Every few weeks, dozens of denizens of 26 villages in the western Philippines gather up their discarded nylon commercial fishing nets and bring them to a central palletizer, where they’re crunched into raw material that will end up in carpet squares made by Interface, halfway around the world in Georgia. For at least three reasons, CEO Dan Hendrix is jazzed about the $1 billion company’s $300,000 investment in the process.
First, he says, the supply “is cost-neutral because if you get enough fishing nets, it’s much cheaper” than virgin nylon. Second, Interface is “cleaning up the ocean and doing something that’s helping these villages, too.” And third, the effort gets the company that much closer to an overall sustainability goal Hendrix calls Mission Zero, which is to completely eliminate Interface’s environmental impact by 2020.
“It’s good business and it’s the right thing to do and our customers care,” Hendrix says. “What every CEO is wrestling with is that consumers won’t pay more” for corporate sustainability, “but they care.”
In fact, nearly every CEO these days is dealing in some form with these twin modern dictates of corporate sustainability, which used to be called environmental stewardship. There’s an almost overwhelming public expectation for their companies to be working proactively, even aggressively, on this front. Therefore, about half of today’s CEOs agree that there is a business case for sustainability, up from just 20 percent three years ago, according to a recent survey.
On one level, sustainability is simply synonymous with productivity improvement and reduces stresses on the environment merely by extending the time-honored prosecution of innovation to reduce and improve inputs ranging from raw materials to energy and to refine the resulting outputs. Every CEO is constantly striving to do that anyway. The second level of sustainability is the tricky one: determining how much to capitulate to demands for sustainability measures where the raw and immediate business case alone isn’t enough to justify it.
“Sustainability is the next big wave; what if 15 years ago a CEO had assumed that the Internet was just a fad?” asks Jay Friedlander, a business professor at College of the Atlantic who specializes in social responsibility. “It’s about combining social benefits and environmental stewardship and economic vitality, figuring out ways to create shared values for all of those [goals]. That [activity] creates innovation and entrepreneurship and new ways of doing things. Companies will see value that was latent.”
Adds Chris Laszlo, an associate professor at Case Western Reserve University’s Weatherhead School of Management: “There are rising expectations by companies and employees and investors of what companies should do in terms of impacts on society and the environment. So it’s about a smart business solution, not about a liberal agenda.”
While B2B customers and consumers alike universally applaud nearly every single “sustainable” thing a company does, they’re reticent to pay more for the privilege of helping serve the planet. About 10 percent of American consumers will accept a price penalty in order to purchase a product positioned as green or sustainable—but 75 percent won’t agree to trade off environmental advantages for a decrease in performance, and the remaining 15 percent still don’t care much about sustainability, even now, according to Procter & Gamble research.
Meanwhile, it’s up to CEOs to decide how far they want to go in committing their companies to the next environmentally pristine supplier, the next huge energy-efficiency initiative or the next green-tinged project to ensure that raw materials or manufacturing done on their behalf in an emerging market meets the standards of the sustainability police.
“Right now, the emphasis is on investment, but it will take a while to sort out what’s socially correct versus what’s correct for business,” says John Grace, president of corporate-branding consultant BrandTaxi in New York. “That’s what’s being determined in this period of time: what’s socially correct about sustainability versus what’s correct for business.”
Ever since the first Earth Day 43 years ago, a rising drumbeat of environmental concern has been fed by the American and global news and entertainment media and the educational system—even while industry worldwide has dramatically cleaned up its act. However, over the last five years, the sustainability phenomenon has become a juggernaut of concern for corporate governance for three reasons.
First, the children of Earth Day have become the consumers, business executives, managers, employees and bureaucrats of today, and their minds think in green hues about everything. Second, their predilections about sustainability are being translated every day into new-product designs, marketing campaigns, Hollywood movies and government mandates that spread and reinforce the sustainability ethos.
And third, the last decade’s dubious hype over “global warming”—fed by many of the same systems and sensibilities as the Earth Day phenomenon—has created a backdrop of strong expectations that companies now can never do enough to reduce their environmental footprints because vast climatic destruction is all but inevitable unless they do.
“All of these things exert an absolutely powerful force,” asserts Kathy Nieland, leader of PwC’s Sustainable Business Solutions practice unit. “But if you’re doing sustainability right, you’re delivering business benefits—ROI and all those things that businesses are looking for—as well as benefits to the environment and to the society in which you operate. It’s increasingly important to tell the story of what you’re doing, particularly for the younger generation of consumers.”
