World is Green

Forum for the Future in the UK has released a report titled “Leader Business Strategies” which explain how sustainability fits into business strategy.

When I started this blog, my aim was to understand, look at examples and provide a convincing case of how sustainability is a business strategy. This reports really takes the lead in providing a framework to take this forward.

I have suggested before that we can look at sustainability as a risk reduction strategy (cost cutting, bottom line focus) or a growth opportunity strategy (new markets, top line focus).

David Bent, a Principal Sustainability Advisor for the Forum of the Future and the report’s author suggest that  the shift has happened from risk to opportunity. In fact, David is an e-mail subscriber of this blog.

He writes, “In the past companies have asked us “What should our sustainability strategy be for our business?” Now they’re asking “What should our business strategy be, in the light of sustainability?”
The report summary (Download - PDF) explains why business needs to look at sustainability and framing the issue in a demand-supply equation. It also explains the eco-system issues as capital depletion and how that can detrimental to future business. More importantly, with change in consumer behaviours, and new opportunities for competitors it is becoming imperitive for a new operational model which incorporates the sustainability aspects.

The report suggests a practical model revolving around technologies, markets and contexts or what can be called the larger business eco-system.  And an approach to implement based on planning, managing and experimenting.

The full report can be downloaded here and the summary here.

In an interview David suggests the growing opportunities for SMEs to use sustainability as a business strategy and he sees a good future for companies which take sustainability seriously.

“I feel sympathy with the fact that SMEs don’t have lots of time and resources,” says Bent. “But there are smaller businesses that are experimenting and making it work. Cafédirect, which started off with three people and one bag of coffee, has transformed the UK market tremendously. What we’re trying to get across is that there needn’t be a trade-off between profit and being sustainable. Finding the right way is the task of strategic management.”

Bent has faith in the UK’s entrepreneurs, those who “create the disruptive change”, to spot the market gaps and make them their own. “They become leaders because they can spot opportunities,” reasons Bent. “What will guide them through this growing terrain is if they ask the question: ‘How can we build up our capabilities so that we are better positioned than our competitors to deal with problems like climate change, energy efficiency and social need and make money out of it?’”

The last question that David asks is the crux of the issue. How do we see these problems as opportunities and solve them?. History has provided proof that people who can solve important problems and create a good business model can profit immensely from it.

Heather Clancy writes in ZD Net’s Green Tech blog about monitoring carbon and advice from Michael Meehan, founder and CEO of Carbonetworks.

Meehan, who hails from Victoria, British Columbia, figures there are five steps companies need to climb on their way to getting a better grip on their carbon position:

1. Measure actual carbon emissions and document where it’s coming from. What’s true for one division may not be true for another.
2. Understand how your carbon position relates to core business values. In other words, how would reducing your company’s footprint affect profitability?
3. Gauge the financial liability/value associated with your company’s greenhouse emissions.
4. Assess the impact of various reduction strategies across the entire company. Sometimes, something that may seem like a great idea for one division may have a detrimental effect on the company as a whole.
5. Link up with verified offset providers to take action.

Joshua Margolis and Hillary Anger Elfenbein, writing in the January 2008 edition of the Harvard Business Review (subs req. free for the month) on social responsibility inform us that after a meta-survey of 167 surveys over the last 35 years they find that there is a low correlation between doing good and doing well in business sense.

They write:

While doing good doesn’t appear to destroy shareholder value, we found only a very small correlation between corporate behavior and good financial results (the exception being public misdeeds, which had a discernible negative impact). Moreover, the minor correlation that does exist could well be explained by deep pockets - a history of strong financial performance may simply give a company the wherewithal to contribute to society. Indeed, of the various forms social responsibility can take, cash contributions to charities have shown a stronger correlation with success than have socially responsible corporate policies or community projects.

They suggest:

1. Corporate misdeeds are costly to companies - if people find out.
2.  Doing good is unlikely to cost shareholders.
3.  Profitability should not be the primary rationale for corporate social responsibility.

