I would like to take you on a journey of discovery at various levels of the business case; the risks and opportunities for sustainable business. We'll explore the early stages, and the significant eco-efficiency benefits we can deliver, but then the going gets tougher, forcing us to look deeper into the changes we might need to make...
We’ll start our journey by taking a quick look at what we mean by sustainable business.Then we will set off for the foothills, and consider the significant eco-efficiency benefits we can achieve – how we can save money by being smarter with our energy and resources.Then the going gets harder, as we experience diminishing returns, and perhaps a few more constraints & challenges, that will force us to look deeper into what we might need to change.I will then look at how we might need to re-think our business models and strategies, and even our system of commerce, if we are to maximise the business case opportunity, and minimise the risks.We’ll then bring all this learning together and reflect on a hierarchy of benefits – on how we can build the business case over time.And ultimately how the process of business transformation will help us realise the full range of business benefits.I also understand that you good people like a lot of detail, and rightly so! And so we will take a few stops on our journey, as we have a look at some of our interesting case studies.
Let’s start with a definition for what we mean by sustainable business…Let’s face it, the term can tend to mean all things to all people, depending on what we are talking about, and what position we are taking.And the term also tends to get used interchangeably when we sometimes mean Corporate Responsibility, Corporate and Social Responsibility, Ethical Business, Responsible Business, Philanthropy and community engagement, and so on.At Earthshine we have developed a broad and far-reaching definition over the last seven years of research and development – for us Sustainable Business is about:“Business strategies & operations that meet the needs of the enterprise, customers and all its stakeholders whilst protecting, sustaining and enhancing the human and natural resources that will be needed in the future, making legitimate profits while accounting for the true costs of doing business.”This, we find, points to the far-reaching and very real responsibilities we have in our businesses.Our rationale for this should become clear though our session and discussions, this morning.
The importance of sustainability is recognised by many CEOs… But!The latest UN Global Compact Survey is quite telling: Despite the recognition that our world is in grave danger, business leaders do not believe the conditions are in place for them to meet the challenge.And according to McKinsey, only around 30% of executives say their companies actively seek opportunities to invest in sustainability, or embed it in their business practices. CEOs admit they are still struggling to make the business case for long-term investments, while key influencers such as consumers, governments and investors are failing to provide the incentives they need.It seems like we are becoming stuck!
In spite of the challenge, leading organizations are making good progress in developing their sustainable business strategies. We see high profile examples, such as Unilever, M&S, Skanska, and others making great progress. M&S with its Plan A has now saved £135 million – a considerable achievement.For those that have been making most progress, it is perhaps unsurprising that the conventional business case is largely based on eco-efficiency.If we get smarter with our resources and energy, and reduce our waste, we can of course make significant operational cost savings.And let’s be honest, this is a really good place to start.
And we have also found this on our Global Research ProjectCompanies can already achieve up to 40% reduction in carbon emissions and energy cost savings through a combination of initiatives. Some businesses have also improved their “top lines” - and increased sales – by integrating sustainability principles into their goods and services, further improving margins in the process.The business case is elegant and persuasive and, as the phrase goes, they are “making money by doing good”.
We also see some businesses going even further, moving towards circular economy principles, with business activity focused on re-use, repurposing, and recycling. This means economic activity and transactions come from within the existing pool of global resources:It’s fascinating to see some of the car companies developing new approaches, not just in terms of how their vehicles are are powered, but also in terms sustainable design, materials and fabrication. It’s great to see M&S Shwopping – working with Oxfam on re-using and recycling clothes. Patagonia, a clothing company from California, has also been doing something similar for a while, and has actually been encouraging its customers to buy less – really pushing the re-use, repair and recycling business model.This points towards sustainable consumption – a really important aspect that we will come back to later.While ‘product take-back’ principles has been around for a while, what is new is the profile; with M&S introducing it’s approach in a highly visible & public way – it takes the model towards becoming mainstream.
