State of Sustainable Business


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State of Sustainable Business

  1. 1. State of Sustainable Business By Rona Fried, Ph.D. "There are several Microsofts waiting to come forth in the clean energy business, and we'll all wish we'd have invested in them in the late 1990s when they were still tiny." - John Palmisano, Enron Corporation Steel, often thought of as the symbol of the Industrial Revolution, now carries a recycling symbol. More than half the steel produced today is made from scrap. Paper mills are moving from the forest to the cities, as they hone in on the source of abundant feedstocks - scrap paper. In New Jersey, a state with little forest cover or iron ore, 13 paper mills run only on waste paper and eight steel mills manufacture steel largely from scrap. Why is this? Natural resources are increasingly scarce and thus more expensive; waste is plentiful and increasingly, abundant. The blueprint for how business is conducted is shifting from Industrial Age operating assumptions of "take, make and throw away" to fit the situation society faces today. It makes sense to use scare natural resources sparingly, and keep them circulating in the system. Society, in its instinctual desire to survive, is tightening the screws on companies that refuse to play by the new rules. The authors of Interface Inc.'s 1997 Sustainability Report say, "We believe institutions that continuously violate these [natural] principles will suffer economically. The walls of the funnel will continue to impose themselves in the form of environmentally concerned customers, stricter legislation, higher costs and fees for resources and waste, and tougher competition from companies who anticipate the narrowing limits and adjust accordingly." Companies, these days, find more freedom through adaptation and reinvention than by retaining the status quo, an indication that a profound transformation is underway. Leaders from many disciplines believe we are witnessing and participating in a societal transition on a scale comparable to the Agricultural and Industrial Revolutions - the Environmental Revolution . Societal Operating Assumptions Industrial Age Environmental Age Extractive Renewable Linear Cyclical Abusive Benign Wasteful No Waste Labor Productivity Resource Productivity Presented by Ray Anderson at the 1999 CERES conference
  2. 2. What Lies Behind this Societal Transformation? Ken Wilber, considered to be one of the great philosophers of our time, proposes that succeeding world orders transcend and include previous ones. The limiting factors of one Age cause its demise; it is subsumed by a world order that includes the best of the outgoing Age, but transcends it. The microscope of science allowed us to study nature down to its smallest parts and, during the Industrial Age, we discovered what the world is made of. This empirical investigation of nature resulted in wondrous inventions like plastic, televisions, and silicon chips. We have advanced tremendously through this period but the exclusive focus on the 'left-hand path' now causes more problems environmentally and socially than it solves. The worldview we are groping toward, according to Wilber, includes this 'left-hand path' and transcends it by integrating the equally important 'right-hand path' dimensions of subjectivity, quality, values and intuition. Wilber also believes that society is evolving by widening and deepening its focus from the small group or tribe to a global worldview. Individuals can appreciate our environmental and social crisis, he says, and "more important, possess the moral vision and fortitude to proceed on a global basis," only when we reach this global level of consciousness. When this happens, for the first time in evolution, "we will look through eyes that see a global world, a world that is de-centered from me and mine, a world that demands care and concern and compassion and conviction." How Do We Get There? A 1997 survey of Canadian and American executives conducted by the Society of Management Accountants of Canada asked business leaders why their company considered sustainable business practices important. The most important reason given, after compliance with legal requirements, was "because it's the right thing to do." In our global economy, many corporations post revenues and assets higher than the gross national product of many countries. Business is a more powerful institution than government. As global consciousness and social values come to the forefront, the private sector is increasingly called upon to go beyond compliance and participate in fundamental ways as leaders of society. The Industrial Age view that business' sole function is to produce products, services, and profit is less and less acceptable to society. Carl Frankel sees it this way: "A handful of powerful forward-thinking decision-makers and policy-formers can really make a difference. We are battling for the hearts and minds of 50 people. That's why people like Ray Anderson of Interface are really important." Anderson presented the "Amoeba Process of Progress" at the 1999 CERES conference, depicted in Figure 2. It shows that people approach change along a bell curve. There are small numbers of Early Movers, a great mass of Mainstreamers, and a small number of Resisters. Since the precepts of sustainable business grind against business-as-usual most people view it as "over there, on the other side." It seems laughably impossible to all but the Early Movers who can sense the potential. As this pioneering small group probes further and further into the waters of sustainability and prove it is indeed possible, and profitable, the Mainstreamers follow. When the great mass dives in the very
