Bruno Berthon and Eric Lowitt 04.20.09 Forbes.com
Most people who run companies know that sustainability is good for business. Yet right now, when they are closely scrutinizing all investment programs, they're looking especially hard at environmental sustainability initiatives that focus on carbon activities.
Curtailing such investments is a mistake, we believe, because sustainability is closely aligned with critical moves companies need to make in a downturn--moves like doing more with less, returning to basics and investing prudently. We recommend, on the basis of what we've learned from our researches and consulting, that companies follow five low-cost sustainability principles to gain an edge in the troubled economy.
Consider which of two proposals you would fund right now--one that promises a 30% return on investment with an 80% likelihood of success, or one that promises a 40% return with a 60% likelihood of success. Which would you greenlight?
During more stable economic times, most executives would go for the second proposal. Today, however, you're more likely to take the surer bet. That's the way companies are thinking about their investments now. Practices like synthesizing high returns by pooling subprime mortgage assets are giving way to safer initiatives based on good sense and prudence.
Sustainability is central to this more thoughtful approach. After all, sustainability means conducting activities smartly and efficiently in ways that are economic, renewable and repeatable. More and more companies are realizing that integrating sustainability into their core processes can help them survive or even thrive during the downturn.
At Accenture, the global management-consulting, outsourcing and technology company, we've found that five low-cost sustainability actions correlate well with the five dimensions we associate with high-performance businesses. They involve growth, profitability, positioning for the future, longevity and consistency.
Growth: Go where the money is
There is at least one place where even now companies are capturing the type of growth that the investment community craves: the expanding market for sustainable products and services. In fact, some companies are finding energy offerings to be their primary source of stabilizing growth. General Electric's main bright spot these days is its GE Energy unit, which reported $38 billion in revenue in fiscal 2008, up 26% from the year before; the company as a whole grew 6% over the same period.
Governments worldwide are creating growth opportunities by preparing stimulus packages to jump-start their economies. They're investing in greening their infrastructures as a critical part of those packages, opening up significant opportunities for companies that can offer green solutions. In the U.S., the Obama administration is dedicating $150 billion to green infrastructure investments over the next 10 years.
Companies like Johnson Controls are already tapping in. In December 2008, Johnson Controls was chosen as one of several businesses the Department of Energy will employ to improve the energy efficiency of federal buildings, a program that the government is reportedly pumping $80 billion into.
The government's support for the creation of a "smart grid" also offers significant opportunity. The smart grid will enhance environmental sustainability by giving consumers ways to conserve energy, tap renewable energy sources and use plug-in hybrid electric vehicles. Progressive energy companies are creating teams from across their operations to get the scale and scope they will need to help build the smart grid.
For instance, Xcel Energy, a U.S. electric and natural gas company, is leading the development of a SmartGridCity project to develop the U.S.'s first local smart grid, in Boulder, Colo. Xcel Energy is using smart-grid technologies to achieve greater operational and energy efficiency, turn more to renewable energy sources and improve its overall business performance. And the smart grid opportunity isn't limited to energy companies; Accenture has helped support Xcel Energy's SmartGridCity efforts by serving as the project manager for the integration and management of data flow, as well as electricity transmission and distribution and customer marketing programs.
Profitability: Align cost reduction with sustainability
As many companies have learned the hard way, the profit margins in providing public sector services can be quite low. But more and more firms are finding that when they reduce environmental effects they reduce operating costs too. As David Abney, chief operating officer at UPS, recently noted in an article in Modern Materials Handling, "I can't speak for companies that are holding on for dear life in this economy, but in our case the economy is making us hungrier and more eager to find ways to conserve energy and reduce waste. It saves us real dollars if we can operate more efficiently."
Companies are saving significantly by lowering their energy consumption, their use of excess packaging materials and their reliance on virgin materials. In a 2008 interview with the Climate Group, a spokesperson for BT (formerly British Telecom) observed that it had signed the world's largest electricity contract in 2004, locking in pre-spike energy prices, and had subsequently launched a number of efficiency-improvement programs. As a result, the company is saving an estimated $300 million a year.
