and its impact on
brand value
Interbrand | Pg. 2

Sustainability and its impact on
brand value

by Paula Oliveira and Andrea Sullivan

One of the...
Sustainability and its impact on brand value                                                                              ...
Sustainability and its impact on brand value                                                                              ...
Paula Oliveira                            Andrea Sullivan

Paula Oliveira has managed brands and     Andrea Sullivan is In...
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Sustainability and its impact on brand value


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Sustainability and its impact on brand value

  1. 1. Sustainability and its impact on brand value
  2. 2. Interbrand | Pg. 2 Sustainability and its impact on brand value by Paula Oliveira and Andrea Sullivan One of the latest buzz words found in companies’ brand value, but guarantee a long Generating demand for products management journals, websites, and corporate life for the business. and services documents is “sustainability.” Some people even A study from Carbon Trust, a UK‑based want to recognize it in a company’s balance Relationship between sustainability consultancy that helps businesses to reduce sheet as an asset. Okay, let’s not go that far. and brand value their carbon emissions, shows that social and Although it’s hard to find consistency among environmental concerns can result in changes It is undeniable that sustainability is a new definitions of sustainability it is common in consumer behavior. Among several factors way of doing business, in the same way sense that it incorporates companies’ that provoke this shift are “issues of immediate “re‑engineering” or “just in time” were in the relationships with the natural environment, personal impact” and “realistic available choices.” late 1980s. Sustainability is not an asset that social causes, and corporate governance. That’s where brands can make a difference. can be bought or sold, rather it’s becoming an In boardrooms, this translates to the “triple integral part of many a company’s philosophy. bottom line,” i.e., a company’s initiatives Let’s take a sector for which sustainability is a big Just as company management practices must consider environmental, social, and issue: automotive. Companies such as Honda influence business value, so do sustainability financial impacts. Yes, financial impacts. That recognized that mineral fuels are limited and initiatives. Therefore, the question is: How does means companies must make investment prices of petroleum are rising. This motivated it create value? decisions that will benefit the environment it to adapt its product range to fuel‑efficient and society, and guarantee the sustainability cars. Honda was one of the first movers in this Moral motivations to invest in sustainability of the project itself. We are not talking about direction and this is paying dividends today. It are not in dispute: climate change, poverty, you charitable causes – but ethical products and was the only car manufacturer to report better name it. But what companies don’t know yet services that will change consumers’ behavior US sales in June 2008 than in June 2007, credited is what level of investment they should make and help them to live a more “sustainable” life. to fuel‑efficient Civics and Fits. While reducing and what is the measurable benefit of investing. dependence of gas‑guzzling cars and increasing When the benefit is not clear enough to justify Brands enter the debate right about here. the number of fuel efficient models became a investments on economical grounds, managers A leading brand translates to customers “must do” in the automotive sector, Honda was easily turn to initiatives that guarantee short‑ what is relevant in today’s world, influencing first to differentiate and is ahead of the debate. term results and everyone’s jobs, especially with buying behavior. It also develops a strong This leading behavior contributed to an increase of recession knocking on the door. relationship with customers because of 28 percent in Honda’s brand value since 2004. its distinct offerings, leading to repeated The same can be said about GE, which saw an There are some direct benefits, such as: purchasing. In other words, a brand creates increase in its brand value by more than compliance with an increasingly rigorous value in two ways: generating demand, and US$ six billion since 2005, when Ecomagination legislation; cost savings derived from reducing risk and securing future earnings for was launched by then‑CEO, Jeffrey Immelt. optimization of production lines and supply the business. A sustainability program that Among other goals, the program intended to chains to reduce energy consumption; is consistent with a brand’s positioning will increase spending on clean technologies, reduce reduction in CO2 emissions; desire for more create value for companies by creating more greenhouse gas emissions, and generate US$ 20 ethical products; and simply satisfying an value for its brands. billion in revenue from green products, including emerging and cynical green consumer. But jet engines, locomotives, and wind turbines. most importantly, incorporating sustainability This created a halo effect around other offers, as a business practice will not only increase