For example, Procter & Gamble has been boosting its own environmental responsibility for two decades, but lately it has been intensifying, broadening—and marketing—it in new ways. A recent emphasis has brought 50 plants worldwide to “zero-waste-to-landfill” status, saving $1 billion a year for the company by harnessing electricity from incinerating trimmings from Pampers production, for instance, and converting paper refuse into ceiling tiles in Mexico.
“Only in a landfill does that waste have no value,” points out Len Sauers, vice president for global sustainability. “Our goal was to find some value in all that waste, which has been a good investment for the company. Plus, not paying to have the stuff landfilled.”
P&G also has undertaken showier sustainability initiatives, such as inventing and distributing a chemical that purifies drinking water in emerging markets. Detergents have been a bellwether for green efforts, as well, including boosting liquid concentrates to reduce shipping volumes and costs, promoting use of detergents that work well in cold water and launching Tide Pods, which are heavily concentrated and control load portions that diminish rampant detergent overdosing worldwide. Tide Pods became a $500-million product globally in their first year in 2012.
A recent question posed to former P&G CEO Bob McDonald by an audience member at a green conference illustrated why, even with such accomplishments, changed social expectations are driving corporate leaders to keep pushing the envelope on sustainability. “As a mother of almost-two-year-old twins, I think there’s probably a special place in hell for me [for using hard-to-decompose disposable diapers],” Wendy Rosen, a media-relations executive with DuPont Industrial Biosciences told McDonald by way of introducing the query: “What kind of technology innovation are you bringing to that particular product?” McDonald was happy to be able to respond that P&G already has taken 40 percent of the material out of Pampers over the last decade, while improving performance—but he also felt obliged to pledge that P&G is “working hard” to do even better.
The incessant drumbeat of new and improved sustainability gambits continues. General Mills is pushing to boost raw-materials sustainability across its product lines, including buying one million eggs from cage-free hens for its U.S. retail operations last year. Nike has released a new mobile app called “Making” with the lofty goal of helping the fashion industry—and consumers—decide what source materials are the most environmentally responsible. Sodexo is working with college-campus food-service managers to meet growing student expectations for “local” sourcing of produce as well as cutting fuel consumption by ordering supplies just once a week instead of two or three times. Novartis has cut the unit cost of its Lamisil Gel by more than 55 percent simply by replacing plastic packaging with recyclable paperboard.
At the Waldorf-Astoria hotel in New York, a sustainability push has produced a 12-percent decrease in waste since the start of implementing true eco-friendly practices in mid-2012. The effort has included installing high-tech kitchen composters, changes in room recycling and an annual waste audit.
“We want to be able to say we’re the iconic, sustainable hotel in New York City,” says Flann Harris, the hotel’s purchasing manager. “We’re not there yet, but it positions us in the marketplace positively on something that our customer base does care about.”
Yet Chris Nassetta, CEO of Hilton Worldwide, is one-upping that effort with a comprehensive sustainability program for the chain aiming at cutting waste, carbon and energy use by 20 percent and water use by 10 percent, which he says Hilton is nearing at the end of a five-year window announced in 2009.
“Our sustainability success has only complemented our business success,” Nassetta says, citing more than $147 million in cumulative cost savings across the system—even while Hilton opened 1,148 new hotels and more than 170,000 rooms around the world over a three-year period. So “sustainability and the achievement of our corporate goals” are “one in the same,” he asserts.
Indeed, the gamut of corporate sustainability efforts runs as wide as the variety of business itself. But while many companies have initiated one-off “green” efforts for decades, the emphasis for CEOs now is to approach sustainability goals systematically and for the long term, keeping a “triple bottom line” of environmental benefits, financial return on investment and overall social-responsibility goals in mind. That strategy requires making sustainability as fundamental a concern as the stock price, executive succession, company culture and other primary responsibilities of the CEO.
“If you want to reduce the amount of waste from packaging that goes to landfills, you can move incrementally,” Nieland explains. “But now you need to actually optimize things at a higher level. Like, why do you need packaging at all? Do you just need it to protect the product or is it a marketing consideration for distinguishing your products from those of your competitors? Maybe you can achieve these marketing goals with a different technique. Sustainability requires you to look at things with a different kind of lens.”
