Sustainability for Business Advantage Chris Laszlo PhD Sustainable Value Partners, Inc. July 22, 2006

Business approaches to sustainability corporate values | ethics | good governance Sustainability Environmental, Health, and Safety (EH&S) ISO 14001, Life Cycle Analysis, pollution prevention, compliance, EH&S reporting,… - EH&S and legal/ technical Source: Prof. Mark Milstein and SVP Corporate Social Responsibility (CSR) Social audits, philanthropy, employee and community relations, CSR reporting,… - HR and corporate communications Business strategy Supply chain innovation, sales & marketing, organizational change Business managers and supply chain partners

Environmental, Health, and

Safety (EH&S)

ISO 14001, Life Cycle Analysis, pollution

prevention, compliance, EH&S reporting,…

- EH&S and legal/ technical

Corporate Social

Responsibility (CSR)

Social audits, philanthropy, employee

and community relations, CSR reporting,…

- HR and corporate communications

Business strategy

Supply chain innovation, sales &

marketing, organizational change

Business managers and supply

chain partners

Stakeholders are now a powerful force in business

Growth of Non-Governmental Organizations (NGOs) Source: UIA Yearbooks and SVP research

Example of new European environmental regulations WEEE – Waste Electronic and Electrical Equipment Directive RoHS – Reduction of Hazardous Substances Directive REACH – Registration, Evaluation and Authorization of Chemicals ETS – Environmental Trading Systems for quotas of CO2 ELV – End–of–Life Vehicle Directive PAEI – Public Access to Environmental Information Source: SVP research

WEEE – Waste Electronic and Electrical Equipment Directive

RoHS – Reduction of Hazardous Substances Directive

REACH – Registration, Evaluation and Authorization of Chemicals

ETS – Environmental Trading Systems for quotas of CO2

ELV – End–of–Life Vehicle Directive

PAEI – Public Access to Environmental Information

Sustainable Value The opportunity for business is value creation (not only regulatory compliance) Stakeholder Value¹ Shareholder Value + + - Unsustainable (Value Transfer) Unsustainable (Lose/Lose) - ¹ environmental, social, and economic impacts Sustainable Value Opportunities Enhanced reputation Product differentiation Motivated employees License to operate Entry into new markets Unsustainable (Value Transfer) Risks Customer de-selection Preemptive regulation Reputation damage Fines, penalties Loss of market share

A business strategy approach takes into account stakeholder impacts along the value chain Environmental impacts of suppliers Energy conservation Water & solid waste Air emissions Toxic materials Social impacts Human rights Community involvement Economic impacts Jobs, economic growth Tax base Environmental impacts of products Durability Energy use Recycling, remanufacture Product take-back Customer health & safety Exposure to toxics Ergonomics Social innovations Meeting unmet societal needs Partnerships to support schools, etc. UPSTREAM OPERATIONS DOWNSTREAM Environmental impacts of operations CO2, NOx emissions Hazardous materials Energy, waste Noise & visual pollution Social impacts Worker health & safety Employability, diversity Community integration Economic impacts Jobs, economic growth Tax base

Environmental impacts of suppliers

Energy conservation

Water & solid waste

Air emissions

Toxic materials

Social impacts

Human rights

Community involvement

Economic impacts

Jobs, economic growth

Tax base

Environmental impacts of products

Durability

Energy use

Recycling, remanufacture

Product take-back

Customer health & safety

Exposure to toxics

Ergonomics

Social innovations

Meeting unmet societal needs

Partnerships to support schools, etc.

Environmental impacts of operations

CO2, NOx emissions

Hazardous materials

Energy, waste

Noise & visual pollution

Social impacts

Worker health & safety

Employability, diversity

Community integration

Economic impacts

Jobs, economic growth

Tax base

Six levels of business value creation Compliance – oriented management of risks and protecting license to operate Reducing energy, waste or other process costs Creating product differentiation based on technical and environmental/social features Addressing new markets driven by customer and societal needs Developing a sustainability culture and brand identity for stakeholder preference Changing the “rules of the game” Sources of Business Value Levels of Strategic Focus Business Context Brand/ Culture Market Product Process Risk

Example: Sustainability goals at To be supplied 100% by renewable energy Stores 25% more efficient in 7 years Fleet 25% more efficient in 3 years To create zero waste 25% reduction in solid waste in 3 years To sell products that sustain our resources & environment 20% supply base aligned in 3 years Source: speech by Wal-Mart CEO Lee Scott October 24, 2006 and company internal data

To be supplied 100%

by renewable energy

Stores 25% more efficient in 7 years

Fleet 25% more efficient in 3 years

To create zero waste

25% reduction in solid waste in 3 years

To sell products that

sustain our resources

& environment

20% supply base aligned in 3 years

Fleet efficiency of Class 8 heavy trucks ~38% efficient today: Engine & drivetrain. Represents >100 years R&D: Engine efficiency more difficult to improve than end use efficiency. End-use: What happens when halving aero drag + rolling resistance? * Assuming driver utilizes engine at 95% of max efficiency due to driving habits (probably much less than 95% in reality) Source: Technology Roadmap for the 21st Century Truck Program (DOE 2000), RMI analysis Total primary energy 1.00 Idling losses Used in hauling Engine losses Driver losses Auxiliary loads Drivetrain losses Reaches the wheels Aero-dynamic drag Rolling resistance Moves the platform Hauls the freight .07 .93 .02 * .56 .03 .02 .30 .19 .11 .047 .066 1 gallon of diesel @ 65MPH

~38% efficient today: Engine & drivetrain.

