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Directions 10

  1. 1. OTHER FEATURES INCLUDE: GS Sustain on ‘Crossing the Rubicon’ The sustainability year – winners, losers and highlights ING’s Third Industrial Revolution Palm oil – myths, facts and some scary research Directions 10 The Innovation Edition INSIDE: Lord Nicholas Stern explains that if we want to keep growing, we need to keep innovating
  2. 2. CONTENTS 04 FEATUREINTERvIEw Andrew Howard of GS SUSTAIN on how companies are ‘Crossing the Rubicon’ 02 AYEARINREvIEw From ‘Climategate’ to the BP disaster we review the highlights of the year 16 CITIES Arup showcase the latest innovations shaping sustainable cities of the future and Nathan Schock from POET explains how biotechnology is set to revolutionise our society 24 COmPANIES ING set the scene for the Third Industrial Revolution and salterbaxter search for the true leaders in sustainability innovation 48 PRODUCTS we explore the latest palm oil scandal and its impact on global brands 36 PEOPLE Peter Graf talks about his role as SAP’s Chief Sustainability Officer and our panel of international practitioners tell us what’s on their mind for 2011 10 COUNTRIES Lord Nicholas Stern describes the global challenge of delivering low carbon growth
  3. 3. salterbaxter  DIRECTIONS 2010  1 editor’sletter Directions 10 welcome to the tenth edition of directions We’ve come a long way from the early days of analysing the trends in what was then called CSR. NIGELSALTER Director, salterbaxter KARENDeignan Sustainability Consultant, salterbaxter Our scope is now international and the sustainability agenda is now arguably one of the key concerns of the CEOs of the world’s biggest companies. It’s one of the few agendas that cuts across entire organisations, covering strategy, competitive positioning, investor relations, product development, brand, reporting, health and safety, employees, and impacting just about every stakeholder group. No wonder this is now a competitive battleground. And it’s a battleground where innovation and sustainability are joined at the hip and where clear leaders are starting to emerge. This edition looks at innovation and leadership in all its layers – countries, cities, corporations, finance, infrastructure, people, products and communications. Amongst other things we hear how GS Sustain believe we have passed a tipping point and that the investment community is now beginning to understand the scale of the importance of sustainability. Lord Stern provides an insight into the challenges of achieving low-carbon growth. We also feature opinion and analysis on sustainable cities, the ING Equity Research team’s prediction of a ‘Third Industrial Revolution’, and the view on the big issues from sustainability practitioners around the world. And then we have our own pieces of research in which we expose some of the startling truths behind the latest corporate palm oil scandal and reveal which global companies are the true innovation leaders. The tenth edition of Directions is harder-hitting, bringing a broader perspective, and with more key players’ views than ever before. It’s also online at www.salterbaxter.com where you’ll find additional features and interactive content. We think it’s the best edition ever – we hope you agree. Nigel and the Sustainability team
  4. 4. 2  DIreCtIONs 2010  salterbaxter © world Economic Forum © US Geological Survey AYEARINREvIEw NOvember 2009 CLImATEGATE SCANDAL Emails from climate change scientists at the University of East Anglia (UEA) that questioned some of the scientific claims about man-made climate change were leaked to the press causing a media storm. The UEA scientists had been influential in driving worldwide awareness of global warming and were involved in the UN’s Intergovernmental Panel on Climate Change (IPCC). The damaging emails kick started what was to be a difficult year for the reputation of climate scientists and for the IPCC. OCtOber 2009 GEORGE SOROS PLEDGES $1BN TO SEARCH FOR CLEAN ENERGY The billionaire financier announced that he would invest $1bn in clean energy technology to tackle climate change. Soros will also spend $10m annually funding a new Climate Policy Initiative, focused on the efficacy and implementation of policy. jaNuary 2010 BRIC NATIONS COmmIT TO vOLUNTARY EmISSIONS CUTS During talks in New Delhi, India, China, Brazil, and South Africa each agreed to formally submit their own voluntary carbon emission control plans to the United Nations by January 31. marCh 2010 OIL COmPANY FUNDS CLImATE SCEPTICS Greenpeace accused US oil company Koch Industries of donating $73m to fund research by ‘climate sceptic’ groups, with the aim of spreading ‘inaccurate and misleading information’ about climate change. DeCember 2009 COP 15 CLImATE CHANGE CONFERENCE IN COPENHAGEN Global leaders came together to try to agree a global deal on climate change that would replace the Kyoto protocol. The talks were generally brandedafailure, asagreement could not be reached between participating nations on appropriate binding emissions targets. DeCember 2009 GOOGLE UNvEILS BREAKTHROUGH TECHNOLOGY TO mONITOR DEFORESTATION monitoring the destruction of the world’s forests should become easier with Google’s new software which can process satellite images and extract scientific and tracking information about how much forests have changed over time. february 2010 LABELLING FOR GREEN POwER TARIFFS Britain launched a scheme to certify and label electricity produced from renewable sources to help consumers choose tariffs that support suppliers who are going beyond legal obligations to cut carbon.
  5. 5. salterbaxter  DIreCtIONs 2010   3 aprIl 2010 BP DEEPwATER HORIzON The explosion and fire on the BP-licensed Transocean drilling rig, Deepwater Horizon, in the Gulf of mexico caused the death of 11 people and serious injuries to another 17. Fishermen and environmentalists looked on in horror as millions of gallons of crude oil poured into the ocean, devastating marine life. Two days later the rig sank resulting in a five-mile-long oil slick. As BP boss Tony Hayward faced a media furore and a tough Congress hearing over the summer, President Obama compared the catastrophe to 9/11. aprIl 2010 GREENPEACE LAUNCHES vIRAL CAmPAIGN AGAINST NESTLÉ BRAND Based on a spoof Kit Kat advert, the Greenpeace campaign forced Nestlé to withdraw from its contract with palm oil supplier Sinar mas, who Greenpeace accused of unethicalpracticesaroundpalm oil. In may, Nestlé announced a partnership with The Forest Trust to independently verify their palm oil supply chain. juNe 2010 BARCOO APP LAUNCHED FOR ETHICAL SHOPPING An app, launched in Germany, is designed to help shoppers access ethical information on products while they are shopping. Its take-up will be an interesting indicator of how engaged consumers are in this area. It is due in the UK later in 2010. july 2010 FIRST SOLAR POwERED FLIGHT The solar powered plane ‘Solar Impulse’ completed its first overnight flight, flying a total of 26 hours and 9 minutes. It was the longest and highest flight in the history of solar aviation. The next milestone will be crossing the Atlantic. september 2010 BJØRN LOmBORG CHANGES HIS mIND The world’s most high-profile climate change sceptic, Bjørn Lomborg, declared that global warming “is undoubtedly one of the chief concerns facing the world today”. In an apparent U-turn he called for tens of billions of dollars a year to be invested in tackling climate change. may 2010 US CLImATE BILL UNvEILED US Senators John Kerry and Joe Lieberman unveiled a new climate bill, which proposes a ‘cap and trade’ system for reducing US carbon emissions. The third author, Senator Graham Lindsey, pulled out of the launch ceremony at the last minute, saying the BP oil spill and plans for immigration reform meant this was not the time to be pushing forward a climate bill. The bill stalled in the Senate with commentators proclaiming that ‘cap and trade’ legislation ‘appears to be dead in this Congress’. august 2010 CATASTROPHIC FLOODS IN PAKISTAN As with the heat wave in Russia in July, the disastrous floods in Pakistan, in which 1,500 died and 20 million people were affected, were deemed to be a direct result of climate change. © Nissan august 2010 NISSAN UNvEILS ITS NEw ELECTRIC CAR The Nissan LEAF was unveiled as ‘the world’s first affordable, zero-emission car’. A medium-size hatchback, it has a range of more than 160km (100 miles). july 2010 SUSTAINABILITY INDEx FOR HONG KONG AND CHINA Hang Seng Indexes launched a series of sustainability indices, covering Hong Kong and Chinese companies. The index series aims to raise awareness about corporate sustainability and meet international demand for socially responsible investment in Chinese companies.
  6. 6. 4  DIRECTIONS 2010  salterbaxter featureinterview the GS sustain focus list is shaking up management thinking on sustainability Nigel Salter talks to Andrew Howard, head of the GS SUSTAIN research team, to find out more about the methodology and how it is linking sustainability performance to company performance and valuation. You can view this interview in full online: www.salterbaxter.com Andrew, welcome to salterbaxter and thank you very much for being an interviewee for Directions 10. I’m wondering if you could just tell us a little bit about what you actually do at Goldman Sachs. Thanks,nicetobehere.IheadtheGSSUSTAIN research team at Goldman Sachs. Our job, basically, is to take a long-term view of industries, how they’re changing, how companies will evolve within those industries and, as a result, which companies investors should focus on for generating long-term outperformance. It’s very much about taking a long-term view of industries and investment, which is something slightly different from how a lot of other research has been done in the past. I think it’s a little bit of an evolution for us, and our industry as a whole. One of your more recent research reports is titled Crossing the Rubicon. Tell me a bit about the background to that. Crossing the Rubicon, the report we put out recently within Goldman, is the culmination of the work that we’ve been doing for the last four or five years within Goldman Sachs, understanding how companies are adapting to long-term pressures. The title itself is designed really to indicate that we take the view we’re shifting from the early recognition that environmental, social and governance issues, long-term pressures, are becoming more important, into an environment where they’re having a very real, tangible impact on the way that companies perform. We’re past the point of theoretical interest. We’re into the point of financial impact and, increasingly, we’re going to find those financial impacts become bigger and bigger on companies within different sectors.
  7. 7. salterbaxter  DIRECTIONS 2010  5 AndrewHoward Executive Director Head of GS SUSTAIN We’re past the point of theoretical interest. We’re into the point of financial impact.