  3. 3. definition of what "mainstream" is changes to the "new sustainable mainstream". At this point, the few Resisters left are food for the regulators. Ghandi said, "First they ignore you, then they laugh at you, then they fight you, and then you win." Where is the business community at this juncture? In the 37 years since the publication of Silent Spring, the book that sparked the environmental movement, corporations have learned to accept "compliance" as business as usual. Many of the largest firms are well along the way toward reducing their footprint by embracing eco- efficiency. Of course, there are still many firms, especially small ones, who still view environmental concerns merely as a cost of doing business. But the number of firms that understand the transition to sustainability offers them a true business opportunity is on the rise. The argument of the 1980s, - that environment and economy are incompatible - is no longer the conversation. The "fight" seems to be over. What does "winning" mean? It means people capturing the vision that our lives will indeed be richer when we bring "values," the stuff that makes us human, into the picture. It means seeing the limitless business potential in re-ordering clean water, air, trees, animals, and people as the first priorities. Like a World's Fair visitor observing future trends with awe, it is exhilarating to watch an "oil company" re-invent itself as an "energy" company; a company that expands its markets and prosperity by providing clean, renewable energy. Or a company that can look beyond "making cars" to see itself as providing clean, efficient transportation. Such changes require courage and a sea- change in consciousness. As Bill McDonough says, the thrill is not in "getting to zero waste," but in unleashing creativity through a new vision of abundance. The list of corporate leaders with this vision is growing paving the way for others to follow. Most everyone in the field knows of Ray Anderson's epiphany and subsequent complete embrace of sustainability for Interface Inc. John Browne, CEO of British Petroleum, surprised the world when he announced a $1 billion investment in wind and solar energy, making it one of the world's largest manufacturers of solar equipment. BP Amoco is converting 200 service stations in 11 countries to run on solar power, making the company one of the world's largest users of solar power. Royal Dutch Shell is running quickly behind, committing $500 million to renewable energy, and exiting the Global Climate Coalition. Shell aims to capture 20 percent of the international commercial market for rural solar electricity systems, worth an estimated $1.1 billion, over the next five years. The heads of two natural gas firms, Ken Lay of Enron, and George Verberg, of Gasunie in the Netherlands, see the natural gas industry as a bridge from the fossil-fuel-based energy economy to a renewable-fuel energy economy; the natural gas infrastructure can be used to carry hydrogen instead of gas. Enron purchased Zond, a wind company, and is a major investor in Kafus Environmental Industries. In fact, Early Movers are stepping forward in every industry sector. HOK, stands out in architecture and design, Herman Miller in office furniture, Scandic in the hospitality industry, IKEA in retail, Xerox in office equipment, Philips in Electronics, to name a few. Universities worldwide are streamlining operations and insisting on environmental construction of new buildings. Leading business schools such as Kellogg, University of Michigan, and Kenan-Flagler are integrating sustainability issues into the core curriculum. In addition to eco-efficiency efforts in internal operations, the sustainable sector of most industries is where the action is. All that is lacking is a commitment from more of the
  4. 4. largest corporate players to turn the economy around. Agriculture/Natural Food Products Although it still represents less than two percent of total food sales, the U.S. organic industry has been growing at 24 percent annually for the past 6 years. It is expected to jump from its current level of $4.2 billion to $6.6 billion by 2000. Organic farmers receive premium prices for their products and are expanding their acreage while conventional farmers tied to the chemical/pesticide cycle have been hanging by a thread for years. Similarly, traditional supermarkets grow by only 2-3 percent per year and operate on slim margins. The European organic food market, also at less than 2 percent of total food sales, is expected to expand to as much as 10 percent by 2006. With a population of 370 million, Europe has more potential than the U.S. The UK imports 70 percent of its food, and Germany - the largest organic food market there at $1.6 billion and growing at 30-40 percent annually - imports 50 percent. The Japanese market is similar to Germany's