Brazil's Efforts to Convert Environmental Responsibility into Competitive AdvantagePublished: January 22, 2004 in Knowledge@Wharton
According to a study conducted in 1998 by BNDES, the Brazilian Development Bank, SEBRAE, the Brazilian service that assists micro- and small enterprises, and CNI, the national confederation of industry, the adoption of environmental responsibility programs has risen sharply since the end of the 1990s. Of the 1,451 organizations contacted, 85% have already adopted some environmental safeguards. About 90% of large companies, mostly with ties to multinational groups, have instituted such programs compared with 35% of small and mid-size companies.
The roots of this movement, however, go back to the 1970s when groups of environmentalists began to proliferate. Since then, companies have tried to avoid having their image linked to environmental disasters and also “have worried about their environmental liabilities,” says Sergio Braga, coordinator of the Center for Sustainability Studies (CES) at the Getulio Vargas Foundation.
Accidents such as the one that occurred in 1984 at a Union Carbide plant in Bhopal, India – in which 500,000 people were poisoned by lethal gases – have had a major impact on social awareness. Even today this disaster is considered one of the largest industrial accidents in history. The social pressure on companies resulting from such disasters encouraged them to include concern for the environment in their planning. “That perception of risk led to a greater demand on the part of the public sector, and it took the form of legislation” aimed at reducing such occurrences, says Jacques Demajorovic, professor of environmental education at SENAC, the national business apprenticeship service.
Whether motivated by legislation or social pressure, companies that place their bets on environmental management can demonstrate positive results from this strategy after a brief period of time, observers say. In general, programs involving the rational use of water and electric power have generated the greatest return in the short term. Marcos Viceconte Baptistucci, manager of security and environment at Boticario, the cosmetic firm, agrees. “If we add up all the programs that we have now, and include everything from the treatment of waste products up to the re-use of water, we expect to benefit from [a savings of] up to 20% in the cost of manufacturing,” he says.
The most important results for companies, however, are those that measure shelf space and sales. “That’s where a company finds out if its eco-marketing is well received by consumers,” says Braga. More and more, those products manufactured by environmentally responsible companies are getting a better reception by the public. Many times, the product’s good image overcomes even the quality of the product itself.
“Research undertaken at some universities,” Brago adds, “and many studies done by Consumers International (a non-governmental organization) about sustainable consumption show that consumers’ preoccupation with the environment is going to grow in a slow but constant and gradual way. This interest on the part of consumers, who also feel pressured to choose other eco-responsible products, is directly reflected in the business results of certain companies.” As Demajorovic puts it: “One way of differentiating yourself … is to adopt the rhetoric of socio-environmental responsibility. You can use this as a strategy of differentiation in the marketplace.”
Marketing vs. Internal Responsibility
In Brazil, Boticario is one company that has shown some benefits from improved environmental management. Over the past two years, the company has invested about 460,000 reais ($156,500) in efforts to control pollutants in its production line. “Our entire process of generating waste products is standardized,” says Baptistucci. “Of the total we invested, 300,000 ($102,000) reais were for the construction of a facility” that separates out waste products generated by the production process.
Nevertheless, although this process reduced costs by 10%, it has not generated as much return as the company had hoped for with respect to its customers. While customers get a product based on the responsible use of natural raw materials, it is difficult for them to appreciate that the product is the result of changes in internal production processes, which are generally among the most polluted, Baptistucci says.
Oddly, this vacuum was filled by another initiative within the same company – a foundation for the preservation of the environment. “The projects supported by the Boticario Foundation don’t necessarily have any tie to the production process,” says Baptistucci. “Yet nowadays the Foundation is better known than the environmental management done by the company itself. What we did was show people” that the Foundation’s recommendations were being instituted by management.
For Braga, however, these types of efforts in Brazil remain insufficient. “Companies are still too worried about promoting their good deeds, and even when they have a well-designed strategy for communicating that, they do it in a very institutional way; they seek to sell the image of the company [rather than] the production processes that reduce” environmental damage.
Embraco, another Brazilian firm, offers a clear example of how sales can be increased by using environmental advertising. At the beginning of the 1990s, Embraco, which manufactures hermetic compressors, placed its bets on the development of an “ecological” compressor that utilizes HFC gas which is not damaging to the ozone layer. This successful tactic pressured competitors to begin using the same process. “Day by day, we rapidly won markets with … the compressors we produced that used HFC,” says Rosane Buttgen, the company’s director of management, health, security and environment. “It wasn’t only a monetary gain; it was also about our image.”
