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Sustainability: Bridge to Tomorrow

New America Media, Commentary, L. Hunter Lovins Posted: Aug 09, 2008

Business As Usual Isnt Safe Anymore

Conventional wisdom urges corporate executive to enhance profitability. Issues of the larger world belong to policy. Executives, of course, employ lobbyists to promote friendly regulations, but feel little responsibility to create a greater good.

Milton Friedman embodied this, saying that for, businessmen to preach the pure and unadulterated socialism of corporate social responsibility would be a fundamentally subversive doctrine in a free society in such a society, there is one and only one social responsibility of businessto use its resources and engage in activities designed to increase its profits.

Friedman died before recognizing that this approach has brought the world to the edge of a crumbling cliff. Global climate crisis, high and rising energy prices, the loss of ecosystems worldwide, a debt ridden economy, and the growing demand for commodities by China and India are forces that will inevitably change everything about how we do business.

Increasingly, business leaders sense that a migration strategy is essential for business success. Far-sighted executives, mayors, civil society leaders, and others are pointing across the chasm to a realm of stability that they call sustainability.

Whats Wrong With Where We Are?

The United Nations 2005 Millennium Ecological Assessment reported that a rising human population has polluted or over-exploited two-thirds of the ecological systems on which life depends.

The report stated, At the heart of this assessment is a stark warning. Human activity is putting such strain on the natural functions of Earth that the ability of the planets ecosystems to sustain future generations can no longer be taken for granted. It warned of a massive loss of natural capital on a global scale, threatening the capacity of the Earths natural systems to sustain life.

The growing recognition of climate change adds new urgency to act. From the UN to national programs to cities to a rapidly growing number of businesses, the scramble is on to implement low-carbon ways to meet our needs. And businesses increasingly recognize that unsustainability is costly.

In 2004, the worlds second largest re-insurer, Swiss Re, warned: The costs of natural disasters, aggravated by global warming, threatened to spiral out of control, forcing the human race into a catastrophe of its own making. The economic costs of such disasters threatened to double to $150 billion (82 billion pounds) a year in 10 years, hitting insurers with $30-40 billion in claims, or the equivalent of one World Trade Center attack annually.

Swiss Re notified its customers that if they do not take its carbon footprint seriously, perhaps Swiss Re will not wish to insure that businessor its officers or directors. Coming a year before Gulf of Mexico hurricanes cost insurance agencies $70 billion,3 this warning made Swiss Re seem prescient.

The Business Case for Change

The business world may be the only institution on the planet big enough, resourceful enough, and well enough managed to respond effectively to these challenges. The worlds governments have a role, but have shown themselves largely incapable of tackling the growing crises. We need solutions at the speed of business.

Venture capitalist John Doerr recently called climate change one of the most pressing global challenges. But, he added, the resulting demand for innovation would create the mother of all markets. Green technology is now the hottest investment target in the economy. One study estimated that investment in renewable energy projects market could reach $50 billion by 2011, with double-digit annual growth rates. A 2007 United Nations report described, A gold rush of new investment into renewable power over the past 18 months. More than 35 billion was injected into wind and solar power and biofuels in 2006, 43 percent more than the preceding year.

In 2007, spending on clean energy projects rose to almost 94bn worldwide, up 60 per cent over 2006. Twenty-three percent of total new power generation added worldwide in 2007 was renewable, adding 31 gigaWatts of installed capacity.

In 2006, Goldman Sachs, the first bank to issue an environmental policy, put $1 billion into clean-energy investments, and pledged to purchase more products locally. Credit Suisse followed, forming a renewable energy-banking group financing biofuel, wind, and solar power industries. Lehman Brothers renewables vertical combined its natural resources and power banking groups. In 2007, Citigroup committed $50 billion to an Alternative Energy Task Force to provide financing for solar, wind, biomass, ethanol, and other renewable industries.

In 2007, JP Morgan Chase and the Socially Responsible Investment advisor Innovest, created the JP Morgan Environmental IndexCarbon Betathe first high-grade corporate bond index addressing the risks of global warming by tracking the carbon footprint of companies, raising $1.5 billion of equity for wind power in 2006, and sponsoring the C40 Large Cities Climate Summit, at which mayors of the worlds largest cities committed to cut greenhouse gas emissions aggressively.

This interest by the financial community did not form in a vacuum. Since 2002, the British non-profit, the Carbon Disclosure Project (CDP), has surveyed the Financial Times 500, the largest companies in the world, asking them to state their respective carbon footprints. Initially, only a few answered. In 2005, 60 percent complied. In 2007, 77 percent answered the survey.

Why the change? For one reason, the Sarbanes-Oxley Act14 makes it a criminal offense for a companys management to fail to disclose information, including environmental liabilities that could alter an investors view of the organization. The CDP also represents institutional investors with assets of over $57 trillion, over a third of all assets held by global institutional investors. Companies seeking funding from the capital marketplace should probably answer the survey.

Building a Bridge to Tomorrow

The worlds leading companies recognize that transitioning from business-as-usual to more sustainable operations confers greater profitability, lowered risk, stronger brand equity, and enhanced shareholder value.