  8. 8. 6  DIRECTIONS 2010  salterbaxter featureinterview Continued business on a fundamental basis. And what we’re doing within GS SUSTAIN, really, is saying, rather than focusing on the 20%, let’s focus on the 80%. Let’s understand how a company will behave and perform in the long run, which, ultimately, can be an awful lot more successful. It’s also, obviously, exactly what sustainability is about, which is why it’s such an important concept. But some of your language in the reports that have been published recently, some of the research, is really quite dramatic. You talk about dramatic structural shifts and global crises. Tell me a little about what those are. The trends that we’re talking about, to a large degree, are relatively well-established trends. We’re talking about population growth. We’re talking about a shift in the structure of the global economy. We’re talking about a rising new middle class of consumers in emerging markets. The important point is the scale, speed and impact of those trends on companies in different industries. Everything is happening at a faster pace, on a bigger scale, and with a bigger impact on how companies perform financially. To put some rough numbers to it, if you look forward over the next 15 years, on the UN’s forecast, there will be as many people added to the world’s population as existed in the world prior to World War I. So it’s not particularly that we’re talking about new trends. It’s the speed, scale and magnitude of those trends that’s really the new factor. And your own climate change report also talks about the equity market just beginning to factor in and understand the scale of these changes. Have you got any proof of that really being understood? We’re beginning to see it happening and I’d say in probably the most obvious industries, in many ways. So, if you look at the utility sector, if you look at the steel sector, you begin to see differences in valuations And what’s the specific difference in the approach that GS SUSTAIN is adopting in its analysis? I think that the really unique characteristic of GS SUSTAIN is the perspective that we’re taking. It’s very much about taking a long-term view of companies and industries. If you look back through the last few decades, really, investing has become a shorter and shorter-term horizon. What we’re doing within GS SUSTAIN is really trying to say, how do we reverse that trend? How do we understand how companies will behave in the longer term? You talk about exploiting the inefficiencies between short- and long-term views. This goes to the heart of why the financial community has been criticised. Is it working? It’s beginning, I think. And, you know, I think it’s a valid point that if you look at the last ten years or so, certainly the focus on short-term movements, the focus on short-term news flow, has only intensified. When you boil it down, however, the average company, globally, in round numbers, about 20% of the value of that company lies in the earnings that they’re going to generate over the next three years. The corollary of that is that 80% of the value of the company lies in the earnings it generates after the next three years. And you’ve got this disproportionate focus on the news flow and the earnings around a relatively small proportion of the value of their Over the next 15 years, on the UN’s forecast, there will be as many people added to the world’s population as existed in the world prior to World War I.
  9. 9. salterbaxter  DIRECTIONS 2010  7 Speak to the company and they’ll tell you that it’s largely about their employees. People that want to work for Roche, by nature, are scientific and have a social perspective that means they find it easier to recruit, retain and incentivise the best employees to work for Roche. And that touches on an important point, which is about management and chief executives, in particular. Some of the recent research suggests there is a massive amount of understanding at the chief executive level of the importance of sustainability. But what’s your view on that? Do they understand and are they doing something, as well as understanding? It’s interesting. As you say, there’s an awful lot of research that points to the same conclusion, that chief executives of companies do recognise that sustainability and environmental and social factors are important to their business. If you look at the responses of companies, actually there is something of a gap between a recognition that it’s an issue and the understanding of what to do about it. And I think it’s fairly clear that the debate about whether environmental issues and social issues are something that companies need to worry about has changed dramatically. It’s very rare today to find a CEO of a large company who says anything other than, these are issues that matter to my business and I recognise their importance. However, there are relatively few companies that have really developed a strategy integrated with their overall business plan that adapts to those. What we’re talking about, with many of the issues in this field, are outcomes that are very uncertain. Planning becomes more of an options process rather than a certain process. And that’s something that I think that investors certainly are continuing to get their heads around and still, frankly, in most cases, haven’t quite managed and, similarly, that companies themselves are struggling with. of companies that are either more or less efficient in terms of their emissions of carbon dioxide or other greenhouse gases. To put some rough gauges to it, if you go out to 2050, on the IPCC’s own data, we would need to see a roughly 60% reduction in annual emissions of carbon dioxide. Combine that with population growth and you’re talking about something of the order of a 75% to 80% reduction in per capita emissions globally. And that’s over 40 years, which sounds like an awfully long time, but when you think about the sorts of changes that are going to need to be made, the investments in new infrastructure, power generation and our transport infrastructure, it’s fairly clear that those changes have to start happening now if they’re going to be met. Do you have any examples of any particularly innovative responses to the climate change agenda or to the population changes? Well, there’s a few examples. I think to start with, perhaps some of the more obvious industries, such as UK power. It’s certainly interesting to me if I look at the leaflets that come through my letter box, to find that utilities companies are trying to explain to me that I should be using less power. That’s a fairly obvious example. I think some of the less obvious examples are a couple of companies like BSkyB and Roche. To take Roche as an example, which has a monopolyoveritsproductsasapharmaceutical company,which really doesn’t emit too much carbon dioxide in the first place, and, yet, when you look at their climate change strategy, when you look at the targets that they’ve laid out, they are actually relatively ambitious, well-thought-through and integrated across the business. 80% of the value of the company lies in the earnings it generates after the next three years.
  10. 10. 8  DIRECTIONS 2010  salterbaxter Companies in emerging markets where economies are still relatively healthy have an opportunity in many industries to effectively leapfrog a technology level that we’ve seen already developed in the West. looking for companies whose share price will outperform. That, ultimately, is the goal of what we’re trying to achieve with all of this. The first question, therefore, is what aspect of financial performance drives long-run performance and we find companies that can sustain industry-leading returns on capital consistently deliver outperformance in the equity market. Because we’re taking a slightly longer-term view – we’re not simply looking at the next three months – we’re trying to understand who those companies will be over the next three to five years. You really need to look at what are the things that drive those returns in the long run. And there’s two factors that we look at. A company’s strategic or industrial positioning within its sector. Do you have access to the low-cost assets? Do you have a strong brand? Are you exposed to parts of the world where demand is growing? And then secondly, a company’s management of environment, social and governance issues and how effectively it’s adapting to the new pressures and the new challenges that it faces. So we end up, for every industry that we look at, with three different rankings of companies: one, their profitability or their return on capital; two, their industry positioning; and three, their management quality. And what typifies the leaders for you? Leaders, generally speaking, are those companies with profitability today and a long-term view of how they reinvest the money that they’re generating into building a business for the future. Rather than focusing as much on short-term results, they’re those And we’ve then had the financial crisis, which has really challenged a lot of the business models around the world. Has that really changed the relationship between business and society? Or do you see it changing? I think it certainly has and I think we see it – we’re sort of in the middle of it within Goldman Sachs and it’s certainly something that’s not escaped our attention. I think it’s become very clear that companies are an integral part of society. They have an impact on it and, essentially, trying to think of the two as separate things has become a defunct idea. The expectations, as a result, on companies to play a more socially positive role have significantly increased in every country that we look at and that will feed through into how companies need to behave, engage with their stakeholders and effectively develop long-term business plans. I’ve heard management talk about using environmental, social and governance aspects as almost a proxy for the quality of their management. Would you agree with that? Well, we almost use the two phrases interchangeably. So for us, when we look at management quality, we’re looking at environment, social and governance factors. We would, in that sense, almost define management quality as a company’s ability to manage those issues, to manage those pressures. Let’s talk a little bit about the GS SUSTAIN Focus List. It’s all about identifying leaders around the world. Just tell me very specifically about the methodology and who are the leaders? Well, we look through about 800 or so companies at the moment, globally, and they’re predominantly large capital companies. The first key point is that we’re featureinterview Continued
  11. 11. salterbaxter  DIRECTIONS 2010  9 Well, Andrew, thank you very much for sharing GS SUSTAIN’s opinions with us. The traction’s been tremendous. If I go back a few years, the majority of people that we spoke to within GS SUSTAIN were people who had a mandate specifically to look at environmental, social and governance issues. We still speak to all of those people. They have become a fairly clear minority of the people that have an interest in the work that we’re doing. We’re finding that an awful lot of general investors, who are simply trying to make money, are finding that understanding how companies are adapting to environmental, social and governance issues – taking a long-term view of industries and companies – are really growing in importance. I think we are beginning to see more of a shift amongst investors, for one, in understanding how a company fits into the longer-term future world and industries in which they operate. And what companies are being given is, effectively, a platform to describe what they’re doing. And I think there’s been a very significant step change in the transparency and disclosure by companies of the efforts that they’re making and that’s got an awful lot further to run but we’ve come a long way, as well, in the last ten years or so. And in the next five to ten years, what are the key headline issues that businesses are going to have to be responding to? The next ten years are going to see growth in demand for everything. It’s going to see increased competition from everywhere and it’s going to see increasing constraints on how that demand can be met, through resource tensions and resource constraints really beginning to introduce new challenges to companies in every industry. companies that are building a business for the world of five or ten years time and they’re taking a more holistic view of the challenges they’re likely to face. It’s about companies that are effectively understanding where are the different possible sources of pressure that I might face and what do I need to do to adapt to those possible sources of challenge. And are there any regions which seem to be better placed to respond to these pressures? The areas certainly with the tailwinds are those parts of the world where demand is growing most quickly. That essentially means the emerging markets and the BRIC economies in particular. Countries where you have domestic demand growing particularly quickly really gives companies there a tailwind. And those companies outside of those regions that can effectively tap into demand, in turn, have a chance to effectively expose themselves to the same trends. But companies that sit within developed markets without taking a more outward view, without trying to think about how do I adapt to the future world, will find it increasingly hard. You get a sense from some of those countries that it’s less driven by regulation and more about innovation and opportunity. Is that really the case? In many cases, yes. And I think, you know, if you look at the way the world is changing, the world of ten years’ time in almost every industry that we look at will look dramatically different to the world of today. Companies in emerging markets where economies are still relatively healthy have an opportunity in many industries to effectively leapfrog a technology level that we’ve seen already developed in the West. And then just finally, two questions really. Do you feel that GS SUSTAIN is really starting to gain traction at the senior level in organisations and with investors? And then where is it taking us?