and will grow to $2.6 billion by 2000. Canada is also experiencing great demand for organic products. Design & Construction Thousands of green building pilot projects worldwide shows that sustainable design principles and environmental building materials work. Now these principles are being integrated into government policy. In the U.S., the GSA, DoD, U.S. Navy and Army, USPS among other agencies, are crafting contractor guidelines to ensure the billions of construction dollars they spend each year are deployed sustainably. The Naval Facilities Engineering Command's Whole Building Guide, for example, defines sustainability, details the principles involved, and lists 14 criteria to use when evaluating architectural and engineering firms, including energy-efficient design, life-cycle analysis, and indoor air quality. The world's first green post office opened in late 1998 in Ft. Worth, Texas, made entirely with recycled-content materials and energy efficient systems. With more than 35,000 facilities nationwide, and about 700 new facilities constructed each year, sustainable design is now policy at USPS. The concept is spreading to all levels of government around the U.S. and New York is the first state to propose Green Buildings Tax Credit legislation. The 48-story 4 Times Square building is the first skyscraper to incorporate sustainable design principles. The companies behind the project are majors in the industry - The Durst Organization, developers, Fox & Fowle Architects, and Tishman Construction Corporation. Conde Nast Publications and Skadden Arps law firm contracted for 75 percent of the building's space before the shovel hit the ground. Over 750 buildings participate in the U.S. EPA's Energy Star Buildings Program including such notables as The World Trade Center, Empire State Building, Sears Tower, the Transamerica Pyramid, Time Life Building, and Mc-Graw-Hill Building. To qualify, a commercial building must be in the top 25 percent of comparable buildings for energy efficiency.
  5. 5. Then there are energy efficiency products such as high performance windows, passive solar design tools, solar water heating systems, transparent insulation, daylighting and building-integrated PV systems that offer avenues for growth. Research in France shows that simply using energy efficient windows with advanced glazing systems reduces annual energy needs by 45 percent in southern regions of the country. Environmental Taxes Even the intransigent tax system is showing signs of change. Public opinion polls on both sides of the Atlantic show 70 percent of the public support tax shifting away from income and toward environmentally destructive activities. The European Union has begun to offset income tax cuts with taxes on activities such as fossil fuel emissions, waste generation, and pesticides. A Japanese Transport Ministry advisory committee is looking at car taxes based on fuel efficiency. In the UK, a proposed tax on energy use in the business, agriculture, and the public sectors would be returned as a 0.5 percent reduction in the employer's contribution to payroll taxes, and for energy efficiency and renewable energy programs. A surcharge would be applied for use of coal and gas, and for total energy consumption. Company cars would be taxed according to vehicle's carbon dioxide emissions. Other measures are being introduced to promote non-car commuting, such as a tax-free bicycling allowance for employee business travel. France, the world's second largest consumer of agrochemicals, is considering taxes on pesticides and fertilizers. Revenues would be used to fund pesticide and fertilizer reduction programs. Transportation Even as Americans are buying SUVs in droves, the automobile industry is spending billions to bring alternative fuel vehicles to market. In the U.S., Zero Emission Vehicle (ZEV) regulations become law in 2003 - a minimum of 10 percent (160,000) of new vehicles in California, New York and Massachusetts must produce zero emissions or earn ZEV credits from greatly increasing the proportion of ultra low emission or hybrid- vehicles on the road. Alternative fuel fleet requirements already affect 90 percent of utility vehicle purchases, and 25-75 percent of local, state and federal government purchases. Daimler-Chrysler announced plans to produce 100,000 fuel cell cars by 2005. GM and Toyota, among major car manufacturers, are forming partnerships to quickly commercialize renewable fuel vehicles. Auto executive surveys suggest that five to ten percent of the global vehicle market will use alternative fuel by 2010, and the fuel cell market may reach several billion dollars annually by that time. Energy By the end of 1999, almost a quarter of U.S. citizens will be able to purchase "green power." People are signing up in record numbers for renewable electricity blends offered by early mover companies like Green Mountain Inc. Eight states have instated 'portfolio energy standards' that require suppliers to use a minimum percentage of renewable energy and disclose their energy sources to customers. In less than a year, 100,000 customers in both Pennsylvania and California have opted for clean energy and power marketers are already shifting their strategy from selling the cheapest electricity to the greenest blend possible. Commonwealth Energy Corporation,