In Embraco’s case, favorable results in the marketplace led to a policy of investing in processes that preserved the environment. In 2001, the company earmarked 1.96 million reais ($667,000) for the reutilization of water, the cleanup of waste products, and the rational use of energy. In 2002, investment grew by 42%, reaching 2.79 million reais ($949,000). Moreover, the company created a prize for environmental responsibility aimed at schools in the region of Joinville in [the state of] Santa Catarina, in the south of Brazil. The result has been an improvement in the company’s status within the community, even though this change has not been reflected in the direct sale of finished products.
Legislation and Oversight
According to Braga, in order to obtain results – both from an economic and an environmental perspective – legislation must be more effective. In Brazil, laws are still in the process of evolving. The most important regulation in this area is one which deals directly with environmental crimes. It establishes penalties for organizations responsible for ecological disasters and extends these penalties to include the company’s top management. Since its adoption five years ago, penalties of up to 50 million ($17 million) have been applied to violators. “The law has an impact on the process of decision-making” within companies, says Demajorovic.
Although the law is the backbone of the movement for better environmental management, “a strict [legal] framework doesn’t function if there is no oversight,” adds Demajorovic. “However, this has moved forward, and it has meant that some companies are taking more care to incorporate environmental matters in their production process.”
Despite improvements, Brazil lags behind countries that are more economically advanced. According to data from CEMPRE, the Brazilian institute that promotes recycling in waste management, 45% of steel plates (often used in industry) consumed in Brazil in 2002 was recycled. In the United States, this figure was 60%, and in Japan it was 88%. The data from CEMPRE also show that 44% of glass packaging used in Brazil in 2002 was reprocessed. That number is significantly lower than the figures for Germany (87%), Switzerland (92%), Norway (88%), Finland (91%) and Belgium (88%).
In addition, only a few companies have gone beyond what the law requires, demonstrating that the results can be as positive for environmental preservation as they are for company profits. In its three years of using recycled packaging, for example, Boticario recycled 800 tons of paper annually, the equivalent of 15,500 eucalyptus trees that didn’t have to be chopped down each year. The processes at Embraco, which were consolidated beginning in 2001, also show solid returns. At the beginning of 2002, the company’s headquarters consumed 25,000 cubic meters of water each month. Twelve months later, monthly consumption fell to 19,500 cubic meters, a reduction of 22%.
Even so, environmentally responsible behavior originates more because of the actions of individual companies than because of legal requirements. Moreover, such actions are very dependent on the reaction of consumers, who are limited by the information that manufacturers themselves provide. “The consumer has to trust what the manufacturer says, but the manufacturer doesn’t always talk about all the stages in the process of manufacturing the product,” points out Braga.
“In general, companies divulge some but not all the facts about their products. They announce that it is recyclable or biodegradable, but there is no certifying organization that, in an impartial way, can attest to the veracity of the information,” he notes, adding that the solution to this problem is not direct intervention by the government through fines and penalties. The solution is for consumers to know how to distinguish between those companies that are environmentally responsible and those that are not.
For Braga, a good solution would be to create an environmental seal that identifies environmentally safe products. “It would be something with great visibility. Only in such a way would consumers be correctly informed about the environmental impact caused by each product. Within a family of products, they would be able to know which ones produce less damage to the environment.”
Demajorovic suggests that those companies that only try to adapt to legislation are not using the commercial potential of investing in environmental preservation. “It is becoming more and more obvious that environmental management can be transformed into a competitive advantage,” he says. Braga adds that “for companies to be viewed as part of the vanguard in this area, they must go a bit beyond all the basic requirements” and examine their entire production chain before deciding which investments would be most effective.
One result of this movement towards greater environmental responsibility can be viewed in the internal movements of the markets themselves. A few years ago, the Dow Jones Sustainability Index – which includes companies that are socially responsible – was created on the New York Stock Exchange. “It is interesting to observe the fluctuation of share prices in the two groups,” says Demajorovic. “The index made up of companies that are socially responsible had share prices much more highly valued than the others.”
Braga predicts that in the near future, companies will move to assess the environmental assets and liabilities that they are producing. “A methodology must be created … that permits the adoption of accounting procedures that demonstrate the integration of environmental costs in companies’ production processes.” Profits could then be computed in a broader way, not merely as profits in terms of image or lower production costs. “I imagine that, in 10 or 15 years, companies will be including environmental [costs and benefits] when their do their bookkeeping,” he says.