Getting rid of excess materials in packaging can definitely help with both one's environmental footprint and one's operating expenses. Wal-Mart has been working to reduce the size of its packages by 5% between 2008 and 2012. The company estimates this will save $3.4 billion over the next five years.
Positioning for the future: Partner to manage intangible assets
In this difficult environment, companies are sharpening their focus on risk management, in part because risk management is so closely linked with reputation. The trick to risk management, as events in the financial sector show, is to manage both the risks you know and the risks you don't yet know. Unfortunately, sustainability initiatives can bring about new risks.
Today's liquidity crunch has placed a premium on certainty; companies can't afford risks that may not pay off. The solution here is connectivity--developing relationships with whoever has the credibility and expertise you need to stay on top of your risks.
More and more companies are linking up with stakeholders and competitors alike to enhance their sustainability actions, to influence the direction of public debate about sustainability and to prepare themselves for forthcoming environmental regulations. These relationships require nominal financial investments, and companies across all industries can pursue them. Companies can derive many benefits in particular from relationships with non-governmental organizations, especially drawing on them for their sustainability expertise and sterling reputations.
A growing number of companies are partnering with competitors and other organizations to try to shape future environmental regulations. For example, businesses as diverse as Marsh (insurance), Pepsi (beverages) and Rio Tinto (natural resources) have joined the United States Climate Action Partnership, a cross-industry alliance that is calling for a government-mandated carbon cap-and-trade system to curb greenhouse gas emissions.
Companies have long known that they can do more working together than individually. Kellogg has partnered with Kimberly-Clark and the supply-chain management company TDG to share truck space in shipments to retailers. The partnership is saving 30,000 gallons of diesel fuel and reducing greenhouse gas emissions by 380 metric tons a year.
Longevity: Ensure your relevance in a sustainability-conscious world
When historians and economists look back at the present moment, they'll probably marvel at the staggering number of stalwart businesses that failed--and they'll say the fault lay in those companies' outdated strategies. After all, even in good times companies need to continuously renew their strategies to keep up.
Generally speaking, there are two ways to stay current: through innovation and through acquisition. The downturn gives companies seeking to capitalize on demand for sustainability-related products and services an opportunity to acquire quality assets at below-market prices. With market capitalizations across the board down between 30% and 40% in 2008 and another 10% in January 2009, the opportunity to acquire sustainability-related assets (as well as other kinds of assets) remains great.
Consistency: Win the loyalty of consumers and employees
The global investment community rewards consistency and hates surprises. We believe sustainability can play into that, helping companies attract and retain customers and boost employee engagement to ensure predictable results season after season.
Consumers' worries about climate change have not been diminished by the economic situation, according to Accenture's annual End-Consumer Observatory on Climate Change. Our research last year took place in the midst of the credit crisis, and the results exhibited a remarkable degree of consistency between 2007 and 2008. More than 80% of respondents both years said they were either somewhat or extremely concerned about climate change, and a similar proportion thought it would certainly or probably affect their lives directly.
This continuing concern translates into continued consumer demand for green products, practices and services. Consumers may not be ready or able to pay more for green, but they clearly differentiate between green and non-green. They will punish poor performers and reward good ones, if not now, then later, when the economy recovers.
Clorox is a company that prepared for--and has benefited from--this trend. Its three sustainability-focused brands--Brita, Burt's Bees and Green Works--are also its three fastest growing. Clorox is one of a handful of leading companies that are differentiating themselves by focusing not just on their own sustainability needs but also on their customers' environmental agendas.
Sustainability, like most other business imperatives, requires up-front investment before it can yield real benefits. At a time when liquidity is constrained for everyone, figuring out where and when to invest in it is critical.
Over the long term, the companies most likely to succeed will have increased their ability to gather market information about sustainability. They also will have reached out, through partnerships and acquisitions in particular, to keep alert and ready to innovate in the right way fast, and at the right time.