  12. 12. 10  DIreCtIONs 2010  salterbaxter COUNTRIESINFOCUS BillionsoftonnesofCO2E 2010 2020 2030 Year 2040 2050 0 5 10 15 20 25 30 35 40 45 50 * The challenge of low-carbon growth The dramatic reductions in global emissions needed to have a 50:50 chance of avoiding more than a 2ºC rise in global temperatures Global emissions target for a 2o C path China’s ambitions for emissions reduction, as indicated in its submission to the Copenhagen Accord. (This still represents about 50% of the world’s emissions ‘allowance’ for a 2º C path) China’s predicted growth path if emissions per unit of output stay constant between now and 2030 Current projections for global emissions, as stated in participating countries’ submissions to the Copenhagen Accord
  13. 13. salterbaxter  DIRECTIONS 2010  11 LORDNICHOLAS sterN Chairman Grantham Research Institute on Climate Change and the Environment Lord Nicholas Stern describes the challenge of low-carbon growth and explains that if we want to keep growing, we need to keep innovating. The 15th Session of the Conference of the Parties (COP15) to the United Nations Framework Convention on Climate Change (UNFCCC) in Copenhagen in December 2009 made important steps towards global agreement, but also revealed and highlighted serious problems and divisions. Managing climate change is a fundamental, indeed defining, challenge of our century and it requires global agreement if it is to be managed effectively. Global agreement for action requires a foundation of shared understanding across three basic issues as follows: Understanding the risks First, we must recognise that unmanaged climate change would put at risk the great advances in development of the last few decades, which have seen hundreds of millions rise out of income poverty, great improvements in health and life expectancy, and major advances in education and literacy. Such advances have taken place throughout the world but in terms of numbers involved and scale of advance, China has been at the forefront. China, with its large fraction of the population near the coast, its pressures on water supply, its dependence on the Himalayan region as a water source, and with many populous countries on its borders, is very vulnerable to climate change. The risks involve substantial probabilities of temperatures not seen on the planet for tens of millions of years, way outside the experience of homo sapiens. And they involve the possibility that local habitats and climates would be so disrupted that hundreds of millions would have to move, with the associated risks of severe and extended conflict. Any discussion of policy must start from an understanding of the potential scale of these risks and the required magnitude of global action. The options for action Second, the transition to low-carbon growth in the world economy over the next two or three decades is likely to be the most dynamic period in economic history, full of innovation, discovery and change. And low-carbon growth, when established, will be more energy-secure, cleaner, quieter, safer and more biologically diverse than high-carbon growth. Indeed, high-carbon growth will kill itself, first on hydrocarbon prices and more fundamentally on the very hostile physical environment it will create; it is not a serious medium- term option. It is a mistake to see the transition to low-carbon growth as a burden and a growth- reducing diversion. That is to apply the crude planning models of the middle of the last century. Modern growth theory is about technical change and learning. And it will also have to embrace interactions with the environment. Delayed action will lock in high-carbon technologies that will take concentration levels of greenhouse gases to still more dangerous levels, and such technologies will soon be outmoded. Delay would also force stronger and much more disruptive and costly action ten years from now. It is much better to plan in a careful, strong and measured way, starting now, for the changes in production and consumption methods that will be inevitable. Global co-operation Third, we must understand how to build on the platform created at Copenhagen, and to do this we must understand both the substance of the Copenhagen Accord and some of the difficulties encountered on the road to and at Copenhagen and how they can be overcome. The agreement in the Copenhagen Accord on the importance of holding temperature increases to 2ºC (relative to mid-19th century levels, the usual benchmark) was a major Global agreement for action requires a foundation of shared understanding across three basic issues: The magnitude of the risks; The options for action, including policies and technologies for reducing emissions and promoting the transition to low-carbon growth, together with a recognition of the attractiveness of both the transition to and low-carbon growth itself; How the different nations of the world might collaborate and work together, including the different responsibilities of each and support for adaptation in the poorest countries and communities. THREE BASICISSUES
  14. 14. 12  DIRECTIONS 2010  salterbaxter 194 5050 194 countries have been involved in discussions about the Copenhagen Accord. FORTY seven BILLION in twenty ten FORTY FOUR BILLION by twenty twenty THIRTY five BILLION by TWENTY THIRTY twenty BILLION by TWENTY FIFTYTo have a reasonable 50:50 chance of avoiding a rise in global average temperature of more than 2ºC, annual global emissions of greenhouse gases would have to follow a critical path from 47 billion tonnes CO2 E today to less than 20 billion tonnes by 2050. countriesinfocus Continued advance. It provides a clear sense of direction and points strongly to global targets for emissions reductions. Good progress was made on the way forward on forest issues and on the establishment of a high-level advisory group on methods for raising US$100 billion per year of financial flows from rich to poor countries by 2020. This will be a key element in providing support for the adaptation to climate change that is now unavoidable, particularly in the poorest countries and communities. It will also be a key element in supporting emissions reductions. The Copenhagen Accord: a platform to build on The submissions on planned emissions paths, received by the United Nations to date, have made possible the first overall assessments on where global emissions could be in 2020 based on the articulated plans of countries around the world. The total is still too high for a 2ºC path. Research carried out by my colleagues at the Grantham Research Institute on Climate Change and the Environment indicates that to have a reasonable 50:50 chance of avoiding a rise of global average temperature of more than 2ºC, annual global emissions of greenhouse gases would have to follow a path from about 47 billion tonnes of carbon dioxide equivalent (CO2 E) today to about 44 billion tonnes in 2020, less than 35 billion tonnes in 2030 and much less than 20 billion tonnes in 2050. But the emissions reductions pledged through the Copenhagen Accord represent a strong move in the right direction. When we left Copenhagen in December 2009 we hoped that the Copenhagen Accord would establish a platform for going forward: the subsequent nine months with the submissions, the establishment of the advisory group on financial resources, and progress on forest issues has given us some confidence that it can be a platform of real substance. On the other hand, there was only small progress on technology and on the monitoring, reporting and verification of emissions. The responsibilities of countries were generally left open on key issues, including emissions and The way forward must build on the platform created by the Accord. We must examine: the prospects for overall emissions; potential developments on emissions reductions in key countries or regions; and the processes of engagement and interaction. We must assess potential progress on four key issues: Finance Reducing emissions from deforestation and forest degradation in developing countries (including the role of conservation, sustainable management of forests and enhancement of forest carbon stocks) (REDD+) Technology Measurement, reporting and verification (MRV). finance, and the Copenhagen Accord was only noted. Further, the discussions in a number of cases led to acrimony and distrust. THERE HAS BEEN GROWING DISSATISFACTION WITH TRYING TO IDENTIFY KEY ELEMENTS OF AGREEMENT ON SUBSTANTIAL ACTION, THROUGH A VERY UNWIELDY PROCESS OF ALL 194 COUNTRIES BEING INVOLVED AT EACH STAGE OF THE DISCUSSION. Openness and participation are crucial but formulating ideas and drafting text requires smaller and more focused groups. All these difficulties must be overcome.
  15. 15. salterbaxter  DIRECTIONS 2010  13 Cap on aviation and maritime emissions = 0.5 billion tonnes Annex 1 countries cut emissions by extra 25% = 1.3 billion tonnes China cuts emissions by 50% per decade = 2 billion tonnes 48 44 4 Developed countries Developing countries Forests/peat International aviation maritime emissions It should be possible to find significant reductions at reasonable cost, from each of four main sub-headings: Reducing the four billion tonne gap billiontonnegapbilliontonnesneededbilliontonnesprojected Global emissions: the four billion tonne gap On overall emissions and their consistency with a 2ºC path, current intentions as stated in submissions for the Accord would, if fully implemented, result in total emissions of around 48 or 49 billion tonnes of CO2 E in 2020. This compares with a target emissions path for 2ºC which would be around 44 billion tonnes in 2020. A 2ºC emissions path with 48 billion tonnes in 2020 will require much steeper and much more disruptive and costly cuts in global emissions later. The first lesson is that we must organise our discussion in terms of overall global emissions. It is this total that matters for climate change. We cannot conduct our discussions only or mainly in percentage reductions; they do not ‘add up’ in any straightforward way. We must constantly apply the discipline of adding up and examining the total. Further, percentages depend on starting dates which can be manipulated for convenience. Emissions per capita have some relevance from an equity perspective. And emissions per unit of output have some relevance from the perspective of effort and difficulty of structural change. They both have a role to play in important aspects of the discussion. But it is the path of total world emissions that is at the heart of the science. We must ask whether it would be possible to find an extra four billion tonnes of reductions by 2020. In my view it should be possible to find significant reductions at reasonable cost, from each of four main sub-headings: Developed countries Developing countries (excluding forests/peat) Forests/peat International aviation and maritime emissions We should have a clear and analytical discussion on possible sources. For example: Setting a cap on international aviation and maritime emissions of 20% below 2005 levels would reduce emissions by around 0.5 billion tonnes Reductions in emissions per unit of output by 29% in each five-year plan in China (halving emissions per unit of output each decade) would save nearly two billion tonnes of emissions by 2020 If Annex 1 countries (industrialised countries and economies in transition) increased their commitments to an average of 25% below 1990 levels, emissions would be 1.3 billion tonnes below the current high intentions.
