Monday, April 25, 2011

Sustainability: The ‘Embracers’ Seize Advantage – A New Report Issued by the MIT Sloan Management Review Addressing Corporate Commitments to Sustainability-Driven Management

Sustainable business practices are being used by large corporate entities to open new markets and build or change a company’s reputation and image, as demonstrated in the recently issued report by the MIT Sloan Management Review (the “ 2011 Report”) entitled “Sustainability: The ‘Embracers’ Seize Advantage”.  This topic was also discussed during the recent Global New Energy Summit in Colorado Springs.

The 2011 Report summarized the findings of the 2010 Sustainability & Innovation Global Executive Study and Research Project (the “Project”).  The Project found that even in a down economy, commitments to sustainability-driven management are strengthening and that most companies believe sustainability will be necessary to be competitive in the future.  The result is that companies are accelerating adoption of sustainability-driven management in order to use sustainability as a source of advantage.  “The only way to continue growing and continue being a successful business is to treat sustainability as a key business lever in the same way that you treat marketing, finance, culture, HR or supply chain,” says Santiago Gowland, Vice President of Brand and Global Corporate Responsibility at Unilever.”  See Sustainability: The Embracers Seize Advantage, MIT Sloan Management Review, pg. 4 (Winter 2011).

The 2011 Report is in follow-up to the MIT Sloan Management Review 2009 report, “The Business of Sustainability: Finding and Insights from the First Annual Business of Sustainability Survey and the Global Thought Leaders’ Research Project” (the “2009 Report”).  In the 2009 Report, Wal-Mart was used as a case study to demonstrate repurposing of the supply chain.  Defined as its key moves towards sustainability, Wal-Mart was highlighted for establishing goals of being 100 percent fueled by renewable energy, producing zero waste, and selling products that will sustain the environment.  As one example,

            [Wal-Mart] began working with Unilever plc in 2005 to sell concentrated laundry detergent in a 32-ounce container (equivalent to 100 ounces under a previous formulation).  Consumers got a more powerful detergent in a smaller package.  Three years after rollout, the container saved 80 million pounds of plastic resin, 430 million gallons of water, and 125 million pounds of cardboard, according to the company fact sheet.

2009 Report, pg. 28.  Accordingly, whereas the 2009 Report was designed to assess the business implications of corporate sustainability programs, the 2011 Report was designed to assess key practices of sustainability management. 

A key finding that emerged from the Project is that while commitments to sustainability-driven management are strengthening, sustainability strategy leaders generally fall into two categories: “embracers” and “cautious adopters.”  “Whereas cautious adopters see the sustainability business case in terms of risk management and efficiency gains, embracer companies see the payoff of sustainability-driven management largely in intangible advantages, process improvements, the ability to innovate and, critically, in the opportunity to grow.  And the embracers, it turns out, are the highest performing businesses in the study.”  Id. at 4. 

The Project identified seven practices that tend to be shared by embracers. 

            1.  Move early – even if information is incomplete.  Movement diminishes uncertainty because action generates data to be used to inform additional decisions.

            2.  Balance broad, long-term vision with projects offering concrete, near-term “wins.”  “An ambitious vision might generate brand premiums, transform organizational culture and help attract capital, talent or public collaborators.  But smart embracers balance those aims with narrowly defined projects in, say, supply chain management, which allow them to produce early, positive bottom-line results.”  Id. at 19. 

            3.  Drive sustainability top-down and bottom-up.  The Project results indicate that embracers recognize the benefits of including employees in sustainability initiatives at all levels because it drives up levels of employee engagement and productivity and helps in recruiting.

            4.  Aggressively de-silo sustainability – integrating it throughout company operations.  According to Duke Energy’s Roberta Bowman, “[i]t’s the approach, it’s the process, it’s the mindset.”  Id. at 20.

            5.  Measure everything (and if ways of measuring something don’t exist, start inventing them).  Beyond establishing baselines from which to measure starting positions and progress, some embracers are developing ways to quantify the impact of sustainability on brand, innovation and productivity.

            6.  Value intangible benefits seriously.  Investment decisions tend to made on the basis of a combination of tangible benefits, intangibles and risk scenarios.  “Smart companies are realizing that conservation of natural resources they need is a fundamental part of risk management, as the work being done by companies such as Coca-Cola and PepsiCo on water conservation clearly demonstrates.”  Id. at 21. 

            7.  Try to be authentic and transparent – internally and externally.  “Companies leading the charge on sustainability are fundamentally realistic. They do not overstate motives or set unrealistic expectations, and they communicate their challenges as well as their successes.”  Id. at 21.  In this way, open communication can be used as a defense to claims of “greenwashing.” 

Also stressed in the study is that companies have realized that sustainability requires cooperation between entities.  Sustainability issues encompass environmental and social problems beyond the typical reach of large industrial energy users.  The results show an emerging trend of partnerships between corporations and nongovernmental entities or NGOs.  For example, Unilever, manufacturer of Dove brand soap, was used as a case study in the Project.  One issue faced by Unilever is that Dove contains palm oil, “whose impacts include deforestation and destruction of the habitats of endangered species.”  Id. at 14.  To address this challenge, Unilever is shifting its supply chain away from palm oil and developing new sustainable sources of oil.  To develop sustainable supplies, however, Unilever is using a coalition of government, industry and NGOs.  “The scale of the issue deserves a global response that cuts across sectors.  Otherwise, anything you do will be even more costly and less effective.”  Id. at 18. 

Improved brand recognition is also a benefit of addressing sustainability.  “The views of consumers increasingly resonate with some of the social, economic and environmental messages of brands . . . So I think that in some brands, the sustainability agenda can reinforce brand proposition.”  Id. at 10.  The results of the Project caution, however, that increased brand recognition in this communications driven global society, presents a reputation landscape that is increasingly risky.  “In short, unless reality matches rhetoric, making sustainability claims is a risky business.”  Id.   

The 2011 Report further identifies key drivers that support sustainability initiatives:

            These include increased margins or market share, greater potential for innovation in their business models and processes and access to new markets.  And when it comes to competitive advantage, a significantly larger group of embracers (38%) picked it as one of the top three benefits sustainability had brought to the organization (only 21% of cautious adopters selected it).

Id. at 12.  Thus, the findings indicate that embracers tend to weave sustainability into the fabric of their corporate culture and use this fabric to innovate new opportunities for company growth that would not have otherwise been identified, including innovations to measure progress and build consumer trust.

Finally, the findings indicate that embracers use broad strategies to analyze the risks associated with not fully addressing sustainability issues.  For example, larger embracer companies tend to focus on the regulatory environment and the concerns of investors.  These companies look ahead to emerging regulatory trends and how these trends will impact their business and how these companies can mitigate these potential regulatory impacts.  In this way, companies can take steps to position themselves to address emerging local, state, national and global regulatory changes.