Let's look at one of our case study examples – and this one is still one of my favourite stories:It’s important to remember that sustainability and eco-efficiency are not just about big companies and big brands – these approaches are for everyone.And so, I am very impressed with what smaller businesses have been able to do in terms of innovation. Businesses like Apollo Motor Group, an auto repair service company with a chain of workshops across southern England, are shifting from a business model reliant on waste, to one built on people. It is fair to say that this company found sustainability by accident; they were forced to do something in response to their situation. They were on fixed price contracts with insurance companies at a time when replacement parts on cars went up by 20%.They were losing money, many jobs were at risk, in fact the whole business was at risk.After many sleepless nights and much searching they found a set of new technologies, that would enable them to radically change their process; drastically reducing the number of parts they were throwing away and replacing, and instead repairing them to a high degree of quality. This resulted in waste being reduced by 42%, energy and carbon emissions dropping by 34%, while concurrently reducing overall costs to the customer, and doubling their own margins. The company has also saved the jobs of 13% of its workforce and is paying them more! The beauty of this approach is that by spending less money on resources and waste, the company can spend more on people – from waste to wages – as well as becoming more profitable. Who wouldn’t want some of that?Although technology was the enabler, this was all about shifting the business model, and how they made money.
This is all good, but the wider reality is that sustainability programs are too often run separate to the main business strategies. And as such, there is often a wide gap between the rhetoric and the reality of corporate sustainability behaviour.In effect, many businesses can be seen to operate on two seemingly contradictory agendas – on the one hand looking to benefit people and planet, and on the other, the singular focus on maximizing profit, often at the expense of the former. I’m not sure if a tobacco company could ever reconcile these two agendas – unless they turn their raw materials into a healthier alternative use?And it is entirely possible that many companies intuitively get the idea of eco-efficiency, without questioning the more fundamental aspects of the business, its strategy, and its true impact.Consider the relative merits of Shell, an oil company, investing in solar energy to enable a 'cleaner' approach when drilling for fossil fuels. This seems to me to be missing the point.Companies can be doing the wrong thing very well, with increasing efficiency, yet still diminishing the triple bottom line.In any case, eco-efficiency only gets us so far; it slows down some of the issues, buys more time. But it doesn’t solve the fundamental problems we face.We also have to be mindful of the ‘rebound effect’, whereby resource depletion can still increase, despite, and because of our increased efficiency, due to our insatiable desire for growth. The more efficient we become, the more we tend towards exploiting this – for as long as we can.We still have much to do: As Peter Bakker reminds us, CR and eco-efficiency initiatives are not going "deep enough, far enough, or fast enough" to enable long-term business success.
We really do face an unprecedented set of challenges at the intersection of climate change, rising energy prices, increasing resource scarcity, and economic/debt restructuring. Slowly, inexorably and irresistibly, the context for business is changing beyond recognition. Climate change economics – adaptation to the increased frequency, intensity and impact of environmental disasters takes on greater significance. In 2012 we experienced a wide range of climate change events, although perhaps the most devastating was Hurricane Sandy – estimated to have caused between $30bn and $50bn of damage. And as we have seen in UK with major flooding events, it’s not just the obvious and direct impacts we need to plan for; there are often hidden impacts too, like the gradual loss of customers and staff over the extended periods through which the businesses are unable to trade.Energy availability and affordability - anything linked to rising fossil fuel energy prices is likely to become inherently unaffordable. In 2011, the IMF identified likely scenarios for price increases of +60% in the short-term, and +200-600% within 20 years. The question is not if, but when oil becomes unaffordable. How sensitive will your customers, suppliers and your own businesses be to this key factor?Resource scarcity – the world’s natural ecosystems and resources are being degraded at an unprecedented rate. Mankind currently extracts 50% more natural resources than was the case only 30 years ago, amounting to around 60 billion tonnes of raw materials – equivalent in weight to 41,000 Empire State Buildings – each year. Many companies have not yet fully addressed the implications of resource scarcity and the associated price risk, and preparedness differs considerably per sector.And in terms of our ecological footprint – the capacity of our planet to support what we do: According to WWF – we are already using around 1.6 planets to maintain our current consumption patterns. Our combined ecological footprint – the demand people place on the natural world – has more than tripled since 1961. In the West, the picture is worse still; we are already living a three-planet lifestyle.
And when you stand back, really stand back, and reflect on what is going on around us, it really makes one wonder…What will the combined impacts be on our businesses? Will our strategies work? Are they resilient enough; are they truly fit-for-purpose in our changing business landscape?For how long will we be able to keep on delivering good levels of return, or still be around, even?At what point might we become a stranded asset – no longer attractive to investors? Ten years? Five? Perhaps within two years?The reality is, every business has a shelf life – but some could be shorter than we would hope for.And as the Guardian newspaper reported earlier this year – climate change and resource scarcity may wipe out the pensions industry within 30 years. Sounds like a long time, but not if you are already well into your career and looking to retire as we approach that time frame.We need to be mindful, if we are to avoid becoming the boiling frog.