  3. 3. Sustainability and its impact on brand value Interbrand | Pg. 3 improving perceptions about the company water heating. They are also beneficial for P&G, from traditional fuels. It also requires a clear, and making it top of mind in sustainability through revenues and positive opinion about hard, baseline of where your firm is today; and surveys. It moved ahead of competitors, such both brands. P&G made sustainability relevant in commitment from the top in the CEO’s agenda, as Siemens and Phillips, which also have strong an unexploited category and is now influencing backed with investment dollars that won’t get commitments to such initiatives. But GE led consumer behavior – not only toward its brands, cut off in six or twelve months if earnings slip.” the debate and it is collecting the laurels – in but toward a new and more “sustainable” way of the form of dividends – today. washing clothes. P&G has similar initiatives in For sectors such as energy and mining other product lines to save energy and replace (Figure 2A), there is a massive impact on the P&G is another example, but in a different chemicals with more suitable alternatives. environment and communities. As such, investments in sustainable initiatives are a Honda and GE play in sectors “must do.” But there is also an opportunity for in which sustainability is differentiation. The same applies for automotive The first step in developing already a concern. Through and diversified sectors. If the brand is perceived portfolio management and as differentiated, but sustainability is not a “sustainable” strategy is innovation, they are now relevant to the sector yet (Figure 2C and 2D), ahead of the sustainability there is an opportunity to develop innovative to identify the relevance of debate and are influencing products and services that will raise awareness demand for their products and relevance of sustainability for the category the issue for the sector. and services. P&G went even (like P&G). The prize is not only leading the further, raising awareness category, but positively influencing of sustainability issues consumer behavior. in a category apparently way. A few years ago, sustainability was not unrelated. See Figure 1. For brands that are not differentiated, and do a relevant issue in the washing powder or not play in sectors in which sustainability is detergent category. Through investments in These examples suggest that the first step in relevant (Figure 2C), there is an enormous risk R&D, P&G developed Tide Coldwater, which developing a “sustainable” strategy is to identify of greenwashing, i.e., trying to differentiate does not require hot water for usage and, the relevance of the issue for the sector and through communication but not investing in as it is more concentrated, allows reduced how differentiated the brand is regarding sustainable development. A study published by packaging materials. Another example, also sustainability issues. See Figure 2. TerraChoice, an environmental marketing firm, from P&G, is Ariel’s “Turn to 30O “ campaign. Ann Hand, former SVP, Global Brand & showed that 99 percent of 1,018 consumer The campaign suggests consumers turn water Innovation at BP adds, “Brands need to have a products surveyed were guilty of greenwashing. temperature in washing machines from 40O point of view on the elements of sustainability These companies risk not only their reputation, to 30O when using Ariel with the same results that are relevant to their brand… they can’t solve but also future earnings for the business. guaranteed. These developments are beneficial it all. For BP it’s about a lower carbon world: for the customer, who can save energy from alternative energy sources and lower emissions
  4. 4. Sustainability and its impact on brand value Interbrand | Pg. 4 Reducing risk and securing future the country. After all, how would Coca‑Cola Brands have the power to earnings for the business produce soft drinks without water? This and change the world Brands create value by generating demand other initiatives positively influenced the Sustainability is not a fad – it’s a new way and securing future earnings for the company’s share value at the end of 2007 and of doing business. We can determine the business. So how can investments in its brand value increased by two percent in influence this business practice has on the sustainability influence those future 2008. overall business and brands, but there is no earnings and brand value? standard solution. Companies need to assess The same applies to oil and mining groups, the relevance of sustainable issues to their A company’s value is today’s value of the both heavy users of natural resources. BP business, as well as current perceptions about earnings it will potentially generate in the had been increasing its brand value since their brands on this matter, the potential future. It’s a function