It is interesting to read this.  Now to be sure the HBR headline reads that CSR. However, what I would like to call ‘Sustainable Business’, how does that fare?

Karl Weber writing in the Triple Bottom Line blog makes some important comments.

First of all, the authors say they found no conflict between doing business responsibly and achieving strong financial results. “Doing good,” they say, “is unlikely to cost shareholders.”…After all, if CSR is (in effect) cost-free, why not make an effort to do the right thing? What is the upside to behaving ruthlessly if it is not even rewarded in the marketplace?
…The fact that Margolis and Elfenbein do confirm such a correlation is, of course, welcome to CSR advocates. And without having access to the original study (which doesn’t yet appear to be available online), it’s impossible to know whether specific factors might explain why the correlation is only a small one.

…The authors might argue that no one, including CSR skeptics, is actually in favor of “public misdeeds,” which means that the CSR movement shouldn’t be credited for any positive impact from avoiding them. I’d challenge that logic. If companies that espouse CSR do a better job of avoiding scandalous behavior, that’s not a mere coincidence.

Stopping the negative consequences do connect to corporate financial performance.

To understand whether any specific circumstances create the scenario where CSR is valuable Vinay Nair, a Wharton finance professor and his colleagues at Columbia University studied whether being charitable — such as donating money to medical research or to organizations that promote economic self-sufficiency — helps a company’s financial picture.

Concentrating only on charity they found that “Corporate philanthropy and profits are positively related only in industries with high advertising intensity and high competition,” the researchers say, citing as examples the beverage and retail industries. In low-advertising industries, such as computer chips and business-to-business services — “there is actually a negative association between philanthropy and profits.” Clearly this helped to serve as a differentiation in a competitive industry.

In thier study they excluded good deeds that could also have the effect of boosting a company’s productivity and, in turn, its profits. For instance, a company’s decision to operate an environmentally friendly plant could increase efficiency. Likewise, a company that offers flex time and good maternity leave benefits may reap the benefits of a more loyal and productive workforce. And I think this is where the companies need to concentrate.

Corporate good deeds need to combine business strategy and sustainability to make a difference. Or else, shareholders will be at loss.

Dave Douglas in a Op-Ed in Business Week writes about the carbon or sustainability opportunities available for companies. Dave is the vice-president for Eco Responsibility at Sun Microsystems and like other Sun executives he writes a blog which makes for good reading.

Dave writes about the growing interest in Carbon Neutrality, which is impossible in actual reduction of carbon to zero. What we can do is increase efficiency and buy green energy and offset the rest.

Dave writes that working only for carbon neutrality is a missed opportunity.

It’s good for companies to invest in others’ good deeds, but right now it’s absolutely critical that companies invest in creating more sustainable versions of themselves. More than ever, we need the innovation that comes from competition and open markets. We need companies that view climate change not as a threat but as an opportunity—and are pursuing it with the enthusiasm that big opportunities engender. We need companies to go beyond carbon neutrality to something I call “carbon advantage.”

You can create a carbon advantage for your company in two ways: First, you can use efficiency and resource reduction to provide a fundamental cost advantage in your operations and products. Second, you can use innovation in green products and services to offer customers a competitive advantage, thus differentiating your offerings.

This has been my learning and the theme of my writing for some time now. I believe that there is a great top-line opportunity in this area rather than just risk reduction, cost savings or bottom line increases only. This is where sustainability and carbon become a business strategy.

Incidentally, it seems that Business Week’s subtitle on carbon offsets missed the point and Dave clarified his position again on this weblog. Business Week seems to have changed the sub title now. It just shows the exact point that Dave was trying to make - to move away from just Carbon neutrality and concentrate on carbon opportunities.