  6. 6. California's largest supplier and one of its cheapest energy providers, is converting its 38,000 residential and small business customers to its GreenSmart program using local, renewable energy sources. Unlike most green power programs, which require people to pay a premium, Commonwealth will provide green energy at a discounted rate. Patagonia, Toyota, the City of Santa Monica, New Belgium Brewing and about nine churches are fueling the green power bandwagon, enabling the installation of new solar, wind, geothermal, biomass and landfill gas capacity. 20 years from now, the Energy Information Administration predicts renewable energy will account for 10 percent of energy use in the U.S.[1] Coal and oil use creeps along increasing at about 1 percent annually, while solar cell sales expand by 15 percent per year, jumping 40 percent in 1997. Solar shingles, a new development, integrate solar cells into a building's roof and have the potential to revolutionize electricity generation worldwide. Wind energy, racking up 26 percent annual increases over the last eight years, now competes with fossil fuel prices. Experts predict it will be cheaper than fossil fuel within 10 years thanks to lower turbine prices, higher efficiency and availability. The U.S. Department of Energy's Wind Resource Inventory shows that North Dakota, South Dakota, and Texas alone can meet U.S. electricity needs with wind energy. Hundreds of new high-tech windmills dot the Midwest landscape, dubbed the Saudia Arabia of wind. Meanwhile, EU country wind investments are growing even more rapidly at 40 percent annually in Germany, Denmark, Spain, and UK. EU power sector emissions can be reduced by over 11 percent by 2040 using wind power. Costa Rica is committed to generating 100 percent of its electricity from renewable sources by 2010. Denmark no longer allows new coal power plant construction. Forest Products In only two years since the first forest certification body was accredited, more than 10 million hectares of forest are certified to meet the Forest Stewardship Council's (FSC) criteria, equal to 115 forests in 25 countries. The World Wildlife Fund's new target is for 25 million hectares to be certified by 2001. In the U.S., the certifier Scientific Certification Systems reports that requests for chain-of-custody certification have tripled in the last year. Two years ago, according to Debbie Hammel, program director, there was more supply than demand for certified products. "Now the situation is reversed and demand is easily outstripping supply." Due to deforestation and protection efforts, the area available for timber production is shrinking. China banned timber production in its forests in 1998 acknowledging that deforestation greatly exacerbated its recent record-breaking floods. The country is employing some state timber firms for tree-planting instead. Beijing's official stand is that standing trees are worth three times more than cut trees, because of the water storage and flood retention services forests provide. Many countries, including Brazil, Cambodia, U.S., New Zealand, Sri Lanka and Thailand, banned or imposed strict logging restrictions in primary forests during the last year. PricewaterhouseCoopers, an accounting firm, predicts after-tax losses of C$1 billion (US $1.5 billion) for the British Columbia forestry industry. Their advice to the industry is to implement sustainable certification or lose markets. As a result of an intensive
  7. 7. Greenpeace campaign, MacMillan Bloedel, the largest British Columbia timber company, agreed to cease clear-cutting and apply for certification, and withdrew from the BC forest industry association. Home Depot, the largest purchaser of forest products, is under similar pressure to redirect its purchases to sustainable harvested timber. Svetogorsk, a major pulp and paper mill in Russia, is completely phasing out ancient forest wood in its production. Meyer International, the UK's largest timber trader pledged that 80 percent of its timber would be FSC-certified within five years. Meyer sources timber from 40 countries. According to Amanda Burton of Meyer, the firm has "always kept a close eye on the development of certification and now, as FSC is entering the mainstream we can see it presents an exciting commercial opportunity." 27 large U.S. corporations, accounting for over one billion dollars of the annual U.S. market for paper, pulp, and packaging have made a commitment to stop selling products or use packaging made from old-growth trees, and to influence their suppliers to do the same. They also committed to reduce overall wood-related product consumption and to increase use of recycled and tree-free alternatives (See Figure 3). To meet this demand there are over 3000 products fashioned from certified wood available. Companies Committed to Sustainable Forestry Products 3M Corporation Advanced Micro Devices Inc. Bristol Myers Squibb Dell Computer Corp. Estee Lauder Hallmark Card Hewlett-Packard IBM Corporation Johnson & Johnson Kinko's, Inc. Levi Strauss & Co. Liz Claiborne Lockheed Martin McGraw Hill Mitsubishi Electric of America Mitsubishi Motors Sales Mutual of Omaha Insurance Mother Jones Magazine Co. National Geographic Magazine NIKE, Inc. Pacific Gas & Electric Patagonia Quantum Corporation Seventh Generation Starbucks Coffee Company United Stationers Supply Utne Reader Capital Markets