Cutting corporate use of energy, thus emissions of carbon, cuts waste and improves the bottom line. In 1999, DuPont pledged to reduce its emissions of greenhouse gases 65 percent below its 1990 levels by 2010, and to get 10 percent of its energy and 25 percent of its feedstocks from renewables. Made in the name of increasing shareholder value, the initiative succeeded: the value of DuPont stock increased 340 percent as the company reduced global emission reductions 80 percent, saving $3 billion between 1990 and 2005.

ST Microelectronics pledged to become carbon neutral (zero net CO2 emissions) by 2010 with a 40-fold increase in production. Figuring how to do this drove the companys innovation, taking it from the twelfth largest microchip manufacturer in the world to the sixth. While reducing carbon emissions six percent a year, ST gained market share, won awards, and reckons it will save almost a billion dollars by the time it meets its goal.

In 2006, the worlds largest retailer, Wal-Mart, announced goals to reduce energy use at its stores by 30 percent over three years, double the fleet efficiency of its vehicle fleet, build hybrid-electric long-haul trucks, and then to go on to become carbon neutral. It pledged to achieve zero waste and to sell only sustainable products.

In 2007, Wal-Mart Canada implemented its first Supply Chain Sustainability Scorecard for all of its 290 Canadian stores. Converting 20 truck generators to electric power saved 40,000 liters of fuel and more than $2 million. Changing shipping crates from cardboard to plastic to use boxes 60 times instead of once, saved $4.5 million in costs, reduced more than 1,400 tons of cardboard, and cut 10,000 tons of carbon emissions.

The Integrated Bottom Line: Hallmark of a Well-Managed Company

Traditionally, bottom line profit has measured whether a company is successful. A companys quarterly profits and stock value had to increase or a company was considered at risk. This questionable metric is so incompatible with management of an enterprise for long-term value that even the Financial Accounting Standards Board (FASB) has undertaken to rewrite financial reporting to encourage alternatives. But raw profitability remained the measure that investors found attractive.

Environmentalists urged companies to manage a triple bottom line, to achieve profit, but also to protect people and planet. While tempting, this formulation bolted promotion of environment and social well-being onto balance sheets as cost centers, reducing the traditional measure of profit.

A more useful approach is the integrated bottom line. This recognizes that profit is a valid metric, but only one of many criteria that gives a company enduring value. Using resources more efficiently, redesigning products in ways that mimic nature, and managing a companys operations so that they restore and enhance human and natural capital:

o Raise profitability by cutting energy and materials costs in industrial processes.
o Driving innovation, leading to increased top-line revenues.
o Enable better facilities design and management, and fleet management to increase effectiveness.
o Deliver sector leadership and first-mover advantage.
o Reduce risk and un-booked legal liabilities, ensuring the franchise to operate.
o Gain greater access to capital.
o Improve corporate governance.
o Enhance core business value through better government relations.
o Build brand equity by differentiating product and enhancing reputation.
o Build competitive advantage through increased market share.
o Increase a companys ability to attract and retain the best talent.
o Increase employee productivity and health.
o Improve communication, creativity, and morale in the workplace.
o Build better supply chain and stakeholder relations.

Some financial advisors state that a commitment to sustainability is the hallmark of good corporate governance and the best indicator of management capacity to protect shareholder value.

Indeed, the companies on the Dow Jones Sustainability Index outperform the general market. In spring 2005, the socially responsible investment research firm, Innovest, released a report showing that in whole industry sectors, from forest products and paper, to oil and gas and electric utilities, the environmental leaders in the sector are outperforming the environmental laggards.

More recently, Goldman Sachs found that companies that are leaders in environmental, social, and good governance policies are outperforming the MSCI world index of stocks by 25 percent since 2005. Seventy-two percent of the companies on the list outperformed industry peers.

In 2008, the Economist Intelligence Unit found that companies with the highest share price growth over the past three years paid more attention to sustainability issues. Those with the worst performance tended to do less. The report stated, The link appears clear: High-performing companies put a much greater emphasis on social and environmental considerations at board level, while the poorly performing firms are far more likely to have nobody in charge of sustainability issues.
Migration Strategies

Companies that wish to survive are recognizing that they cannot remain on the cliffs edge; they have begun to build a bridge to the other side, putting in place policies and procedures to make their operations more sustainable.

A growing number of books and consultancies are available to help newcomers. The book Natural Capitalism, details the massive savings achieved by companies that increase the productivity by which they use resources. Bob Doppelt, in his book, Leading the Change Towards Sustainability, details the organizational practices that corporate and community leaders can implement to guide this transition. Such consultancies as Natural Capitalism Solutions, Saatchi and Saatchi S., and many others help companies and communities profitably integrate these approaches.

Only a sustainability strategy can protect shareholder value in the long run. Companies that realize the seriousness of the challenges and commit to a transition to more sustainable behavior and that deliver on that commitment will succeed in the coming decades. Corporate commitment to sustainability will become the hallmark of corporate integrity and management capacity.

Hunter Lovins is president, Natural Capitalism Solutions.

Copyright, Hunter Lovins and Natural Capitalism Solutions.

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