SustainAbility, the organization, along with the International Finance Corporation (IFC), has come out with a “case study + sustainability strategy building steps” report called Market Movers: Lessons from a Frontier of Innovation, where they analyzed in detail 4 companies in the emerging markets of China, India, Brazil and Sri Lanka and how their sustainability focus has influenced their business success.

The report goes on to draw some lessons from their experiences and to make recommendations as to how other emerging-market businesses might create value from sustainability. The report identifies a number of ‘ingredients of success’ – factors that contributed to the strong results in all four case studies and helped them overcome some of the constraints that many emerging-economy companies face. The five ingredients are:

Leadership: the role of the chief executive or chairman in pushing through a strategy based on sustainability.

Integration: the embedding of sustainability elements in corporate strategies from the very beginning.

Innovation: using sustainability as a source of innovation.

Differentiation: having the courage to be different.

Quality of relationships: business benefits from strong relationships with stakeholders – suppliers, customers, employees.

The reports using a nice little matrix which provides sustainability parameters like environmental performance, social and governance performance and the business benefits of these startegies. As the case studies show, each company has used a different mix of sustainability parameters for generating business value.

A very interesting read. However, it is important to remember the following advice from the authors.

While we recognise that any measure of the value added either to their bottom line or to society by businesses’ sustainability strategies is necessarily imprecise, it is none the less real for that. In all our cases there is a close correlation between sustainability and business success, even if there is no irrefutable evidence of causation between the two. The entrepreneurs who built up these companies invariably attest to it.

The Age on a South Korean carbon consulting company called Eco-Frontier.

LIM Dae-woong has a job that will be familiar to an increasing number of Australians. As a carbon consultant, Mr Lim is in hot demand from governments and businesses scrambling to prepare for coming emissions constraints, and from investors on the scent of big profits in emerging markets.

And, as with Australia, South Korea is nearing the starting blocks when it comes to setting targets for curbing greenhouse gases, and laying groundwork for carbon trading.
[...]
Some wins can be had, even for small companies such as Eco-Frontier, which employs about 90 staff. It teamed up with London-based Climate Change Capital to outbid Japan’s Mitsubishi and Mitsui to secure carbon credits gained from cutting output of the potent greenhouse gas HFC23 at a Chinese plant. The plant will now reduce its annual carbon dioxide emissions by 4.25 million tonnes and deliver a 100% return on investment.
[...]
The plant in Malaysia will burn oil palm residue, which would otherwise rot and release methane gas. The $100 million plant would have a payback period of seven to nine years, a rate that will be cut by about half once the derived carbon credits are sold.

In Mr Lim’s experience, companies — Korean or otherwise — tend to treat environment issues as cost issues, rather than profit opportunities. “Many people in the environment departments just hide,” he said.

In Payback and Plugins we talked about Wrightspeed and their strategy to target the automobile segments with the highest payback for using EV technology. In Luxury and Innovation; I suggested how luxury cars like Tesla will drive innovation.

Now, the former CEO of Tesla (now the President of Technology), Martin Eberhard has a discussion with David Pogue and he spells out Tesla’s strategy in simple steps.

DP: That’s handy. Now, you have bigger plans than this one model . . .

ME: Yeah. This is our first car. We come in at the top of the market, changing the way people think about electric cars fundamentally. Electric cars don’t have to be goofy little golf carts; they can be something that we all want to own. Maybe we can’t all afford one of these things, but we realize that electric cars can be hot cars. O.K.

It allows Tesla Motors to develop the brand, to develop the relationships we need with suppliers, to build and buy things at prices that allow us to make more affordable cars.

With that progress, then we consider the next car. We look for a car that’s in the $50,000 range that can seat five adults as our next model. Still kind of expensive, but a step down, for sure, from the $100,000 roadster.

If we pull that off, then the next car should be higher-volume still and lower priced.

It’s how you get into the market. If you try to come in from Day 1 and build a car that everyone can afford, it’s a recipe for disaster—as all of the electric car companies in the last 30 or 40 years have proven.

