Fashion or Strategy? Why Firms Are Jumping on the Sustainability BandwagonPublished: January 19, 2011 in Knowledge@Wharton
If building a sustainable enterprise was a fashionable trend five years ago, today it is a business imperative. Forward-looking corporations have figured out that a focus on environmental, social and governmental (ESG) factors is not just a bid to burnish their image, but rather it is a necessity in today's marketplace. And if done well, it is a true competitive advantage.
A panel of senior executives from consulting, banking and the chemical industries sat down to debate and discuss this critical shift during the recent Wharton Social Impact conference. The panel, "Sustainability and Corporate Social Responsibility: Is ESG the New CSR?" included participants from a variety of backgrounds and experience. Still, all were in agreement that what was a somewhat nebulous (but fashionable) movement five or 10 years ago has become a focused, integrated way of doing business at many firms.
"Sustainability has become more mainstream now," said Eliza Eubank, assistant vice president for the environmental and social risk management department at Citigroup. "It is not just something that the do-gooder environmentalist cares about. It is something that is on the priority list of CEOs." Stephane N'Diaye, senior manager of strategy-sustainability at consulting firm Accenture, echoed that view. The progress over the last several years in sustainability efforts, he noted, stems from "where it stands on the CEO's agenda."
In fact, for savvy companies, a strategy built around sustainability can be a critical advantage, Boston Consulting Group senior partner Martin Reeves pointed out. Even when government action puts more burdens on business, Reeves said there can be an upside. When you change the rules of the game, you "are putting a floor on certain behaviors [and] raising barriers to entry." Case in point: the establishment of the Food and Drug Administration, which Reeves contended "essentially took a snake oil industry and turned it into an industry with very strict scientific standards."
Certainly a focus on sustainability has changed the way many big firms operate on a daily basis. Citigroup's Eubank pointed to the firm's work in financing projects such as oil and gas pipelines. The bank requires borrowers for those types of projects to meet certain environmental and social guidelines. "We work with our sponsors who are developing these projects to make sure they have consulted the local community, that they are using adequate pollution control technology, and that they have good environmental and health and safety standards for their workers," Eubank said. There are real repercussions for failing to meet those standards. "We agree on an environmental action plan, which is a formal to-do list that the company needs to follow in order to bring their operation into compliance with international standards. It actually becomes an event of default if they stop complying with the environmental standards that we require of them."
According to Eubank, the motivation for this push comes from practical concerns. For one thing, the loans are repaid when the project becomes operational and starts generating cash. So if the project sponsor has done a poor job of building local support for a pipeline, for example, there is a risk that someone will sabotage the project, potentially delaying the repayment to Citigroup. In addition, if lenders like Citigroup fail to police their borrowers, they run the risk that their own brand becomes tarnished. The reason: Over the last decade, environmental groups began focusing their campaigns on the companies financing controversial projects. "You don't want to be on the front page of The New York Times [with a headline] saying 'Citigroup financed some mine and this mine spilled cyanide into the local river and poisoned the drinking water for all the villages downstream,'" Eubank noted.
Accenture's N'Diaye said that concern about reputational risk is widespread. According to a 2010 survey of more than 750 CEOs by Accenture and the United Nations Global Compact, 93% viewed sustainability as important to their future success, while 72% said "strengthening [the] brand, trust and motivation" was the biggest driver of their action on sustainability issues.
In fact, the right sustainability formula can transform a brand. N'Diaye pointed to the Swedish burger chain Max Hamburgerrestauranger AB. In 2007, the company, in response to evidence that the meat industry was a key contributor to greenhouse gas emissions, overhauled its business. The chain measured the climate impact of its food from the farm to the restaurant and printed that information on its labels. In addition, the firm shifted to wind energy and has supported reforestation projects in places like Uganda. The result: Between 2007 and 2009, an independent survey found customer loyalty for the chain spiked 27%, mostly driven by its sustainability blitz. "Here is a company that in the downturn has invested pretty heavily in environmental sustainability, in social sustainability and in paying attention to the consumer and making bold choices," N'Diaye said. "With all of those programs, they still manage to keep growing revenues."
Despite these success stories, however, the science of understanding how such social and environmental programs drive consumer behavior remains an inexact one. "We don't have the right metrics," N'Diaye noted. "We haven't done a good job of tying sustainability performance with business performance. We need to better understand the consumer and see how sustainability can drive the purchase decision. About 75% of people would say, 'All things being equal, I would buy green'. How you translate that into an actual purchase decision ... is something else."
Beyond brand protection, however, there are some very tangible benefits to these practices, as panelists made clear. Catherine Hunt, R&D director of external science and technology for Dow Chemical, said sustainable business practices can drive profitability. "If you use less energy, that affects your bottom line. If you generate less waste and, particularly in the chemical industry, [if] you don't have to get rid of chemical waste, you improve your bottom line."
Indeed, for companies like Dow that are actually developing green products, finding a showcase for those efforts can enhance their brands while expanding their markets. Dow's Hunt highlighted her company's co-sponsorship of RetroFIT Philly's "Coolest Block" contest, in which Philadelphia neighborhoods competed to win an energy efficiency overhaul of their homes, including installation of a "cool roof" using Dow technology.
"The Dow Chemical Company Foundation funded this," Hunt stated. "And I was asked 'If you paid, what is sustainable about that?' But it is about education. If you don't know what it means to have a cool roof, and what a difference that makes to your neighborhood, you are not going to do it."
For other companies, the benefits to their business may be less obvious but no less critical. According to Boston Consulting Group's Reeves, one of the biggest challenges for his industry is finding and retaining the right employees. That talent pool is a product of the education system in this country, which Reeves noted "is not in a great state."
That is why BCG has partnered with Chicago Public Schools, which teaches some 400,000 children, in an effort to boost performance and cut the dropout rate. The firm put its consulting expertise to work, analyzing what was wrong with the Chicago system, where, for every 100 freshman high school students, a scant six go on to graduate college. The project resulted in new efforts, including a scorecard for parents of high school students and new, intensive support for math, science and English teachers in struggling schools. More recently, Reeves was part of a team using a logistic regression model to understand what was causing the unacceptably high rate of high school shootings. "We are applying analytical, business approaches to a social problem," Reeves said. "Some of this is not about new ideas, but it is about applying existing ideas and clear thinking to places where that has been absent."
And when it comes to borrowing good ideas on sustainability, the panel made it clear that innovation can come from surprising sources. Citigroup's Eubank pointed out that Chinese banking regulators have required banks in that country to take a look at the environmental impact of their lending activities. "The Chinese Banking Regulatory Commission came down with a mandate that all banks in China need to start developing environmental policies," Eubank said. "There is actually a black list of about 200 companies in China that banks are not allowed to finance because they are too polluting." A representative from the Commission visited with Citigroup executives last summer and talked to them about the policy.
Among the panel's key messages was that the need to address ESG issues will only intensify over time, in part because the next generation of business leaders is demanding it. One of the audiences most keenly interested in the report Citigroup puts out annually on its sustainability record, Eubank noted, is the company's recruiting operation. "Students these days are much more environmentally aware, and they want to know what a company's sustainability policies are," Eubank said. "Bankers want to know that they are working for a company that is being responsible."