At the same time, even as they might grasp the significance of sustainability to modern corporate governance, CEOs also must “cascade the sustainability message to their organizations in a disciplined way,” says Clinton Moloney, the managing director of PwC’s Sustainable Business Solutions. “There’s still quite a bit of work to do to get middle managers to have that viewpoint. Any time you make a philosophical shift in business, there’s always work to be done to enroll the rest of the company in that strategy.”
The latest wrinkle for CEOs in “sustainability” thinking is that the very term has become amoeba-like, often bulging and stretching to cover a variety of corporate attitudes and policies that have nothing to do with strictly environmental outcomes.
Launched by activists and endorsed by some CEOs, this amorphousness often is aimed at getting companies to embrace or go along with other progressive agenda items. Collectively, these tropes used to be known as “corporate social responsibility,” but—now—by shoving them into what has become the nearly sacrosanct arena of sustainability, these additional goals can be promoted and protected as part of a nearly untouchable package whose separate components may or may not stand up to individual scrutiny as a CEO’s priorities.
For example, Novartis CEO Joseph Jiminez includes as non-environmental “sustainability” goals “making a long-lasting impact on health, the economy and global health-care infrastructures in underserved communities.” Likewise, Hilton Worldwide CEO Christopher Nassetta believes that sustainability goals “are just one component of a web of challenges driven by broader global development trends, so we could not solve for sustainability in a vacuum.” And Nestlé CEO Paul Bulcke has come to include improving nutrition labeling as a sustainability imperative.
“The environmental area is where a lot of this stuff grew out of, but the social arena now is just as important,” says College of the Atlantic business professor Jay Friedlander.
The rising sway of activist, non-governmental organizations has played a huge role in warping the definition of sustainability. Oxfam International, for example, recently conflated environmental policies and workers’ rights in condemning the “sustainability” records of the “Big 10” of global food companies. Thus, it was no surprise that Cargill CEO Greg Page recently acknowledged he has come to define sustainability broadly as meeting “today’s needs without impairing the world’s capacity to serve future generations,” as the grain-processing giant struggles with NGO demands over child labor on cocoa farms in Africa.
Sodexo includes as a “sustainability” goal developing its people and promoting “diversity” in its own workforce. “We bundle our goals together where we think we can impact society and the human beings we serve,” explains George Chavel, president and CEO of the Gaithersburg, Maryland-based food-service giant. At Kering, the France-based owner of Gucci and other lifestyle brands, boosting “biodiversity” of its own workforce, as well as “fighting violence against women” and “empowering” them worldwide are “sustainability” goals. “In all areas of the social path, we have a specific responsibility to do something,” says Marie-Claire Daveau, chief sustainability officer. “We think it’s the social path of sustainability.”
Pressure to blur the distinctions between “green” initiatives and other elements on a progressive wish list can come from the outside, but John Grace blames CEOs and boards if they give in to it. “They’re trying to cobble together every ‘good’ that they do under one umbrella,” says the New York-based president of Brand Taxi, a globally renowned branding consultant. “But in the long run, they’ll be found out. Truth is the ultimate arbiter.”
Some CEOs are recognizing this situation. “‘Sustainability’ is becoming somewhat confusing; the definition got a lot broader than it was when people were just talking about the environment,” said Dan Hendrix, CEO of carpet manufacturer Interface. “So we’ve actually kicked around not calling it ‘sustainability’ anymore.”
No one is in the sustainability spotlight like automotive CEOs. Their industry transformed the globe and it remains the most environmentally impactful, so the sustainability stakes are high in just about everything they do and so is the outside interest.
Nowhere else can forming and executing “sustainability” strategies be so frustrating and muddled. Automakers are whipsawed by crucial yet sometimes conflicting consumer expectations, long product cycles, promising but complex technologies and the ever-higher bar set by stiffening government environmental mandates.
Yet with practically every decision they make—from engineering and design to manufacturing practices to future-product planning and marketing—car-company CEOs must peer through some sort of sustainability prism or risk going awry.
“Sustainability is woven into our global strategies,” General Motors CEO Dan Akerson said at a conference earlier this year. “Every decision we make is: I want to know what it’s going to do to us in 2023, 2033, 2043, so that somebody isn’t looking back to me like I kind of, in my weak moments, look back to prior management and say, ‘What the hell were they thinking?’”