  8. 8. Influencing the financial community's investment, lending, and insurance decisions is a relatively new focus for sustainability efforts. Private groups, rather than world governments are behind much of international development, especially as the World Bank and similar groups increasingly partner with private banks. Between 1990-1996, capital from private institutions to developing countries increased from 44 - 86 percent, according to the World Bank. Banking industry leaders increasingly perform environmental due diligence in decisions to extend credit lines, finance projects or equipment. Over half the respondents to a recent National Wildlife Federation world banking survey expect to intensify this focus over the next three years (three-quarters of European banks). In the future, "eco-rating" systems or screens may well be applied to equity investments. While virtually no one targeted the environmental industry for investment two years ago, two thirds of respondents now direct some credit or investment in the industry; some institutions have environmental business units. Nearly every responding institution expects to increase this activity over the next three years.[2] BankAmerica's Corporate Environmental Report portends future bank policy. In it, the bank discusses its credit policy and how environmental issues affect its decisions regarding specific transactions such as its controversial bond issue for the Three Gorges Dam in China. Socially screened mutual funds are an established investing sector and are offered by many fund managers from Dreyfus to Smith Barney. Rather than screening out companies social investors want to avoid the emphasis is shifting toward a more proactive approach - investing in environmental and social leading companies. A recent flurry of quantitative studies demonstrates that beyond compliance corporate environmental investments increase financial performance and thus, shareholder value. [3] Firms, which implement systemic measures - such as organizational change initiatives and product redesign - show the most benefit. Ecos Consulting Group surveyed the environmental performance of the top 150 companies on the Australian Stock Exchange. A "best of sector" portfolio of environmental leaders out-performed the Australian All Ordinaries Index by four percent from 1992 - 1998. Comparisons have been made for U.S. and Canadian companies, with similar results. Mutual funds are emerging to tap into the enhanced performance: Triodos Bank launched a fund in the UK and the Netherlands which invests in wind energy projects; the Storebrand-Scudder Environmental Value Fund, SBC Eco Performance Portfolio, and Swedbank's Environmental Fund invest in companies based on eco-efficiency assessments and have shown dramatic performance gains over their counterparts. Innovest Strategic Value Advisors, a New York- and Toronto-based environmental rating agency for the financial and investment communities says reason environmental indicators work is that "environmental performance can invariably be used as a strong, empirically demonstrable proxy for the quality of corporate management, which, in turn, is a primary determinate of relative financial performance." Innovest's eco-efficiency rating tool, EcoValue 21, uses more than 60 company- and industry-specific criteria to link eco-efficiency with profitability.
  9. 9. Corporate Environmental Reports Financial reporting was unreliable until the Securities and Exchange Commission required a standard format. 10 years from now, corporate environmental reporting may be accepted much in the same way. The debate has shifted from whether companies should produce corporate environmental reports to what kinds of information should be released and in which format. A growing list of stakeholders, each framing questions from their unique perspective - customers, governments, NGOs, communities, and the financial/investment sector - demand sustainable performance information. This presents a significant reporting burden for a company, especially if it has global operations. Without a standard reporting format performance across companies cannot be compared. Several European countries, including Denmark and the Netherlands, have adopted, or are in the process of adopting, laws that require companies over a certain size to publish environmental reports. The Netherlands, for example, is developing an Energy Efficiency covenant with energy-intensive companies. If a company can demonstrate superior performance for their industry sector through international benchmarking they avoid additional energy efficiency requirements. [4] To meet the need for standard, reliable information, leading companies around the world are participating in the Global Reporting Initiative, the goal of which is to develop generally accepted "sustainability" disclosure guidelines. Environmental guidelines will be cemented first, to be closely followed by social guidelines. Draft guidelines have been issued and will be tested by 20 multinational companies. The guidelines will have multiple positive effects: • Companies will be able to produce one report for all stakeholders around the world. • By