Well, you cannot get a better explanation. Now, the same blueprint can be used by other companies to enter the “sustainability and environmental” markets and drive innovation and growth.

In the world of electric cars there are very few new ideas. Mostly it revolves around Prius type of cars. The Tesla is in a different strategic direction (focus on power and performance) and may be a good one.

Well, Ian Wright comes up with another good strategic direction. Neal Dikeman at Cnet writes about his discussion with Wright.

Wright knows something about this topic, as he was formerly an executive at EV start-up Tesla Motors, and is now the founder and CEO of Wrightspeed, a Silicon Valley-based start-up whose first car is going to be a high-performance electric supercar, price tag just shy of $200,000. And as it’s electric, Wright expects it should out-start, outrun, out-turn, and generally outperform anything in its class.
[...]
I am known among my friends as being a real skeptic when it comes to EVs, but behind Wright’s business plan he got my attention with two ideas that are worth repeating: payback and plug-ins.
[...]
Putting expensive hybrid and EV technology in the small car not only has a worse financial payback–compounding the perennial problem of EVs being too costly, but the same 20 percent efficiency improvement does very little to reduce overall fuel consumption for society compared to the same efficiency gains in a big truck that drives a heck of lot of miles.

So Wright asks, if we want to both find a way to save car owners money, and save the world–wouldn’t we focus on applying technology to where the problem is the worst and the returns are the best?
[...]
To deal with this issue, Wright isn’t all about the all electric. He’s pushing plug-in electric hybrids, PHEVs, aka gridable hybrids…Wright’s vision also addresses one of the long-running Achilles’ heels of electric cars–the lack of fueling infrastructure. Regardless of your feelings on the matter, it’s generally bad business to try to bet on an expensive infrastructure rollout. And if it means slower and lower uptake of fuel-efficient vehicles, then calling for infrastructure change that’s not going to happen is bad for the environment, too.

Wright is asking a very good question. His focus on payback and through plug-ins using the current “fuel infrastructure” may be a great strategic bet that will potentially payoff.

The Mint reports on D.Light and its plan to provide LED lighting to Base of the Pyramid markets in India.

‘We don’t think it’s right that families are using kerosene in 2007,” said Tozun, who added that kerosene and candles are polluting, bad for respiration, can cause fires, and often have very dim lighting. “With today’s technology available, it is possible to have safer, better lighting. We want to provide that.” The product, called Forever Bright, will have a retail value of about Rs500 and is small enough to hold in your hand, said Tozun.

Uused in modern appliances such as the numbers on digital clocks, images on a television screen, and traffic lights, LEDs are tiny light bulbs that fit into an electrical circuit, but unlike ordinary bulbs, they don’t have a filament or get too hot.

According to Light Up The World, an international humanitarian organization whose goal is to light up the world’s poor, benefits of LEDs include ultra low power usage, durability and extended lifetime.
[...]
The for-profit company was formed a year-and-a-half ago, after Tozun and a few colleagues took the “Entrepreneurial Design for Extreme Affordability,” class at Stanford University’s design school. They learnt to design for folks who earn a dollar or two a day.

D.Light’s plan is a good example of socially motivated, highly educated entrepreneurs to target a base of the pyramid market. And it’s just not easy.

Sam Goldman, the CEO and founder, is sharing his experiences on his blog.

Some lessons to sell in India from him.