  16. 16. 14  DIRECTIONS 2010  salterbaxter It is time to recognise the extraordinary potential of technical advance to low-carbon technologies and realise that the current rate of discovery is encouraging. countriesinfocus Continued China’s path to growth The largest emitters are associated with one or more of: high income, large populations, deforestation. Hence the five largest emitters are China, the US, the European Union, Indonesia, and Brazil. Let us examine some basic arithmetic for China. If China’s output were to grow at 7% per year then China’s output would roughly double each decade. I am deliberately keeping numbers simple here to keep the arithmetic transparent and to avoid formal modelling which sometimes conceals the basic logic of the argument. It is possible that China will grow more quickly between 2010 and 2020 and slow down a little between 2020 and 2030. But 7% per year keeps things simple as it gives a doubling in a decade. China’s emissions in 2010 are probably eight or nine billion tonnes of CO2 E. If emissions per unit of output were to stay constant, China’s emissions would be 30–35 billion tonnes in 2030. As discussed earlier, the maximum for the world as a whole, consistent with a 50:50 chance of 2ºC, is well below 35 billion tonnes, probably around 30–32 billion tonnes. Thus China would exhaust the entire world’s budget for a 2ºC path. If it managed to cut emissions per unit of output by 50% by 2030, then China’s emissions would be 15–18 billion tonnes, more than half the world’s budget in 2030. Given that, for 2ºC, the world’s average emissions per capita have to be below four tonnes of CO2 E by 2030, China’s emissions per capita would likely have to be well below its current level of around six (or a little above). That would mean that China would have to get back to something like eight to nine billion tonnes of total emissions by 2030. In other words, if it is to grow at 7% per year for the next two decades, and we hope growth rates will be at least that, it would have to cut emissions per unit of output by a factor of four over 20 years. That means cutting emissions per unit of output by 50% each decade or 29% in each five-year plan. A cut of 29% in emissions per unit of output in a five year period could be achieved, for example, by a cut of 20% in energy use per unit of output and a cut of 11% in emissions per unit of energy.
  17. 17. salterbaxter  DIRECTIONS 2010  15 My own interactions with Chinese analysts and the experience of the 11th five-year plan suggests that this could be possible but it would depend on strong technical progress as well as major investments. My own assessment is that all too often formal modelling tends to underestimate technical progress and be too focused on current technologies and input-output coefficients. It is time to recognise the extraordinary potential of technical advance to low- carbon technologies and realise that the current rate of discovery is encouraging. China has indicated in its submission to the UNFCCC for the Copenhagen Accord that it will endeavour to lower its carbon dioxide emissions per unit of GDP by 40–45% between 2005 and 2020 and has indicated targets for non-fossil fuels and for forestry. This points to total emissions for 2020 (with an 8% assumption on growth rates) of 11.4 billion tonnes of CO2 E, compared with around eight or nine billion tonnes now. If there were a similar quantity increase in total emissions in the next decade (2020 to 2030), then China’s emissions in 2030 would be 14 or 15 billion tonnes. This would correspond to a reduction in emissions per unit of output of 30–35% in that decade. Emissions per unit of output would have been divided by a factor of around 2.5 between 2010 and 2030 compared to the four which seems necessary for a 2ºC path. That total for China would be close to half of the world’s emissions in 2030, from a country with a population of around 17 or 18% of the world’s total population in 2030. Basic arithmetic: emissions cuts for a sustainable future We must recognise that such a path for China could not possibly be consistent with the 2ºC path we have described. This is not to allocate blame or to make any demands, or to identify required policies: this is purely arithmetic. But we must ask ourselves about the implications of such arithmetic. I must emphasise, however, that I am not making recommendations here. I am simply following the scientific implications of the 2ºC path and combining this with the assumption of 7% per year growth in China to work out implications for changes in emissions per unit of output. THIS IS BASICALLY ARITHMETIC. WHETHER IT CAN BE ACHIEVED IS A MATTER OF POLICY AND TECHNOLOGY, AND IS UNDER INTENSE DISCUSSION BY CHINESE ANALYSTS. These illustrative calculations have been focused on China; corresponding calculations for other countries indicate that, if the 2ºC path is to be realised, rich countries, assuming a 2.5% annual growth rate, would also have to cut emissions per unit of output by around a factor of four by 2030. China’s emissions, on the above assumptions, would be similar in 2030 to now, implying a peak around 2020 or somewhere in the early 2020s. If we both accept 2ºC, as we surely should, and we look for growth, which in my view is vital to raise living standards in developing countries, then the above arithmetic is inescapable. The world as a whole, rich and poor, cannot avoid this simple logic. The discussion above has been mainly arithmetic. It is hard to describe the implied emissions paths of different countries as equitable. These calculations take no account of relative income or wealth, the challenge of poverty reduction, of past history of emissions, or of the questions of whether responsibility for emissions lies with the producer or consumer of a product. Both consumers and producers benefit from and determine the international division of labour. Thus they should both bear some responsibility for emissions. All of these are important ethical issues. My own view is that they have strong relevance and there is a responsibility and obligation arising from past emissions by rich countries, at least over the last 20 years when the dangers have been clearly understood. Further, we must recognise that the two defining challenges of our century are managing climate change and overcoming poverty. Ultimately we will succeed or fail on the two together. Lord Nicholas Stern is IG Patel Professor of Economics and Government, Director of the Asia Research Centre, and Chair of the Grantham Research Institute on Climate Change and the Environment at the London School of Economics and Political Science. 50 35 China must cut emissions per unit of output by 50% by 2030 to achieve the 2°C path. China’s intention for emissions reduction per unit of output by 2030, as stated in the Copenhagen Accord. % %
  18. 18. 16  DIRECTIONS 2010  salterbaxter citiesinfocus Sustainable cities of the future
  19. 19. salterbaxter  DIRECTIONS 2010  17 KEYCONTRIBUTORS Building, Infrastructure and Planning Groups, Advanced Technology and Research Team ARUP Sustainable cities Over half of the world’s population now live in urban areas. By 2050 this will have risen to 70%. In the industrialised world, cities are bursting at the seams, struggling to meet the needs of their citizens. Creaking, outdated infrastructure, cars clogging up the roads, and buildings that are literally leaking energy – not exactly the picture of urban health. Add to this inadequate public transport, a shortage of green spaces, landfill sites overflowing and it’s enough to make you run for the (greener) hills. The situation is even worse in parts of the developing world, with the poorest countries least equipped to invest in the basic urban infrastructure – water, sanitation, housing – that is needed to cope with rapidly growing urban populations. Unfortunately there is no simple formula for converting a sprawling, polluted, congested 20th century metropolis into a clean, free‑ flowing, low-carbon urban utopia. Most of the world’s leading cities have evolved over many decades – think of London, New York, Paris, Copenhagen. A few, like São Paulo, have been created in a concentrated burst of growth. Almost none have been ‘planned’. But planning, together with innovation, investment and cooperation is exactly what is needed now. So how can we achieve this? And which cities are already leading the way? Reducing emissions The much-used management phrase – ‘you can only manage what you can measure’ – certainly holds true for cities. Pioneers such as San Francisco, Stockholm and Copenhagen started mapping Cities across the world are growing by over one million people every week. Creating sustainable urban landscapes for this growing population while simultaneously cutting carbon emissions is undoubtedly one of this century’s greatest challenges. Here, Arup describe the scale of the problem we face and how the latest innovations are set to revolutionise urban life as we know it. the profile of greenhouse gas emissions and measuring vulnerability to climate change in the 1990s. Many others are now following suit. But to truly understand sustainability a city needs to measure the wider impact of consumption: from food, to water, to transport and beyond. The resulting ‘ecological footprint’ calculates how many planets it would take to sustain a place (or person) if everyone adopted the same consumption patterns. The answer in a sustainable city is one! The challenge of course, is to achieve this while at the same time improving quality of life. In the developed world, energy used to heat and cool buildings and power devices used within them is the single biggest contributor to cities’ carbon emissions. With 50-70% of existing buildings expected to still be in use in 2050, reducing energy demand by retrofitting will be key. Lighting alone accounts for up to 10% of a city’s energy demand. Technological advances in things like LED lighting will enable huge reductions in energy consumption. Changing behaviours Reducing demand for energy will require significant mass behaviour change. As the former Mayor of London, Ken Livingstone, put it, “We don’t have to reduce our quality of life to tackle climate change, but we do all have to change the way that we live”. Technologies like smart meters can make consumers much more aware of the amount of
  20. 20. 18  DIreCtIONs 2010  salterbaxter CITIESINFOCUS Continued energy they are using and how much that energy is costing. New transport technologies offer the prospect of low- carbon travel, which, combined with a shift away from cars towards public transport, walking and cycling bring not only more environmentally friendly cities, but also better public spaces and improved public health. Improving efficiency moving away from reliance on a centralised grid and installing decentralised heat and power networks that use combined cooling, heat and power (CCHP) technology goes a long way in minimising wasted energy. ‘Smart grids’ offer another option, allowing energy suppliers to smooth supply over the day, for example by automatically turning down the temperature on washing machines during peak demand, via financial incentives to consumers to allow these minor, automated adjustments to their energy use. Renewable energy Densely populated urban areas are unlikely to be the best sites for large-scale renewable energy generation. However, there are often widespread opportunities for solar thermal and photovoltaics and many cities have developed solar energy programmes in recent years. There is also considerable scope for generating energy from the one thing every city has too much of – waste. Integration and co-operation If it is easy to create a dream- team of interventions to reduce a city’s ecological footprint, it is much harder to draw them together into a comprehensive, integrated plan that also meets societal and economic goals of delivering a better place to work and live. As the challenge of sustainable development demands fundamental change to cities’ infrastructure, there will be many instances where the cross-benefits of emissions reduction policies are not immediately obvious, or where real conflicts emerge with other policy aims. Sustainable development policy-making has, therefore, to be conducted at the most holistic level possible. In governmental terms, this means that responsibility has to sit across all departments and report directly to the city administrator or mayor. The scale of transformation required to fashion revamped cities capable of providing high quality living without destroying the planet for future generations, in an incredibly short timescale of just a few decades, is beyond anything humanity has had to cope with previously. Yet low-carbon cities are feasible, if we can marry science, political will and technological innovation. Let’s now take a look at some of the innovations that will shape our cities in the future. Leading the way – around the world ImprOvINg effICIeNCy Copenhagen has connected 97% of its buildings to a district heating system over the last 30 years cutting carbon emissions in the city by over a third. ImprOvINg effICIeNCy Helsinki supplies 84% of its heating from CCHP and has become a net exporter of electricity. reNewable eNergy Barcelona has achieved a tenfold increase in solar heating in just three years, since city authorities made it compulsory to use solar thermal panels to generate at least 60% of running hot water in new buildings. reNewable eNergy Freiburg’s anaerobic digestion plants now supply 25% of the town’s electricity demand. reNewable eNergy São Paulo already generates 7% of its electricity using biogas emitted from landfills and the authorities are looking to significantly increase this in the coming years. reDuCINg emIssIONs Los Angeles’ plan to replace 209,000 street lights with LED systems will deliver a 40% cut in energy usage, reduce CO2 emissions by 40,000 tonnes, and save the city $10m annually. ChaNgINg behavIOurs Bogota’s cost-effective rapid bus transit system, the Transmilenio, carries 1.4 million passengers every day, reducing travel time by 32%. ChaNgINg behavIOurs Toronto aims to get at least 300 plug-in hybrids and pure electric vehicles into public and private fleets by 2012. ChaNgINg behavIOurs Just two months after Paris’ bicycle hire scheme was launched, over 100,000 people were cycling 300,000km each day. Londoners are following suit since the launch of a similar scheme in London this summer.
