PR essentially invites additional scrutiny, so companies had better have the facts to back up their claims.

Can Everyone Be Sustainable?

Not every industry can be squeaky clean. Petroleum extraction, chemical manufacture, mining and airline transport are all messy or polluting industries by their very nature. However, no one, not even mainstream environmental groups, expects things to change overnight. What stakeholders and observers do demand is that companies start taking steps to make their operations more sustainable, to take responsibility for environmental degradation, and to improve transparency on both environmental impact and sustainability initiatives.

To illustrate the importance of stakeholder engagement, consider the example of the oil company Shell. In 1995, Shell decided to sink the Brent Spar rig in the North Atlantic Ocean. The decision prompted a fight with environmental groups led by Greenpeace and boycotts of Shell filling stations. International public opinion shifted to the point where Shell was forced to change its plans, dismantle the rig and dispose of it onshore.

It later turned out that sinking the rig actually would have had less of an environmental impact than dismantling it, just as Shell’s experts had suggested all along. Shell learned its lesson and now places greater importance on engaging with the stakeholder community. Shell has enjoyed much smoother sailing from both a business and PR perspective in its current effort to extract resources from Canadian oil sands, by engaging in an open dialogue with a broad set of constituents about how to minimize environmental impact.

An analysis of the Dow Jones Sustainability Index confirms that the members of the index do not necessarily have the smallest environmental footprints, but do have a commitment to transparency. Companies like DuPont and other chemical firms are actually well represented on the index.

How can companies demonstrate their commitment to transparency vis-à-vis sustainability? Establishing an external environmental advisory board and adopting clear metrics and reporting requirements can go a long way toward making a company more transparent.

Strategic Focus = Biggest Impact

When it comes to sustainability, it’s easy to get paralyzed by the sheer scope of the issue. Sustainability can include water use, land use, waste management, toxicity and many other variables. Companies need to meet a certain baseline performance in all these areas, but would-be sustainability leaders will only achieve traction by choosing to invest disproportionately on addressing those issues where the company can have disproportionate impact.

Ideally, a company will identify and focus on sustainability efforts that maximize both business and environmental value. For example, Coca-Cola has three major planks in its sustainability platform: Water Stewardship, Sustainable Packaging and Climate & Energy Protection.

Water is a major input in Coca- Cola’s products. Water scarcity problems in the countries where Coca-Cola operates would have an adverse affect on its business. Promoting water conservation or ensuring that developing countries have a functional water infrastructure therefore makes sense both from a sustainability perspective and a business perspective.

When companies are assessing their environmental impacts and the potential of sustainability initiatives, they need to think big. Sustainability initiatives cannot be judged on a quarter-byquarter basis; they require long-term planning horizons and an understanding of potential future developments in policy and technology.

In another sense, companies need to consider not only their direct environmental impact, but also their broader indirect environmental impact. For example, consider the different choices that Ford and Toyota made in sustainability initiatives. Ford decided to focus on improving manufacturing efficiency, basing the transformation of its River Rouge plant on sustainable design principles. Toyota looked at the main environmental impact of its business across its value system—the downstream impact of fuel consumption and emissions from the internal combustion engines in its cars—and invested in hybrid technology to develop the Prius.

Today, Ford shares are in free fall as it struggles with oversupply of gas-guzzling trucks. By contrast, Toyota enjoys a reputation as one of the most environmentally forward-thinking auto companies. It will soon roll out the third generation of its coveted Prius and finds itself well positioned for industry sustainability leadership.

Developing the Prius did not necessarily reduce Toyota’s environmental impact within its “four walls” (i.e., inside the company and its factories). The Prius was not less energy intensive to manufacture than Toyota’s other cars. But Toyota looked downstream and realized that its biggest footprint came not from its own operations, but rather from how consumers burned fuel while using its products.

In other cases, a company’s biggest impact may actually be upstream in the manufacture or sourcing of raw materials. In that case, changing the components that go into the product may have the biggest effect on reducing the company’s footprint. Sometimes the biggest impacts will be in processing, or in logistics and distribution, or in consumer use and disposal.

The point is that in all cases, companies need to think broadly about their environmental impact. Your biggest sustainability opportunity may be in developing a waste recovery program— a step that retailer Office Depot recently took with its E-Waste Recycling Service. Consumer packaged goods companies should look upstream to their packaging suppliers to see whether these packages meet evolving demands for biodegradability, recycled content and other criteria. Companies cannot risk being caught off guard as consumers and major retailers like Wal-Mart start to make purchase or shelving decisions based partly on the green-ness of a product or its packaging.