There’s plenty of budget airlines and a quarter million cell phones being made a day. India is ‘calling all entrepreneurs.’ And yet its not that easy. Razor thin margins, an older bureaucracy, whole neighborhoods of C&D (copy and develop instead of research and development), and the little things - like trying to get a cell phone present constant challenges. I was shocked by how demanding the Indian consumer is - requiring high quality, low price, and service guarantees even or $10 purchases. If we can crack this market - we can crack any.
[...]
India is the ultimate retail market and quite a challenge. As far as base-of-the-pyramid and rural marketing is concerned, I have found a few surprises. The first is how sophisticated the market has become. For example, the Chinese imports coming in as emergency lights have received a terrible reputation for low quality, and although they are still sold by the tens of thousands, newer Indian brands are springing up. Although the Indian brands are higher priced (often 2X) they come with guarantees (6mo-1yr) and often service warranties (up to 3years). Consumers are not only demanding high quality at low prices, but they want to be able to easily and inexpensively repair their products. If you are offering products that cannot be easily repaired – it is going to be hard to crack this market.

The Australia hosted APEC summit in Sydney has come to an end with 21 world leaders agreeing to “aspirational targets” for cutting down greenhouse gases, and this non-binding agreement is called the “Sydney Declaration”.

Even though condemned by some as lacking any strict targets I think the declaration is meaningful. Considering the scale of change required it is not easy to convince 21 countries to do anything, especially international co-operation on uncertain effects 75 years into the future.

The declaration has the following actions:

In summary, and without prejudice to commitments in other fora, we have decided to:
• highlight the importance of improving energy efficiency by working towards achieving an APEC-wide regional aspirational goal of a reduction in energy intensity of at least 25 per cent by 2030 (with 2005 as the base year);
• work to achieve an APEC-wide aspirational goal of increasing forest cover in the region by at least 20 million hectares of all types of forests by 2020 – a goal which if achieved would store approximately 1.4 billion tonnes of carbon, equivalent to around 11 per cent of annual global emissions (in 2004);
• establish an Asia-Pacific Network for Energy Technology (APNet) to strengthen collaboration on energy research in our region particularly in areas such as clean fossil energy and renewable energy sources;
• establish an Asia-Pacific Network for Sustainable Forest Management and Rehabilitation to enhance capacity building and strengthen information sharing in the forestry sector; and
• further measures in trade in environmental goods and services, aviation transport, alternative and low carbon energy uses, energy security, the protection of marine biological resources, policy analysis capabilities and a co-benefit approach.

It has for the first time made possible for China and the US to agree to some targets and importantly, to work under the current United Nations Framework Convention on Climate Change (UNFCCC); thus not creating another rival framework. (Incidentally, China played a major role in this)

John Howard’s experience in the last decade in managing Australia’s greenhouse gases through agri-management has provided the impetus for forest cover targets. In fact, the Stern review has suggested that forestry management (afforestation and reducing deforestation) is a good way to tackle climate change. Considering the costs of changing current economic systems, in the short term this is a valid strategy.

The effort on improving energy intensity is a good one. Even though this may not ultimately reduce actual consumption it will improve the efficiency of all countries involved. The importance of trade of economic and social development is well known. These principles are being supported in the declaration.

This declaration is also a good step forward because it acknowledges that “differences in economic and social conditions among economies” and that this would mean “differentiated responsibilities”. Also the emphasis on adaptation is important. As Schelling has suggested,

The sooner Malaysia can become like Singapore, the sooner it can worry less about the impact of climate change on health, comfort, and productivity.

In that sense, trade and economic development is the key to adaptation for climate change.

More importantly, Schelling talks about inputs and outputs.

One striking contrast between NATO and the Kyoto Protocol deserves emphasis: the difference between “inputs” and “outputs,” or actions and results. NATO nations argued about what they should do, and commitments were made to actions. What countries actually did — raise and train troops; procure equipment, ammunition, and supplies; and deploy these assets geographically — could be observed, estimated, and compared. But results — such as how much each NATO nation’s actions contributed to deterring the Warsaw Pact — could not be remotely approximated.

The Sydney declaration takes a small step towards “inputs” — energy intensity, forest cover, trade barriers, clean technology — and this makes it a valid strategy as it is not possible to guarantee the exact emission reduction (outputs) in 10-15 years.

Overall, I think that the Sydney declaration is a good step forward in tackling climate change.