  21. 21. salterbaxter  DIreCtIONs 2010   19 Innovations for sustainable cities vehicles (Evs) are set to revolutionise sustainable transport, leading to cleaner, quieter cities. The first mass- produced Evs will be available next year, but expect to see performance improve and prices fall as more manufacturers move to volume production. Batteries are key to increasing range, and vast sums of money are being poured into lithium-based research, with nanotechnology being introduced to improve power output and charging times. By interacting with the smart grid, Evs will help balance the system with users programming their vehicles to charge only when electricity is abundant and costs are low. SOLAR POwERED vEHICLE CHARGING Parking bays are being developed which use solar energy to charge electric vehicle batteries. The 1.5kw peak power generation provides enough energy for 10-15km driving for every hour a car is parked. when the bays are empty, the energy is fed back into the grid. SmART GRIDS ‘Smart grids’ are electricity networks that use IT to better plan and run electricity generation and distribution and enable more efficient end use. Information fed back to the network allows it to dynamically adjust supply to meet demand, so less energy is wasted. Smart grids can also deal with the fluctuations in energy generation that will come from the inherent variability of renewable sources like wind and tidal power. SUPER GRIDS Plans are underway for a pan-continental electricity super grid, which will be powered by a chain of solar farms in the Arabian Gulf and North Africa. These will be linked to hydroelectric plants in Scandinavia and the European Alps, onshore and offshore wind farms in the Baltic and North Sea, and various marine energy and biomass power facilities. The ‘Desertec’ plan, as it’s known, aims to provide 15% or more of Europe and the middle East’s electricity needs by 2050. SmART mETERS ‘Smart meters’ are a key component of smart grids. They provide real time data on energy production and consumption. Utility companies will benefit from a wealth of data on the detailed usage patterns of end users. And consumers will be better able to understand and manage their energy consumption. Smart meters can encourage consumers to reduce their demand when prices are high or when system reliability or power quality is at risk and vice versa. ELECTRIC vEHICLES with almost silent motors and zero tailpipe emissions, electric
  22. 22. 20  DIreCtIONs 2010  salterbaxter the nearest available parking space, so time and fuel is not wasted driving around. ITS also provides information on the public transport options available if a user leaves their car outside the city centre at a ‘park and ride’ type facility. ACTIvE TRAFFIC mANAGEmENT Active traffic management systems, also known as managed motorways, will become more common on inter-urban motorway routes. They reduce congestion and pollution by smoothing traffic flows to prevent queues and stop/start driving. Key components are the use of dynamic speed limits displayed on electronic overhead signs, which are modified based on conditions monitored by traffic detectors, and use of the hard shoulder to maximise available capacity at peak times. CITIESINFOCUS Continued INTELLIGENT SPEED ADAPTATION Intelligent Speed Adaptation (ISA) enables a vehicle to become aware of the speed limits or road conditions. Satellite systems coupled to a database of speed limits/ hazards send information to the vehicle or alternatively, the vehicle is equipped with an image capturing device, capable of reading roadside signage. The resulting action taken by the vehicle varies from a simple warning to overriding the driver and reducing the speed of the vehicle automatically. PERSONAL RAPID TRANSIT SYSTEmS Personal rapid transit (PRT) is a system of small, automated vehicles on a network of specially built electric guideways that provide on-demand transport for individuals or groups. wIRELESS CHARGING ‘Static induction’ or wireless charging for electric vehicles will do away with the need for cables and charging posts in the street, replacing them with a pad, most often buried under the road surface in a parking place. To charge, the car just needs to park over the pad and the electricity for charging will be transferred by induction. The next evolution – ‘dynamic induction’ – will see cars charged on the move. This has the potential to remove ‘range anxiety’, which is currently a major barrier to the uptake of electric vehicles. INTELLIGENT TRANSPORTSYSTEmS Intelligent Transport Systems (ITS) provide information to enable more efficient travel and better choice of travel mode. For example, in-vehicle information provided via satellite and mobile communication guides drivers to
  23. 23. salterbaxter  DIreCtIONs 2010   21 BIOFUEL PLANES Aeroplanes emit around 600 million tonnes of CO2 every year. This is almost equivalent to Africa’s annual CO2 emissions. The aviation industry is already taking measures to reduce emissions and dependency on fossil fuel. Aero engines will slowly migrate to higher blends of biofuel over the coming years and trials are underway with fuel and engine suppliers. The use of biofuel is a step in the right direction to achieve sustainable aviation. However, rigorous testing, fuel specifications and standards will be required to convince airline operators to increase the blend or change fuel type completely. The remaining energy consumption will be offset by a combination of onsite renewables (see microgeneration) and a contribution to community energy funds, which will invest in energy efficiency and renewable technologies. mICROGENERATION microgeneration is the generation of zero or low- carbon electricity or heat by individual households, small businesses and communities. It uses an array of technologies such as small-scale wind turbines, micro hydro, photovoltaic solar panels, ground source heat pumps and micro Combined Heat and Power (microCHP). Through feed-in tariffs (currently being introduced in several countries) microgeneration can also provide an additional income stream whereby excess electricity produced can be sold back to the grid or offset against energy bills. Since microgeneration is, by definition, decentralised, energy is not wasted in transmission/distribution. GAS FROm wASTE waste disposal plants that convert waste into energy are already a common sight in Denmark and are set to become popular around the world. Through the natural process of anaerobic digestion, organic matter from household and garden waste is stored in containers with little or no oxygen where it breaks down and produces methane. This gas can be further processed and delivered into the gas network or used as a fuel for transportation. zERO CARBON HOUSING with UK building regulations stipulating that all new homes built from 2016 onwards must be carbon neutral we will see a major shift in construction industry techniques in the next five to ten years. Homes will be fitted with much better insulation, heat recovery systems and energy efficient LED lighting. Passengers go to the nearest PRT station and purchase a ticket or swipe their travel card. A display screen indicates the next available ‘berth’ and once the vehicle arrives, passengers select their destination using a touch screen. The central control system verifies the details and provides journey instructions to the vehicle, which takes passengers straight to their destination by the best available route. There is minimal waiting time, no stops along the way, and you only travel with people you want to travel with! HIGH-SPEED RAIL High-speed rail (HSR) offers a genuine alternative to short haul flights, making future low-carbon business and personal travel much easier. HSR services between station hubs at least 100 miles apart enable journey times to compete with short haul air travel and allow long high speed trains to run efficiently, without the need for frequent time- and energy- consuming stops. HSR can also benefit from the use of innovations like ‘regenerative braking energy’ where kinetic energy is generated during braking and fed back to bolster the grid.