Interestingly, the general public credits automakers as “green” even while CEOs struggle with how to go in that direction. Toyota placed No. 1, Ford No. 2, Honda No.3, Nissan No. 5 and Volkswagen No. 7 among companies across all industries in the latest version of Interbrand’s closely watched Best Green Brands survey of consumers. “What may have started in the periphery, today lives at the heart of the business and brand strategies of the world’s most successful auto companies,” observes Andrew Martschenko, a senior director of strategy at Interbrand’s New York office.
Automakers used to try to trump each other with breathless touts of the horsepower and handling of their new sheet metal, but now the brand-building drumbeat focuses on out-greening one another. No sooner had Ford’s Executive Chairman Bill Ford Jr. pledged recently to cut the company’s carbon-dioxide emissions another 30 percent by 2025—on top of a 37-percent drop since 2000, for example—than a VW executive in Germany was promising the company would become No. 1 globally in sustainability via ambitious energy-efficiency gains in manufacturing under a program called Think Blue.
Giving such prominence to a sustainability ethos also is causing problems for the industry, and electric vehicles provide the best illustration. One of Akerson’s predecessors as CEO of GM, John Smith, was pilloried for killing the original mass-market battery-powered car, the EV1, in 2002. Now, just about every auto brand has an EV or a “plug-in hybrid” like the Chevrolet Volt, but they can’t travel substantially further on a charge than the EV1 did 20 years ago, and they remain very pricey.
So mainstream American consumers have been rejecting all-electric vehicles en masse. Yet auto brands are forced to treat EVs as the lynchpin of their future lineups by an Obama administration that has invested heavily, both financially and politically, in the commercial success of the segment. Federal tax credits of up to $7,500 are meant to lubricate purchases, and popular culture keeps propping up the idea that all-electric cars are the most responsible way to travel.
The pressures are immense on CEOs, and some are drinking the Kool-Aid. Akerson is striving to cut the sticker price of the Volt by $5000 to try to boost its potential mass-market appeal. Already in 2013, an electric-vehicle price war of sorts has erupted as Nissan and Ford have slashed stickers on their money-losing EVs in a last-ditch effort to woo reluctant consumers.
Meanwhile, shedding what he called “German angst” about making paradigm-busting decisions, BMW CEO Norbert Reithofer told shareholders at the annual meeting in May that the company is embracing “electro-mobility” because “being the spearhead of change means taking a calculated risk. The future belongs to those who dare to take bold actions.” So BMW has begun producing an i3 all-electric car and plans an i8 plug-in hybrid, with Reithofer’s promising that “we will earn money with [the i3], too.”
On the other hand, German luxury rivals Audi and Mercedes-Benz have remained much more conservative about EVs. Ford wasn’t an early producer of EVs. Toyota essentially has gotten out of the all-electric business and is concentrating on bolstering the dominance of its Prius brand in the conventional-hybrid segment.
In addition, no automotive CEO is more skeptical of EVs than Sergio Marchionne. His conglomerate was among the slowest in the industry to delve into the segment, and for good reason: For every all-electric version of the Fiat 500 that U.S. dealers sell, he told an industry group in May, the company loses about $10,000.
“Doing that on a large scale would be masochism to the extreme,” Marchionne complained. “My fear is that regulators are rushing precipitously into embracing electric vehicles as the only technological solution” to environmental concerns.
Ironically, so far—and perhaps astonishingly in the future—those CEOs who are fixated on EVs may be denying the auto industry faster adoption of a basket of other technological approaches that could bring about true, long-term sustainability that American consumers would embrace.
For one thing, new methods are boosting the mileage of conventional gasoline engines by double-digit percentages. A new generation of fuel-efficient “clean diesel” vehicles are catching on with consumers. And the growing revival of domestic production of hydrocarbons means that relatively clean-burning natural gas actually may become the preferable automotive-propulsion system of the next few decades.
Even Akerson has acknowledged this opportunity. “I think we have a moment in time to really change the calculus for this country on so many dimensions,” he said at the green conference. “We’ve been given a gift called shale [because] we sit on more BTUs of energy than Saudi Arabia does.” And “natural-gas engines … exist today,” he said.
“We have this moment,” GM’s CEO concluded, and “it has to be grasped.”
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