And so we need to redesign our whole approach to business – our models and our strategies.It seems almost too obvious, that we need to focus on the long-term. According to a study by Harvard Business School, sustainability-focused companies significantly outperform traditional firms in terms of stock market and accounting performance. ‘Taking a long-term view’ is cited as the key enabler for this success.All dimensions of sustainability need to be firmly integrated in the business strategy; they all cut to the heart of business risk & opportunity. Going forward, the sustainability strategy is the business strategy, and vice versa.The business model dynamic is changing, becoming more holistic, more transparent and accountable. The costs of key factors that were simply labelled as externalities now need to be considered more carefully – pollution, resource scarcity, climate change impacts, carbon, and social costs.Each aspect has a potential impact on profitability; if the company gets it wrong, the impact on attractiveness to shareholders will be huge. By building in all these factors we develop greater resilience; we can last for longer and keep delivering profits.We also need sustainable consumption: I Love the Tim Jackson quote here, reflecting on the madness inherent within the current paradigm: ”people are being persuaded to spend money we don’t have, on things we don’t need, to create impressions that won’t last, on people we don’t care about.” Profound.Without radically more sustainable consumption patterns, any business strategy within a resource & energy-constrained world becomes self-defeating.Of course, all this needs to be eco-efficient in delivery. Which is great, but we’ve got to remember on its own, eco-efficiency only slows down the rate of consumption of resources and energy. It buys a little more time. We also need to go further, & develop circular economy principles, where waste is designed out. And ensuring customers are able and encouraged to buy products that are more durable, as well as reducing consumption where possible. And products are more easily and economically repaired, upgraded or remanufactured.And we also need to think through the ‘Higher purpose’ of each of our businesses. While business is still about making money, it is also about how we make money that is important. Are profits generated in a way that does not deplete natural resources and create adverse impacts for the environment, society or people? And to get to truly sustainable business, we have to go higher still, and challenge the whole operating system – can we make capitalism itself sustainable? That’s a subject for another time…
Let’s take another case study. Life Technologies is a company working on new frontiers in biotechnology. Their sales last years were in excess of $3.6 billion, employs approximately 11,000 people worldwide, has a presence in more than 160 countries Their model is an interesting blend of entrepreneurial and higher purpose, with a focus on:Products that make life better – for example the development of technologies to enable more rapid production of vaccines. This work is vital, especially in developing countries. Products that help accelerate a mode sustainable future - one key example here concerns products and technology that enable the development of viable alternatives to fossil fuels, using a feedstock derived from plants (but not food plants, and not grown on land that would otherwise displace food production). This technology is important as it enables a much higher conversion of solar energy than occurs with conventional biofuels. The company has developed a four phase Evolution Model, through which its sustainability program has emerged, from Compliance, through Footprint Reduction & Resource Conservation, Green Products, to Sustainable Business Models. This structured approach has delivered an impressive range of eco-efficiency achievements – saving millions of dollars on the process. Green product revenues grew 17% from 2009 to 2010, as compared to the overall company growth of 9% for the same period. This gives one a sense that sustainable products are certainly in the ascendency. And all new products will eventually be zero landfill products. The company is building take-back into the product life cycle, so that products are collected, refurbished, or disassembled and harvested for high value parts, or recycled. And with its emphasis on sustainable business models, sustainable products, and eco-efficiency, Life Technologies has outperformed the NASDAQ by 30% over a five year period. A compelling business case!