  24. 24. 22  DIRECTIONS 2010  salterbaxter citiesinfocus Continued to sustainability. As a recent report from WWF Denmark states: ‘If we do not radically alter the system and construct a 21st century green economy we are likely to reduce the problem but not solve it entirely.’ So what is the solution? The headline finding from the WWF report entitled ‘Industrial Biotechnology: More than Green Fuel in a Dirty Economy?’ is that biotechnology is a big part of the answer. It has the potential to save the planet up to 2.5 billion tonnes of CO2 emissions per year by 2030. That’s more than Germany’s total reported emissions in 1990. At the centre of the innovation is the biorefinery. Like a new type of industrial village, it will Books have been written about it. Movies made. We are addicted to oil. But if we are to create sustainable cities and a sustainable society for the future, we need to urgently shift away from this oil- dependent society towards a ‘bio-based society’. First we must acknowledge the scale of the problem. Petroleum is most visible in the tanks of our vehicles, but it is literally everywhere. There aren’t many products you can buy today that don’t have petroleum in them or used petroleum to make them. From the computer I’m using to type this to the paper you’re reading it on, petroleum is everywhere. Part of the answer in the short term is simply to use less of it; to be more efficient. But efficiency alone won’t get us take products such as corn cobs, sugar, wood waste and methane and convert them into all kinds of useful products, from ethanol (for fuel), to proteins (for animal feed), to consumable oils and compounds (for use in paints, solvents and bio-based plastics). Many of the things that are made from hydrocarbons today will essentially be made from carbohydrates in the future. The WWF report describes four interlinked steps on biotechnologies’ path to a low-carbon, bio-based economy: 1. Improved efficiency 2. Switching to biofuels 3. Replacing petrochemicals with bio-based materials 4. Closing the loop Imagine a world where cars are fuelled by sugar, homes powered by corn and cities run on waste. Welcome to the bio-society. Living in a bio-society
  25. 25. salterbaxter  DIRECTIONS 2010  23 Each step presents a monumental challenge, but biotechnology is chipping away at every one of them. Let’s take a closer look at progress. Improved efficiency Biotechnology has made the production of crops more efficient, requiring less land and less energy. Combined with efficiency gains at the biorefinery, it has made the production of biofuels more efficient. 30 years ago it took more energy to produce a gallon of bioethanol than the energy it contained. Today, it’s more than a 2–1 gain. Bioethanol from waste products, which is being produced at small scale today, can be more than a 7–1 net energy gain. Switching to biofuels One of the fastest growing sources of energy in the world is biofuels. Today, bioethanol makes up nearly 10% of the gasoline in American vehicles, and in Brazil it’s about half. The US Energy Information Administration (EIA) predicts that global use of petroleum- based liquid fuels will be flat over the next 15 years because biofuels will account for all of the three million barrel per day expansion in liquid fuel use. But, as the WWF report notes, bioethanol production provides the platform for the next step. Replacing petrochemicals with bio-based materials Existing bioethanol plants are platforms upon which true biorefineries of the future will be built. In addition to the bioethanol, food and animal feed they are producing today, they will also produce speciality proteins, oils and compounds for use in paints, solvents and bio-based plastics. Closing the loop Biorefineries are working to close the loop and eliminate waste in a number of ways. One model has a biorefinery adjacent to an animal feedlot so that the animal waste can be converted to biogas to power the plant; and the grains left over from ethanol production can feed the animals. Our engineers have developed a system to close the loop on water, recycling water throughout the biorefinery so that there is no discharge. One of our bioethanol plants is powered by burning waste wood and landfill gas. Three others use co-generation. To see all of these steps occurring in one biorefinery, I would invite you to come to our research centre in Scotland, South Dakota. This little community provides the corn and corn cobs that the plant converts to ten million gallons of bioethanol each year. In return, the community gets a local, sustainable market for their commodities and uses the distiller’s grains left over from bioethanol production to feed their animals. But what makes this biorefinery unique is its production process, where very little is wasted. First, let’s take the corn grain, which can roughly be divided into thirds: starch, protein (the fibre, fat and micronutrients) and carbon dioxide. At this plant, the starch is used to produce bioethanol. From the protein comes animal feed, speciality proteins, oils used to produce biodiesel and even edible fibre. The biogenic CO2 is captured, liquefied and used for beverage carbonation, municipal water treatment and other applications. The second feedstock that comes into the biorefinery is the plant residue – corn cobs, leaves and husks. The cellulose is extracted from those materials and used to produce cellulosic bioethanol. The leftovers are fed to an anaerobic digester that produces biogas power. Finally, we are researching the use of the ash from the anaerobic digester as an application that could be used to increase the soil carbon of the surrounding fields. Some of the early criticisms of bioethanol have been the vast amount of land it takes to grow the feedstock and the use of food crops to produce the fuel. Today’s bioethanol production is addressing those issues by being more efficient with the land and the feedstock. Ten years ago, an acre of corn was only capable of producing around 300 gallons of bioethanol. Today, the productive fields around our biorefineries produce more than 600 gallons per acre. With the ability to produce bioethanol from the crop waste coupled with increasing grain yields, it will eclipse 1,000 gallons per acre in the near future. All the while using the nutritious part of the kernel to produce edible food and the leftovers from the crop waste to power the biorefinery. The WWF biotechnology report cites a 2008 United Nations Food and Agriculture Organisation (FAO) study identifying an additional two billion hectares that “are considered potentially suitable for rain fed crop production”. That presents a vast opportunity for industrial biotechnology and the biorefinery. Biotechnology may still be in its infancy in 2010, but if the current pace of innovation continues it will undoubtedly be a fundamental building block in the creation of a low-carbon, sustainable future. biorefinery Corn cobs, wood waste and methane converted into fuel, animal feed and bio-based products nathan schock PR Director POET
  26. 26. 24  DIRECTIONS 2010  salterbaxter Companiesinfocus The Third Industrial Revolution
  27. 27. salterbaxter  DIRECTIONS 2010  25 Eight crises, eight opportunities The Third Industrial Revolution takes place against a backdrop of eight interdependent, global crises – demographic and consumer explosion, ethical and value change, financial and economic ‘reset’, food scarcity, climate change, water scarcity, energy tension and political power shifts. Each of these represents both an enormous challenge and an exciting opportunity for business. 1 demographic and consumer explosion With global population predicted to reach nine to ten billion by 2050 we forecast 40% more consumers in the next 30 years. These new consumers will consume more per capita than ever before. Companies will undoubtedly benefit from this consumer explosion, however the growth also leads to competition for agricultural land, energy and water. Successful companies will have to decouple consumption growth from impacts on society and the environment by using scarce resources well. 2 ethical and value change As human beings we have long been conditioned to think that ‘growth is good’. However, criticism of capitalism and ever-rising consumption is now widespread. We are seeing Leading the revolution will be consumer goods companies who reposition themselves as MCCs – multi-committed companies. These businesses will create opportunities from the eight interdependent crises the world is facing. They will expand their presence in new regional power centres such as Brazil and China. They will transform their business models to cope with the reality of resource scarcity. And they will alter their marketing strategies to respond to consumers’ growing social and environmental concerns. In doing this they will reap hard business benefits – higher sales, lower supply chain costs, and better margins. The unexpected heroes of the revolution, they will, on the one hand, save the planet and on the other, accommodate the impending explosion in global consumerism. several groups in the debate: the ‘cultural creatives’ who want to reshape the world in a more sustainable way, the ‘populists’ who feel hurt by the negative effects of capitalism and want to defend their personal wealth and the ‘mass conservatists’ who simply want to go on consuming as they’ve always done. These groups all disagree on how values and ethics should be adjusted. They present real challenges for product development and marketing. 3 financial and economic ‘reset’ The resolution of the financial crisis is likely to result in lower economic growth in the Western World and a tempering of potential growth in developing countries. Consumers will reset their consumption patterns, leading to lower consumption growth and more inflation in debt-laden nations. 4 Food scarcity The rising population and growing consumption per capita leads to increased demand for food, especially grain. In a best-case scenario, food demand-supply tension can be managed, but higher prices will be needed in the coming ten years. In a worst- First came the steam engine, then the computer. Now, we believe the world is on the verge of a Third Industrial Revolution. GERARDRIJK Food and beverages analyst ING Commercial Banking, Equity Markets
  28. 28. 26  DIRECTIONS 2010  salterbaxter case scenario, which takes account of the negative effects of climate change and water scarcity, tensions between rich consumers and poor consumers increase, with grain use per capita in developing markets falling by 42% from an already low starting point. In order to avoid this kind of global food crisis we need more efficient use of land, higher yield and less food waste in the Western World. 5 climate change The debate on the validity of climate change science that we have seen over the last year has dealt a blow to climate scientists and pushed the subject of climate change somewhat to the background. In addition, governments will struggle to gain support for investment in climate change measures because of the knock-on effect of higher taxes/costs for consumers. To keep climate change on the agenda, companies need to invest in research that demonstrates the catastrophic consequences if ecosystems reach a climate change tipping point from which there is no going back. 6 Water scarcity Global demand for fresh water will increase due to rising populations, increasing per capita consumption and urbanisation. We forecast a bigger supply-demand gap in the coming 20 years, which means the price of water could increase by 300% over this period. Political struggles are likely as particular regions face shortages. Around 75% of fresh water is used in the food chain (from agriculture to consumer) so companies will have to adapt and find innovative solutions for using water efficiently. 7 energy tension Rising energy prices, driven by a shortage of fossil fuels and rising consumption, will lead to higher costs for agricultural raw materials, packaging materials, production and transport. Companies will need to drive down their energy consumption or use renewable sources. They will need to reduce the carbon footprint of their products or even stop production of very energy intensive products. Areas with large oil and gas reserves, like the Middle East, Russia and parts of Africa and Latin America should benefit from the energy crisis and companies are likely to find the most disposable income growth in these areas. 8 political power shifts Regional wealth changes will lead to the creation of seven or eight new power centres in the world. This means a shift from a unipolar world (with the US dominating) to a multipolar world. We expect the US/ Canada will remain strong; Brazil will become stronger; China will remain a stronghold especially given its investments in resources worldwide; and Russia and parts of the Middle East will also be strong. The EU will have a relatively small place based on its limited resources in energy and soft commodities. Sub-Saharan Africa is an outsider. India will be very strong in demographics but its current investments in infrastructure and its lack of resources make it a problematic area. Evolution of the phasing of crises and opportunities While climate change has been the major focus over the last five to ten years and the climate crisis will continue for the next 40 years, we predict that the climate discussion will move to the background temporarily. In 2010–15 the focus will instead be on demographic trends, financial, social and economic crises, food price risk and energy tension. Then from 2015–20, it will shift to a focus on the water crisis, changes in consumer ethics, and the global political change from unipolar to multipolar. The phasing of these crises and trends is important for companies and investors in terms of understanding the key driving factors in the coming decade. Companiesinfocus Continued 2005 2010 2015 2020 PHASING OF THE EIGHT CRISES/OPPORTUNITY EVENTS Source: ING estimates Climate change Water scarcity Ethical value change Political power shifts Climate change Demographic and consumer explosion Financial and economic ‘reset’ Food scarcity Energy tension