Beyond Compliance— Embedding Sustainability into Core Business Processes

Sustainability isn’t always easy or obvious. Consider the decades-long debate over whether washable cloth diapers or disposable plastic diapers have a bigger environmental impact. Alternatively, consider the fight between those who want to use corn as a renewable fuel source and those who see corn as an important sustainable food source.

If environmentalists argue over these issues, how can corporations hope to get it right? Sustainable business decisions are not those made based on the “loudest” green voices in the public debate. Rather, sustainable business decisions are those that take into consideration environmental and social impacts and trade-offs—as well as the usual economic factors—as part of the decision-making process. In order to evaluate the environmental, social and economic trade-offs effectively, and make decisions that ultimately optimize long-term profitable growth for the business, companies need to embed sustainability considerations into their core business processes.

The important thing is that companies need to stop thinking of sustainability as a set of regulations to be handled by a compliance-oriented department and start considering sustainability as an opportunity to get ahead of business risks, improve business efficiency and drive innovation that can generate competitive advantage or reveal new business opportunities.

Having a vice president of sustainability or a chief sustainability officer can be a good way to begin to embrace the sustainability ethos, but ultimately the line managers are the ones who must have accountability for embedding sustainability into business strategy development, execution and tracking.

Beyond Issues Management— Engaging with Customers, Consumers and Other External Stakeholders

In the past, companies have tended to engage with external stakeholders on environmental issues primarily to manage risks. Such interaction has often been adversarial and reactive, with the intent of minimizing negative fallout from relevant issues. As sustainability issues become more mainstream, not just for NGOs but for customers and consumers as well, companies need to rethink the way that they engage with external stakeholders on environmental issues in order to drive the business.

In B2B, sustainability decisions by downstream players like Wal-Mart are already having major upstream effects on production, product design, packaging and distribution choices. At a minimum, suppliers need to meet the sustainability standards being set by these companies to maintain their competitive positions. However, companies that go beyond standards compliance have an opportunity to enhance their competitive position with their key accounts. By including a customer sustainability assessment as part of the sales and marketing team’s core account-planning process, companies can uncover new opportunities to create value for their customers by helping these customers achieve their own sustainability goals.

For B2C players, it’s worth remembering that what consumers say about valuing sustainability does not always translate into purchase decisions. Consumers still weigh green attributes against other factors, including price, functionality and quality. By incorporating green considerations into consumer segmentation, companies can better determine where green matters in the market and how best to incorporate it into brand strategy.

It is important to note that even when green attributes do not directly drive consumer purchase decisions, they often do play a major role in word-of-mouth advocacy for a product. For example, a scan of blogs and message boards about home cleaning products reveals that discussions of environmental issues far outnumber discussions of price or functionality for these products. Stimulating such positive word-of-mouth advocacy about green products can help stimulate active consideration by potential new consumers.

Finally, companies should take advantage of a new collaborative mindset among a broad set of external stakeholders including NGOs and governmental organizations. This new spirit of partnership can be seen in the Coca-Cola, Unilever, Greenpeace and United Nations Environmental Program “Refrigerants, Naturally” joint initiative to phase out ozone-depleting fluorinated gases currently used for refrigeration.

Companies that seize the initiative can form valuable partnerships and leverage the sustainability expertise of outside organizations. After all, if The Clorox Company can join with The Sierra Club to promote its new Green Works natural cleaning products, there’s no reason that other manufacturers can’t find common ground with NGOs.

Using Sustainability to Drive Innovation

A lot of companies struggling with innovation don’t realize that sustainability can be the perfect catalyst to make their organization more innovative. When DuPont set an internal goal of phasing out the use of toxic materials in the production of Teflon, it used sustainability as a driver for process innovation. Similarly at GE, the Ecomagination program that devoted R&D resources across the corporation to stimulate the sales of environmentally advantageous products will probably hit its $20 billion sales goal a year before its 2010 target date.

Ultimately, companies should go beyond green PR to develop true sustainability initiatives not just because it’s the right thing to do from a social and branding perspective, but also because sustainability offers so many opportunities to improve efficiency, drive innovation in products and processes and generate competitive advantage. A comprehensive diagnostic, assessing both the impact of the business on the natural and social environment as well as the potential impact of environmental and social issues on the business environment, can help companies determine the key sustainability issues which they need to address.

For most CEOs, this type of assessment is a good first step to position their companies for long-term growth and success while being responsible to the natural and social environment in which they operate.

Yakir Siegal (Yakir_Siegal@Monitor.com) is a senior partner at Monitor Group and leads the firm’s Sustainability practice.

Amy Longsworth (amy@estyep.com) is a senior partner with Esty Environmental Partners.

About yakir siegal monitor group and amy longsworth esty environmental partners