One final case study, that we like.Now, you don’t often hear these three words in the same sentence – sustainable – financial – and innovation! But Triodos provides a refreshing exception here.Triodos Bank is one of the world’s leading sustainable banks. Although not as large as some of the mainstream banks yet, Triodos now has a balance sheet worth €4.3 Billion, and is one of the largest investors in renewable energy in Europe.As you might expect, sustainability is at the heart of the Bank’s mission, to make money work for positive social, environmental and cultural change. The Triodos business model is based on lending to, and investing only in organisations that benefit people, society, and the environment.As such, Triodos helps its customers to deliver sustainable outcomes. For example, Triodos-financed renewable energy projects in 2011 generated enough power to meet the needs of nearly 1.5 million households in Europe, saving over 2 million tonnes of CO2 emissions.The Triodos story also provides another interesting example of how sustainability and profitability are not mutually exclusive concepts, even in the world of financial services. As well as driving towards, and influencing a more sustainable world, Triodos delivers consistent and growing returns. The Bank generated a net profit of €17.3 million in 2011, up by nearly 50% on the previous year.Triodos Bank truly walks-the-talk, integrating sustainability principles within its own operations, too. This includes carbon neutral banking, through energy reduction and efficiency measures, eco-efficiency buildings, allied to appropriate offsets. The Bank also has a good focus on sustainable resources.The Bank also shows us how alternative ownership models can work. All Triodos Bank’s shares are held in trust, and are traded via a ‘matched-bargain’ market. This approach protects the integrity and independence of the business and helps maintain its long-term focus.Visibility and transparency are key factors. It is also the first bank to publish 100% of the loans it makes.While there are many lessons in eco-efficiency and ethics, this case study also provokes much thought on the development of sustainable business models and strategies in support of the transition to a more sustainable economy – if a financial services company can do it, then anyone can.
So, let’s bring all this learning together.Eco-efficiency is good; this approach builds confidence, and there are major benefits to be had – but we also have to be mindful of diminishing returns. And while it can buy time, we also have to realise that getting to zero harm, or net positive, may take several hundred years. Also, there is also little to be gained in focusing on a 3.8% annualised saving in energy costs if we could go out of business within five years. For a long-term and genuinely sustainable business case, we should also look further – we need to be mindful of the big picture risks and opportunities – and their impact on our continued profitability, and even our existence. For organizations making the transition to become high-performance, competitive, sustainable enterprises, a radical transformation will be required in their strategic thinking and approach. By taking a more holistic and strategic approach, organizations can achieve greater resilience and long-term profitability, and generate value for their shareholders, investors, employees and other impacted stakeholders.
This is all well and good, you might be thinking, but how do we shift our business models from old to new economy principles? This, of course, involves real transformation – and this naturally requires careful management.We need to be adept at managing both short and long term perspectives, concurrently To keep business going, manage costs and operational imperatives But also, to evolve/transform in response to longer-term driversIn an ideal world, this transition would be smooth and seamless. While we cannot generalise on the specific cost dynamics within each business model, it is highly likely that some form of transition in results will be experienced, however, in both the size and quality of earnings delivered. The road to change is often bumpy and difficult.The real magic comes in holding two situations at once; discontinuing the risky stuff, while ramping up on the sustainable goods and services.Dong Energy, one of Europe's leading energy groups, is managing its transition away from fossil fuels, towards 85% renewables by 2040. And if a fossil fuel company can do it, anyone can.But for some, moving away from short-term markets – to generate longer-term value, for a sustainable future, we might also need to look beyond the constraints of our current organisational and ownership models. We can’t always do what is needed within the confines of a conventional PLC format.We might need to consider realigning the business format and ownership structure, to enable the right decisions and practical delivery of our business strategy. Perhaps Dell provides an unlikely source of inspiration here? As they have recently taken the company back into private ownership, to provide the scope to make ‘painful changes’ that could impact on short-term profits, while they turn the company around. There is an opportunity to look at this challenge through a different lens. If we open our minds up to the full range of possibilities…
There is no doubt that we are already in a time of radical change, and change often means stress for everyone, whether you are an employee or a business leader.And for sure, the 21st Century Executive will need to develop a raft of new approaches, to help make sense of our changing world, to synthesise strategies based on a new set of business dynamics, to lead people through uncharted waters, and hopefully arrive at a better place. This is a time to be both evolutionary and revolutionary, a time for futurists and systems thinkers, and a time for authenticity, and integrity.As a board members, we also need to find a new voice and direction, in sharing the real challenges, and engaging our employees in developing solutions. If we frame it right, we may be surprised at the positive response we get. We can also reframe the sustainability business case, based on long-term business resilience and success.We can re-design our business strategies - mindful of the real challenges and opportunities we face in 21st century.And with this, there is a real opportunity to bring greater harmony to our businesses, and within our selves, too – reconciling the values within and the practices without – so we are operating from a more authentic place. The power of this is not to be underestimated. And let’s be honest, transforming business strategies is much more fun and productive, rather than trying to patch-up an out-of-date and broken paradigm.But I will leave the last word to the late great Ray Anderson, as we finish our journey; who famously declared, I never did see the business case for unsustainable.Thank you.