  29. 29. salterbaxter  DIRECTIONS 2010  27 Revolution in strategy: the rise of the MCC The rising star of the Third Industrial Revolution is a new breed of company: the multi-committed company (MCC). Some multi-nationals are already on the way to becoming MCCs while others still have a long way to go. One thing is clear – this is not just a fad driven by the need to be ‘seen to be green’. Successful MCCs will achieve hard business benefits from a combination of higher sales, lower supply chain costs and better margins. So what does being an MCC involve? First, it requires companies to move away from traditional colonial-style behaviours where Western brands are simply rolled out in developing markets, towards greater connection with and commitment to local regions. The focus will be on the new regional power centres: North America, Brazil/LatAm, Europe, Russia, China, the Middle East, parts of Africa and possibly India. In recent years several companies have significantly expanded their activities in these regions, mainly by following the rise in local purchasing power. We think this geographical footprint change will continue in the coming decades. Second, ‘clean sourcing’ across the whole supply chain needs to get into the DNA of every company. Companies that are able to secure the use of ‘crucial input materials’ like milk and grain and reduce waste will be best able to defend their margins in an environment of rising resource Revolutions that changed the world 1st The Industrial Revolution 2nd The Digital Revolution 3rd The Sustainable Revolution
  30. 30. 28  DIRECTIONS 2010  salterbaxter Companiesinfocus Continued scarcity. The focus needs to be on enhancing supply chain control and securing sustainable sourcing. Third, to cope with the complex and contradictory consumer trends emerging in the Third Industrial Revolution, companies and brands will need to redefine their sales and marketing strategies. Given the attitude of the majority of consumers, the role of NGOs such as WWF and Greenpeace will remain important in changing hearts and minds. In product portfolios, we expect to see the development of innovative products that better serve the world, like low-energy cars, wind turbines, organic food, and products with a low energy and raw material footprint. The positive impact for companies from the multi- committed approach is better international knowledge transfer, the development of local sourcing, and improved roll out of corporate governance. Local employees will also benefit from things like better healthcare support. In our view, national governments (particularly in Western democracies) and multilateral organisations are unlikely to offer solutions to the current global crises. They have neither the power nor sufficient legacy to make decisive changes. The proof: some companies are changing, others are lagging In general, we believe big companies are aware of the multi-crisis and opportunity environment and are taking action in many areas including climate change, energy and water efficiency, securing supplies and implementing ‘green’ strategies. Small companies are, not surprisingly, more conservative and less active. Unilever is an example of a company that we think is taking a broad, forward-looking approach. It not only looks at its own energy and CO2 efficiency, but also at that of its suppliers and customers. CEO Paul Polman said recently that it is essential for sustainability to be part of the company strategy and that this will be rewarded in the future by higher sales growth and higher profits. In Africa, SABMiller obtains barley from 12,700 local farmers in Uganda, Mozambique, Malawi, Ghana, Tanzania, Zimbabwe, and Zambia. By 2012, it aims to increase this to 45,000 farmers. In an effort to reduce their carbon footprints, Whole Foods Market and Bed Bath Beyond have both taken a decisive stance on the Canadian oil sands issue and are avoiding energy suppliers that source from that area. The future: vive la révolution Multi-committed companies are in the sweet spot of a number of emerging crises and trends. We predict that those companies that can anticipate global GDP and middle class growth trends in developing markets and become known for innovative sustainable strategies will show above- average sales growth and create increased shareholder value. Through establishing sustainable sourcing policies, and through development of a local supplier base, their margin growth will also be above average. Crucially, this commercial success goes hand-in-hand with creating a better world at a time when governments and the consumer base are not capable of driving this change themselves. The stage is set for MCCs to create the Third Industrial Revolution: real responsible and sustainable growth. The question is: can they step up to the challenge?
  31. 31. salterbaxter  DIRECTIONS 2010  29 coupled with the potential for huge opportunity should they make the right, bold changes. We looked at five DJSI supersector leaders and compared them against two of their sector peers to find out if they have the systems, initiatives and programmes in place to foster sustainability- led innovation. We then challenged whether the DJSI supersector leaders really are the best of the best. where business and society come together to solve complex problems. McKinsey have identified five global forces set to make 21st century operating environments the most complex yet.* To address these challenges as McKinsey sees them, businesses must use sustainability as a force for innovation. We set out to discover whether sustainability-framed innovation is at the centre of the DJSI leaders’ thinking across a selection of sectors. These sectors all face the challenge of adapting to an altered external environment The 2010 Dow Jones Sustainability Index (DJSI) supersector leaders and their peers appear to be leading the way in embedding sustainability across their businesses. But how well set up are they to make the big leaps forward that a shift to a sustainable global economy needs? The global landscape of the future will need creativity and adaptability – two qualities not traditionally used to describe large public companies. Sustainability can be both a lens to focus minds on innovation challenges and opportunities, and a place How well do the best companies link innovation to sustainability and are the true leaders slipping through the net? Innovation and true leadership * The five global forces include growth and innovation in emerging markets, increased productivity in developed economies, a connected but volatile global economy, ‘pricing the planet’ and the pressure on resources, and social stability. https://www.mckinseyquarterly.com/Strategy/Globalization/Global_forces_An_introduction_2625?gp=1 Salterbaxter Sustainability team
  32. 32. 30  DIreCtIONs 2010  salterbaxter Telecoms CHALLENGES AROUND THE SHIFT TO EmERGING mARKETS TURNING CLImATE CHANGE AND ACCESS CHALLENGES INTO NEw SOLUTIONS AND SERvICE OPPORTUNITIES BECOmING A PART OF THE NEw GLOBAL ICT INFRASTRUCTURE COmPANIESINFOCUS Continued Our verDICt Our verDICt Our verDICt Our winner Telefónica narrowly beats Vodafone to retain its supersector leader position. If it can maintain the quality of its services while developing fundamentally new product lines (in areas like health and finance), it should deliver sustainable change to its business model. Vodafone has experienced the sharp end of governance in emerging markets. If it can weather legislative and cost pressures, its focus on a sustainability-led product pipeline should see it well placed to take advantage of changes to its operating environment. Does state interference make a difference to China Mobile’s sustainability innovation performance? If the answer is yes, there are implications for the effectiveness of the solutions it can provide. If no, its potential to transform the way society functions could become a defining factor in China’s future development. Innovation driven by sustainability has played a big role in helping the Telecoms sector reposition itself to cope with demand for new products and services from emerging markets. As these products and services move into the mainstream they should maintain the Telecoms industry’s position as a key player in addressing sustainability challenges. As the world’s largest mobile phone operator with over 70% national market share and 530 million subscribers, China mobile is playing a transformative role in the new global economy. Through collaboration with a range of partners, it is addressing barriers to technological and business innovation. For example, it is developing energy efficiency monitoring solutions for a range of industries, and a microcredit information platform for use in rural areas. China mobile also created the mobile labs sharing platform as a creation space for the communications and tech industries to come together to discuss and share challenges, solutions and expertise. For vodafone, sustainability is a driver of innovation against a backdrop of persistent cost pressures and wide-ranging issues sparked from operating in emerging markets. Access and low-cost solutions, climate change mitigation, mobile health and mobile payment services are areas where sustainability expertise is being used to refine new products and services. Climate change is an issue across the sustainability value chain and so vodafone positions itself at the forefront of research into mobile telephony’s role in tackling climate change. Supersector leader For Telefónica, the two areas of access and inclusion and Green Information and Communication Technology (ICT) are supported by developments in e-health, e-learning, and the provision of financial services. Across all these areas, there is a recognition that huge new business opportunities exist. The recently established Global e-health Unit in Granada, Andalucia is recognition of this shift. Telefónica partners with the likes of Google and Intel, collaborates with non-tech companies on challenges such as energy provision, and commits to open innovation. bIg INNOvatION Issues
  33. 33. salterbaxter  DIRECTIONS 2010  31 Healthcare Changing global demographics and growing demand Fixing the ‘access to medicines’ problem Finding cost effective and sustainable approaches to RD OUR VERDICT OUR VERDICT OUR VERDICT Whether Roche’s approach to innovation will be enough to see it through tough regulatory licensing issues and help it respond to a shortage of skills amongst potential employees will determine how well it rebalances itself in a changing operating environment. Cross-sector collaboration and sharing of expertise should help Novartis adapt to the changing global context for the healthcare sector and remain competitive. Our winner AstraZeneca beats Roche because its approach appears to be more fast-paced and nimble. This, together with effective partnerships, should enable it to anticipate new challenges, feed that straight back to RD, and innovate at a rate that is in line with future healthcare demands. The healthcare industry’s RD model is struggling to adapt to a changing economic climate. The innovation and RD pipelines are long, so looking for ways to make this process more effective is key. Beyond this, meeting the demand from emerging and developing regions will determine companies’ ability to prosper. This will require even greater focus on transparency and access. AstraZeneca has identified the need to transform its approach to RD as central to helping it get fit for the future. Creating value-enhancing partnerships by going outside the business to source innovation is key to lowering fixed costs and building flexibility into its operating structure. AstraZeneca is collaborating to explore personalised healthcare (PHC) solutions which bring down the costs of medicines in high income countries. It is working with international NGOs and other organisations on developing world health issues. All of this allows AstraZeneca to innovate and prepare for future healthcare demands and new markets. Novartis’ business focus is on innovation and diversification to remain responsive to a challenging external environment and changing global demographics. Novartis’ RD strategy targets neglected diseases where market potential is large. It also recognises the importance of collaborating with external partners and across industries. For example, in partnership with not-for-profits, the company has repurposed its knowledge from research into diseases in high income countries to create solutions to illnesses such as diarrhoea in developing countries. In an effort to improve efficiency, it has also used techniques taken from the FMCG sector to adapt its approach to patient education. Supersector leader Roche’s commitment to innovation is backed up by its mission to create medically differentiated products and services – i.e. ones that add real health benefits to people’s lives and the bottom line. It aims to do this through an innovation-driven culture. For Roche, innovation is firmly linked to human capital. This is critical in not only maintaining the highest levels of product quality, but also in providing it with the management expertise and skills required to adapt to the changing face of the global healthcare and pharmaceutical sector. big innovation issues