conforming to a format all stakeholders agree on, the information will be much more usable and valuable. • Governments can track progress on implementing national commitments to international conventions, such as the Kyoto Protocol. • Corporate leaders will be able to tangibly distinguish themselves from under- performing competitors. • Companies will have a useful system to track performance internally. • Investors will be able to analyze corporate environmental performance. Where Companies Are on the Sustainability Path Two recent surveys of corporate executives, one by Business for Social Responsibility (BSR) and another by Arthur D. Little (ADL), provide a snapshot of the status of corporate environmental activities. [5] Sustainable development, according to the ADL survey, "refers to the global push for companies to build their long-term business strategies around three interconnected goals: economic growth, environmental excellence, and social responsibility." Executives in both surveys revealed they realize the value of sustainability initiatives; 83 percent of respondents to the ADL survey agreed that "companies can develop real
  10. 10. business value and economic growth from sustainable development initiatives." Although most companies use the term "sustainability" to describe their efforts, activities currently center on environmental rather than social issues, and continue to focus on eco- efficiency efforts such as energy efficiency, pollution prevention, and environmental audits. Companies are extending their reach throughout their supply chain and customer chain. About 13 percent of American companies, and 22 percent of European companies polled in the ADL survey are well along the road in implementing advanced sustainability concepts like design-for-environment, closed-loop manufacturing systems, and full-cost accounting. A very promising development noted in the BSR survey is a new attitude of openness and willingness to collaborate between companies and stakeholders. Unlikely partnerships are springing up between former adversaries as they see the need to work together as stakeholders with common concerns. In Conclusion The corporate world is on the path to sustainability. As it learns to integrate eco- efficiency measures into core operations and philosophy, it sets the stage for dramatically reducing the quantity of materials used in production, product take-back and reuse, and the dematerialization of products, the next steps in the Environmental Revolution. Financial and policy market incentives are emerging as drivers toward that end. Today, companies are assimilating and experimenting with the new guidelines, reflected in the "2-faces" of corporate behavior. BP enters the solar market on the one hand, and pressures the U.S. Congress to open the Arctic National Wildlife Refuge to oil drilling on the other. The new Alliance of Automobile Manufacturers with Ford at the helm, forms to lobby against on safety and environmental issues, while they promote clean vehicles. As corporations experience success in burgeoning environmental markets and engage further and further in sustainable practices their behavior will be more consistent. In the coming century, the transition to sustainability will change the types of businesses that exist and the products they produce. The way we structure and manage our economy will be fundamentally different. Sustainability is, in commercial terms, a business driver of immense significance. Rona Fried, Ph.D., is president of Sustainable, the center for environment and business on the Internet. Contact her: Footnotes. 1. "Hydroelectricity and Other Renewable Resources": 2. "Environmental Policies & Practices of the Financial Services Industry: A Global Survey on the Private Sector," NWF Finance & Environment Program, 1997. 3. Reed, Donald, "Green Shareholder Value, Hype or Hit?" World Resources Institute, September 1998. Descano, Linda & Gentry, Bradford, "Communicating Environmental Performance to the Capital Markets," Corporate Environmental Strategy: The Journal of Environmental Leadership, Spring 1998. Russo, Michael & Fouts, Paul, "A Resource-Based Perspective on Corporate Environmental Performance & Profitability," Academy of Management Journal, 40(3), 1997.
  11. 11. "Uncovering Value: Integrating Environmental and Financial Performance," Aspen Institute, 1999. Feldman, S., Soyka, P, Ameer, P., "Does Improving a Firm's Environmental Management System & Environmental Performance Result in a Higher Stock Price?" ICF Kaiser International, November, 1996. Porter, M., "Green and Competitive", Harvard Business Review, September-October, 1995. 120-34. 4. Energy Efficiency Benchmarking covenant, Dutch Ministry of Housing, Spatial Planning and the Environment, November 1998. 5. "Sustainable Development and Business Survey," Arthur D. Little, 1998. "Moving Toward Sustainability: A View of Leadership Company Practices and Stakeholder Expectations," Business for Social Responsibility Education Fund, 1998. "The twenty-first century will be anything but 'business as usual' and the institutions that are able to balance the need to make a profit with the ability to honor the souls of those who work for them will emerge as corporate America's strongest leaders." David Whyte, The Heart Aroused