of the magnitude of those 1999 mainly due to its large investments upsides of investing in sustainability projects, earnings and the risk associated with them. in safety and renewable energy. However, and the reputational risk of not doing so. Therefore, sustainability is strongly related its reputation suffered after an accident at Brand value is a way to summarize all of this. to value: the more a company proves to the a Texas City refinery in 2005, with shares financial markets and other audiences that it is dropping almost 10 percent in a month. The Most leading companies already understand a sustainable business, the lower company’s reputation has recovered, but of how sustainability issues can affect their the risk associated with that company the incident demonstrated the strong businesses. The challenge is to embed a (and the lower the rate used to discount future correlation between sustainable actions real sustainable behavior in everything a earnings). and value creation. company does; not only to attract new customers, but to help define future behavior Similarly, brand value is today’s value of the This correlation is also seen in the Best Global and shape the market. In other words, to be earnings a particular brand will generate in the Brands 2008 ranking. Financial services a leader. “The transformational challenge future. Brand risk is a function of company’s risk, institutions included in the 2007 and 2008 is to make “green” a part of the DNA of the adjusted by the strength of particular brands. studies lost a total of US $10 billion in brand enterprise, just the way companies had to This depends on many factors including the value. This reflects not only the financial make globalization and digital technology a investments it receives (quantity and quality), impact from the US credit crunch but also part of nearly every business consideration,” brand image (brand’s perceived personality the reputational damage caused by breach says Andrew L. Shapiro, founder and CEO and reputation) and customer franchise of trust between these companies and the of GreenOrder, a business strategy and (relationship with customers). investment community. management consulting firm that specializes in the field. Coca‑Cola is the most valuable brand in “The changing landscape of liability,” a report the world. It consistently invests in its published by the consultancy SustainAbility, Brands can be the engine towards a more main brand and develops an emotional suggests a rapid convergence between sustainable world. They should be ahead of connection with consumers. So why did its companies’ risk management and sustainable the market and create products and services brand value decline US$ 5.1 billion between development programs, as technical that will be relevant to consumers while, 2003 and 2007? compliance “may no longer be an adequate at the same time, helping them to live in a defense against social and environment more sustainable manner. This will create a Coca‑Cola’s decline is due to the fact that activists in the court of public opinion and positive influence on the environment and it is seen as one of the bad guys by many even in the courts of law.” This leads to a much communities, as well as generate dividends organizations. Increasing health concerns have more rigorous approach to risk assessment to shareholders through growing demand. been affecting brand earnings in developed or, at best, an opportunity to develop winning A sustainable brand will also enhance a markets, despite its light, diet and zero strategies from multiple stakeholders’ points company’s reputation and secure future versions. Also, its image and reputation have of view – an opportunity that can help secure earnings through stakeholder loyalty and been inconsistent around the world. On the future earnings and the sustainability of the advocacy, thus increasing brand value. upside, Coca‑Cola has been investing in many business in the long term. initiatives, such as campaigns to improve As the saying goes, “today’s best practice is the community access to safe drinking water and best practice of tomorrow.” Hopefully, today’s adequate sanitation in India. successful sustainability strategies will soon Is this only a form of CSR to boost the become standard, promoting company’s reputation after protests were held long‑term benefits for businesses and in the area? No. Investment in water supply generations to come. ■ in India is not only relevant to the population, but also to the sustainability of the business in
  5. 5. Paula Oliveira Andrea Sullivan Paula Oliveira has managed brands and Andrea Sullivan is Interbrand’s Executive worked with clients across a wide range Director of Client Services in New York. of geographies. As Interbrand’s Senior Among her many contributions to Consultant in London, Paula is a key the business, Andrea looks after client component of the Brand Valuation team, relationships and ensures that programs are and has helped many clients understand managed efficiently and deliver the value potential of their brands. long‑term value. Creating and managing brand value TM