  34. 34. 32  DIRECTIONS 2010  salterbaxter Companiesinfocus Continued Technology For Nokia, the transformational effect of its handsets can help address issues around access and environmental protection. Tools such as education delivery, data gathering, mobile banking, and low cost mobile internet access make Nokia well placed to deal with demand from emerging and developing countries. Nokia is transparent in setting out supply chain challenges recognising that securing a social and environmentally positive supply chain will give it competitive advantage in the future. It hosts innovation discussions to bring together ideas to enhance the development of its products and services and to encourage wider participation around sustainability challenges. SAP recognises that through improving the effectiveness of its sustainability software, combined with its role as business partner to a customer base worth $5 trillion, it can have a big role in the shift towards creating a sustainable future. By collaborating and co-innovating with its ‘ecosystem’ of customers, partners and stakeholders, SAP aims to expand the reach and impact of its business solutions. SAP’s Developer Network (SDN), a community of over two million members, is a co-innovation space where members can share, discuss and learn about how to best use the company’s services. Supersector leader As a chipmaker, Intel sits at a unique point in the technology sector. Its product range gives it a key role in creating the tools and mechanisms that will help in the transition to a sustainable future. This fits its goals of playing a transformative role in education, quality and access, and environmental sustainability. Alongside the citizenship aspect of this approach, the strategy also lays the foundation for building new businesses by tackling big problems. By pledging to train ten million teachers by 2011 and investing in science and maths education, Intel is helping people engage with digital technologies and ensuring its workforce requirements for the future are catered for. The technology industry is set to play a central role in enabling the transition to a low-carbon future. There are promising signs of innovation, but the sector is not quite there. More needs to be done to create the tools needed to respond to social and environmental challenges and to facilitate companies coming together to share knowledge and find solutions. OUR VERDICT OUR VERDICT OUR VERDICT Intel’s approach, while not explicitly about innovation, is about transformative change. Helping people learn through its products and services – at a time when access to quality education is a major challenge – means that the company is facing up to future challenges in critical areas of its business footprint. Our winner SAP beats Intel, because it demonstrates the best ‘horizon spotting’ potential and the best approach to co-innovating solutions. It has the products to serve a new generation of business and if it can continue to look ahead and move fast, should stay ahead of the competition. Nokia faces serious supply chain challenges in the near future. While it is clearly focused on tackling this challenge, its overall approach to innovation is not as aggressive as we would expect from such a leader and potential enabler of a low-carbon economy. How to balance resource constraints with growing demand for products and services Creating more ways for people across sectors to collaborate and share expertise Aligning products and services with sustainability solutions big innovation issues
  35. 35. salterbaxter  DIRECTIONS 2010  33 Automotive VW has linked its sustainable mobility strategy to increased urbanisation and the diversity of approaches that are needed to adapt to a variety of local, regional and national contexts. The ‘18plus’ strategy provides the framework for the company to continue innovating to adapt to serve new markets with relevant vehicles. Networked driving goes hand-in-hand with environmental considerations to ensure that driving fits into smart transport systems of the future. The group’s BlueMotion technology provides a well recognised engagement channel with customers around VW’s environmental efforts. Fiat recognises that innovation focused on sustainable mobility, which creates solutions people want to use, will mean the group remains competitive. The eco:Drive partnership with Microsoft allows drivers to create personalised plans for reducing emissions. The Open Innovation Initiative is an example of Fiat’s commitment to sharing expertise. It aims to bring together ideas from around the world to speed up and restructure traditional RD platforms. The Fiat Mio crowdsourcing project in Brazil, which allowed individuals to suggest their own innovations for a perfect vehicle, demonstrates an appetite for experimenting with new forms of customer engagement. Supersector leader For BMW, premium and performance count. The business recognises the competitive edge for a manufacturer offering the most compelling vision for an eco-friendly future and the best environmental production management. The cross- company ‘project-i’ business unit, which rolled out the electric Mini customer test scheme last year, leads on exploring sustainable mobility. Alongside this, the efficient dynamics strategy is continuing to push the potential of hybrid technology, reducing the carbon intensity of BMW’s product line. OUR VERDICT OUR VERDICT OUR VERDICT BMW is working hard to lower the carbon intensity of its vehicle line-up in the near-term and explore mobility concepts for future transport challenges. If it can scale up innovation fast enough it can retain its position at the top end of the market. Our winner Fiat beats BMW, because of its open approach to RD and its understanding of what a car manufacturer of the future needs to be concerned about. Fiat is just ahead of VW but it’s a close race. VW’s awareness of the shifting global landscape means that it is well structured to adapt to new markets with new products. Ability to engage with customers depends on continued innovation and the effectiveness of the BlueMotion brand. Can the automotive sector make the right near- term decisions, combined with long-term vision, and integrate itself with other transport infrastructure thinking? Innovation around sustainability will be harder for some than for others but obsolescence beckons for the company that can’t see that sustainability is its biggest challenge. Lowering the carbon intensity of vehicles Integrating technology into the approach to sustainability Adapting to future demographic and urban challenges to transport infrastructure big innovation issues
  36. 36. 34  DIRECTIONS 2010  salterbaxter Companiesinfocus Continued Personal and household goods With 54% of its current workforce and a target of 45% sales by 2012 (up from 38% in 2009) coming from emerging markets, FMCG company Henkel is adapting to global shifts. It not only needs to make products that meet a global standard but that also meet the specific needs of national and regional markets. This global- to-local context also applies for production standards and efficient resource use in Henkel’s 57 producer countries. New products must contribute to at least one sustainable development area, ensuring that social and environmental decisions go hand-in-hand with the product innovation process. Nike’s sustainable business and innovation strategy is an explicit approach to rewiring the way it does business to keep the brand on track in light of upcoming resource constraints, continuing supply chain challenges and changing consumer behaviour. In a sector where the customer-brand relationship is key, Nike has taken to talking about this journey via campaigns such as Nike Grind – where rubber from shoes is repurposed. Nike also demonstrates willingness to work beyond the traditional corporate walls to seek out changes to techniques and consumer behaviour. The GreenExchange – an almost free to use open patent exchange set up in collaboration with Creative Commons – is an example of this. Supersector leader Philips is aware that the healthcare challenges and demand for other products from emerging markets will shift the balance of its business East and South. In these new markets, both lower cost solutions that are sympathetic to a variety of conditions and high end equipment that meets growing needs are required. Philips launched EcoVision5 – a set of sustainability targets for 2015 – in response to the need for flexibility in the face of this new demand from multiple new markets. OUR VERDICT OUR VERDICT OUR VERDICT Philips’ focus is on meeting demands of new markets while reducing its environmental footprint. But it will need to further leverage the power of its brand if it really wants to drive sustainable innovation across its business and its customer base. Our winner Nike, with its potential to harness the power of its consumer base, is our winner. Nike is using its considerable expertise as a marketer to communicate and engage customers on sustainability issues, in a language they understand. Henkel’s global footprint has forced the company to develop product and service design skills that fit the new global challenges. More effort to use new forms of customer engagement will help speed up learning about new local contexts. Developing products that have social and environmental value is a key challenge for companies in this sector. They must also take advantage of their brand leverage and marketing expertise to influence consumer behaviour around sustainability challenges. This means embracing open innovation and ‘crowd platforms’ to bring people together and effect change on a large scale. Companies must do this without missing a step on the road to sustainable supply chain management. Securing a sustainable supply chain Creating products and services that add value to society and the environment Leveraging the power of brands to engage consumers big innovation issues
  37. 37. salterbaxter  DIRECTIONS 2010  35 Conclusion We took five DJSI supersectors that we felt were facing some big issues and that have a big role to play in speeding up the transition to a sustainable future. We then took the DJSI supersector leaders and benchmarked them against two of their supersector peers, looking at the following criteria: 1 Commitments, strategies and systems for sustainable innovation 2 Sustainable innovation initiatives and programmes 3 Evidence that customers and consumers are being engaged around sustainable innovation 4 Evidence that they are going outside the boundaries of their company to source innovation and are helping others to connect, share and collaborate around sustainable innovation. We set this against what we see as the big challenges for each sector and whether their company’s approach to innovation and sustainability is sufficient for them to rebalance their business to cope with the big shifts taking place. The risks and opportunities in sustainability have become better understood – though the actions of companies to address them can be less clear. Our analysis shows that leading the sustainability industry rankings does not necessarily mean leading in sustainability innovation – and that is a serious gap in a company’s leadership qualities. If those held up as leaders are not taking the agenda forward to meet global pressures and unprecedented change to the corporate operating environment, where will adaptation and new, sustainable ways of doing business come from? The word ‘sustainability’ has joined ‘innovation’ as one of the most over-used words in the corporate lexicon. To achieve true leadership companies need to demonstrate robust sustainability measurement and performance with forward thinking innovative approaches to tackling global environmental, social and economic challenges. No easy task, but the ability to link innovation and sustainability objectives gives a sense of accountability in response to the question: are you doing all you can to be ready for the risks, challenges and opportunities ahead? methodology
  38. 38. 36  DIRECTIONS 2010  salterbaxter peter graf Chief Sustainability Officer SAP peopleinfocus inside the world of A CSO In March 2009, Peter Graf was appointed SAP’s first Chief Sustainability Officer, reflecting the company’s strategic commitment to sustainability. Karen Deignan spoke to Peter to find out more about his role – specifically how SAP is improving its own operations to become more sustainable and how it is helping its customers do the same.

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