Represents >100 years R&D: Engine efficiency more difficult to improve than end use efficiency.

Cut drag + roll 50%, idling 80% => 2x MPG First, cut aerodynamic drag and rolling resistance by 50% * Assume no change in driver behavior from previous slide. Assumes steady state power out. Source: Technology Roadmap for the 21st Century Truck Program (DOE 2000), RMI analysis Total primary energy 0.47 Idling losses Used in hauling Engine losses Driver losses Auxiliary loads Drivetrain losses Reaches the wheels Aero-dynamic drag Rolling resistance Moves the platform Hauls the freight .006 .47 .01 * .017 .01 .15 .09 .06 .019 .037 .28 >50% less fuel use No change in engine & drivetrain (same 38% efficiency) Also, reduce idle time by 80%

Example of cotton apparel Growing soil fertility, pest mgt, boll maturation, crop rotation, harvesting Production ginning, spinning, weaving, dyeing, finishing, cut & sew Distribution packaging, transportation, inventorying Use wear and care Product Disposal What can suppliers do to address these issues? Fair labor standards Use of dyes and finishing chemicals that may be hazardous to factory workers Energy use in transportation Waste in packaging Dry cleaning chemicals Risk of allergic reactions to chemicals in cotton fabric Hot or cold machine wash Landfill Cotton by-products used in animal feed Pesticide use Fertilizer use Herbicide use GMO seeds Mono-crop Irrigation intensity

Interview of Lee Scott, CEO, Wal-Mart Corporation

THE “WHY NOT ?” PURCHASE Organic Cotton as a “Plus One” ORGANIC COTTON AT SAM’S CLUB

THE SAM’S EXPERIENCE Distribution in approximately 300 stores of Capri Pant, Vee Neck Top Delivered in Spring 2005 Sales of these two items in the USA were as strong in the Midwest as they were on the coasts, which is a good indication of how widespread this explosive “Natural Lifestyle” market is.

THE SAM’S EXPERIENCE

Distribution in approximately 300 stores of Capri Pant, Vee Neck Top

Delivered in Spring 2005

Product differentiation : at the same color, style, quality and price, the organic cotton seal becomes a “plus one” for consumers Customer attraction : organic cotton products draw in higher-income consumers who may not otherwise shop at Wal-Mart Reduced business risks : anticipates tightening environmental regulations of toxic chemicals, community and NGO opposition Improved reputation : Wal-Mart’s image is enhanced with employees, local communities, NGOs and other stakeholders Business context : First-mover advantage for Wal-Mart based on establishing loyal relationships with farmers and other players who hold the key to organic cotton as a scarce resource Business value created for Wal-Mart

Product differentiation : at the same color, style, quality and price, the organic cotton seal becomes a “plus one” for consumers

Customer attraction : organic cotton products draw in higher-income consumers who may not otherwise shop at Wal-Mart

Reduced business risks : anticipates tightening environmental regulations of toxic chemicals, community and NGO opposition

Improved reputation : Wal-Mart’s image is enhanced with employees, local communities, NGOs and other stakeholders

Business context : First-mover advantage for Wal-Mart based on establishing loyal relationships with farmers and other players who hold the key to organic cotton as a scarce resource

Sustainability key messages for managers Sustainability is about business strategy in a new competitive environment A “lens” through which line managers innovate along their extended supply chains Sustainability is not about trade-offs. Investments can have pay-backs of ≤1 year Moral responsibility remains the foundation but not the primary motivator for action Sustainability solutions require collaboration with key stakeholders Partnering with stakeholders can reduce opposition and bring new knowledge Effective stakeholder relationships must take into account perceptions & emotions Managers must accept that they cannot please all stakeholders all the time Sustainability solutions require new organizational competencies Skills include assessing and managing stakeholder impacts along supply chains Many companies lack the organizational capacity for listening and empathy Supporting activities include social marketing, sales training, government lobbying

Sustainability is about business strategy in a new competitive environment

A “lens” through which line managers innovate along their extended supply chains

Sustainability is not about trade-offs. Investments can have pay-backs of ≤1 year

Moral responsibility remains the foundation but not the primary motivator for action

Sustainability solutions require collaboration with key stakeholders

Partnering with stakeholders can reduce opposition and bring new knowledge

Effective stakeholder relationships must take into account perceptions & emotions

Managers must accept that they cannot please all stakeholders all the time

Sustainability solutions require new organizational competencies

Skills include assessing and managing stakeholder impacts along supply chains

Many companies lack the organizational capacity for listening and empathy

Supporting activities include social marketing, sales training, government lobbying

Contact Information Sustainable Value Partners, Inc. [email_address] www.SustainableValuePartners.com USA - (703) 759-2744

Sustainable Value Partners, Inc.

[email_address]

www.SustainableValuePartners.com

USA - (703) 759-2744