Business

A new report by Arthur D. Little reveals that many companies’ have a long way to go on their level of sustainability performance, even among Nordic companies, regarded as among the most environmentally responsible. The report, “Sustainable Performance,” argues pressure from consumers and regulatory agencies have not pushed companies much beyond superficial levels in terms of sustainability. However, investors are proving to be a driving force in moving corporations toward more sustainable practices. As Annette Malmberg, a senior manager in Arthur D. Little's Energy, Utilities, Strategy and Organization Practice, commented:

“Our research has shown that there are clear signs that a powerful force that does have the ability to effect a rapid and deep-rooted change in corporate behaviour is emerging and the international investor community now recognises that those companies that are able to derive value from sustainability will outperform their peers financially in the long run,” said
The result is that sustainable performance drivers and shareholder economic interest are aligning."

Malmberg also pointed out that sustainable performance and effective carbon management allow companies to become more competitive and create value by demonstrating superior management skills.

Download the report

How do companies create value? There really are only so many ways. Borrowing from strategy guru Michael Porter's work and tweaking it a bit for the environmental age, there are four big buckets of value creation from thinking green: cutting costs, reducing risk, driving revenues, and enhancing brand value.

Within those buckets, companies find many tactics that work. But after years of pursuing environmental wins, some of the trend-setters have a good sense of the most productive paths. So clearly there's real value in green. But where should companies start and what kind of value should they pursue? Before you can tackle these tougher questions, you need to start with some basic ones: what's the environmental impact or "footprint" for the company and for key products up and down the value chain? How do environmental issues affect us, our suppliers, and our customers?

Even these seemingly simple questions can be hard to answer, and even if the analysis is done, companies that understand their footprint along the value chain are often surprised in two related ways:

Look at electronics or transportation companies, for example. For both these industries, energy use - often a good proxy for total footprint - is large in two key areas of the value chain: upstream (mining metals) and manufacturing. But the full value-chain footprint is dominated by impacts during the customer use phase (a fancy way of describing when we drive our cars or use our computers). Picture a wedge of impact growing through the value chain, with the smaller (though still considerable) impact upstream and the larger end with customers.

At the other end of the spectrum, take the food or packaged goods industries. The customer use impact is negligible; aside from packaging, the product disappears. But the upstream energy and water use in agriculture dwarfs the operational footprint. As one dairy company executive told me, "Our risk is the cow." So reverse the wedge and put the big end in the back of the chain.

If you understand these wedges, track where the big environmental impacts are, and then reduce them, you'll create the most value, right? Not quite. First, getting everyone used to the idea of looking at the full value-chain impact is a big hurdle. Second, much of the value from reducing impacts elsewhere in the chain is not easily measured (or even captured). Finally, when you try to choose the best strategy for creating value, you may stumble on a second surprise.

The best bang for your buck - especially with hard-to-measure intangible value - may not come from the big part of the wedge of impacts. When impacts line up well with business value, everybody's happy. But reality is often more complicated.

Let's look at Mattel and toy makers again. These companies make many products that use energy and are made of plastic you can't recycle. They could probably reduce their measurable footprint the most by designing toys that use less or no energy (a downstream issue) and less plastic (a downstream issue with waste and a big upstream issue in petrochemical production).

But look at intangible value, and the picture is different. Think of the damage to both brand and revenues when lack of knowledge about the supply chain causes a scare about toxic lead. When your brand is a majority of total company value, avoiding a reputational hit is the critical environmental priority. Look, lead is a serious problem, but for many products the exposure is small. So it may not be the biggest environmental footprint issue in the value chain. But handling a lead problem well will still create the most value for the company.

So what's the answer to these challenges? In short, hedge your bets and develop a portfolio approach. Big companies have built portfolios of brands and businesses for years. Why not portfolios of strategies and approaches?

Click here for more on Andrew Winston's "portfolio approach" to green strategies.

Andrew Winston helps forward-thinking companies use environmental thinking to drive growth. He is the co-author of Green to Gold, which explores what works-and what doesn't-when companies go green.

Professional services organization KPMG released a report recently claiming six major industry sectors are in particular danger from climate change risks. Aviation, healthcare, tourism, transport, oil and gas and the financial services sector all feature in the "danger zone," meaning they score highly on the risks which face them yet score poorly in terms of their preparedness to face these risks.

The report, "Climate Changes Your Business" represents some of the most comprehensive analysis of its kind to date, based on a review of 50 authoritative published studies addressing the business risks and economic impacts of climate change at sector level.

Download "Climate Changes Your Business" (PDF)

Andy Savitz at Greenbiz.com writes this week on six ways companies can advance government policy in favor of sustainability:

Regulating government, by applying pressure to to do the right thing. An example: The demise of apartheid in South Africa when businesses threatened to leave the country over the issue.

Leading government, by helping to frame the debate and be willing to participate in voluntary mechanisms for addressing the crisis.

Partnering with government (and with NGOs), as in the recent example when Wal-Mart met with a number of US mayors recently, including NYC's Mayor Bloomberg and Boston's Mayor Menno to reach an agreement to track the sale of firearms more closely. As Savitz puts it, "Governments now need the active participation and, in many cases, the leadership of private companies to provide even basic goods and services like public safety. Our public agencies are increasingly dwarfed in stature and effectiveness by the world's largest companies."

Forming your own government, through the use of meaningful industry trade organizations that provide regulation and guidance, such as the Sustainable Forestry Initiative by the American Forestry and Paper Association.

Regulate as if you are government: Savitz again points to Wal-Mart: "The behemoth has such enormous purchasing power that almost anything it says has the force and effect of law with its 60,000 suppliers." But companies of any size can work with their supply chain on sustainability issues, creating codes of conduct as part of standard contracts.

Influence the real government, through traditional lobbying, like the US Climate Action Partnership, including members like DuPont and GE, pushing for climate change legislation which will be good for both the planet and business.

Read Andy Savitz's full post here