Using Sustainability to Compete in the New EconomyAug 14th, 2010 | By John Curtis and Dominique Gangneux | Category: Environmental Management, Sustainability
Sustainability is reshaping the competitive landscape in every industry. Companies that are able to anticipate changes and innovate early are reaping the benefits of improved operating efficiency, new growth and a stronger license to operate.
This article, which is based on interactions between Environmental Resources Management (ERM) and its clients, provides a snapshot of how companies can deliver
- Cost reduction through a radical step change in resource efficiency
- Growth through innovation by integrating sustainability into products and customer relationships
- A stronger license to operate by engaging effectively with stakeholders
The New Economy
The New Economy, we would argue, is an emerging business climate in which environmental and social constraints present companies with new risks but also new opportunities.
The facts speak for themselves. With a projected global population of eight billion people by 2025 and the growing demands of global consumption, environmental resources such as water and carbon will become increasingly constrained over the next fifteen years. Different regions of the world are already experiencing serious resource depletion. The challenge for business is to become more resource efficient and to play a part in protecting and recycling scarce resources.
Existing Pressure Points
- Carbon: Governments around the world are starting to impose a cost on companies that emit greenhouse gases. In some industries, the cost of carbon is fundamentally altering the structure of the business supply chain.
- Water: According to the Organization of Economic Co-operation and Development, 2.8 billion people — 44% of the world’s population — live in areas of high water stress. Not surprisingly, water is rapidly rising on the political agenda, and many companies have already experienced significant production downtime because of water shortages.
- Biodiversity: According to a survey by the International Union for Conservation of Nature, half of the planet’s 5,487 mammal species are in decline. Significantly, 21% of species are or may be at risk of extinction. Nongovernmental organizations and local communities that exist in fragile areas where industry seeks to expand operations are placing significant demands on corporations to act in a responsible manner and to cause no harm.
All of these pressure points can impact a company’s access to high quality air, water, soil, food and raw materials. They could also lead to sociopolitical instability (see the EHS Journal article “Water Shortages Threaten Global Security”), which could cause businesses to run their existing operations at suboptimal levels or delay or even cancel planned development.
Businesses can meet these challenges and generate real business value in the New Economy through the following:
1. Cost reduction through a radical step change in resource efficiency
Companies can become more resource efficient and add real business value by adopting an integrated management approach that combines process improvements with lasting behavior change in relevant parts of the business. In this way, ERM helped one North American food and beverage company achieve cost reductions of over one million U.S. dollars a year through waste reduction and other resource efficiency measures.
In another example, a European automotive manufacturer’s resource efficiency program was able to achieve carbon and energy reduction savings of US$ 10 million by 2012 with an average payback period of two to four years.
One ERM tool being used with clients in this area is QUEST (Quick Environmental Savings Technique), which combines a high impact, fast paced response to client issues around resources with rigorous diagnostic and implementation techniques to home in on possible cost savings. The collaborative nature of QUEST can also be used to bring together an organization’s leaders, the people who are able to make change happen.
2. Growth through innovation by integrating sustainability into products and customer relationships
Consumer surveys in Europe and the United States suggest that up to 25% of consumers regularly buy “green products,” while another 30% informally monitor green developments. Although sustainable consumption is still an emerging trend, business-to-business green markets are starting to grow robustly as more companies develop and deliver their low carbon/ low water/ low waste targets.
Some companies have perceived the emerging trends and are already making new money out of them. For example:
- Philips generated 31% of total revenue sales from green products in 2009, reaching its target three years ahead of schedule.
- GE’s ecomaginationsm portfolio has grown from 17 products to more than 80 products today. Revenues for 2008 reached US$ 17 billion, an increase of 21% over the previous year.
- Siemens increased its environmental portfolio products in 2009 by 11%, to US$ 28 billion.
When applied rigorously, techniques such as life cycle analysis (LCA) and carbon footprinting are proving a catalyst for innovation in a wide range of sectors. ERM, for example, is working with the leading European food retailer to calculate the carbon footprint of an expanding basket of the retailer’s own-brand products as part of the company’s planned transition to become a less carbon intensive business. An LCA carried out for an international oil products company helped shift industry debate on a key scientific and consumer issue, potentially saving the company several million U.S. dollars while helping the company protect its existing market share.
By accumulating knowledge about product impacts and wider sustainability characteristics, companies have the ammunition to drive change and improve long term competitiveness, whether they are selling orange juice or supporting oil and gas exploration.
3. A strengthened license to operate through effective stakeholder engagement
More effective stakeholder engagement is another aspect of doing business in the New Economy. Increasingly, companies are looking at what kind of value can be gained or lost through the way they engage with stakeholders. In the case of a major oil and gas company that is operating in some of the most challenging parts of the world, it was estimated that US$ 3 billion of value was being eroded annually as a result of poor sustainability performance in the upstream business. What’s more, ERM estimated that 30% of these losses could be avoided through more effective internal and external engagement. As a result of the assignment, the senior leadership team has implemented a number of structural changes to the way sustainability performance is managed throughout the global upstream business.
In our experience, early engagement with regulators, customers and community groups, as well as between different parts of a disparate project team, is a key component of a company’s license to operate. Engaging early will help to ensure that resources are accessed and managed in a cost effective manner and also strengthen a company’s license to operate.
In summary, we advocate three key steps to compete in the New Economy:
- Recognize and value the implications of resource constraints across the value chain;
- Innovate and deploy bolder business-led sustainability initiatives in relation to products and customer relationships; and
- Engage early, effectively and consistently with stakeholders as part of the company’s license to operate.
About the Authors
John Curtis is a partner in the London, U.K. office of Environmental Resources Management (ERM), where he is the company’s global sustainability and climate change practice lead. John began his career in commercial banking before earning an MBA at Harvard. Beyond his consulting career, John was the CEO of a Vodafone Joint Venture Company and CEO of a software development company. Recently he worked as a Director with EcoSecurities, a carbon credit origination and trading company. He is also the nonexecutive chairman of a specialty chemical company and director of an education company.
Dominique Gangneux is a partner in the London, U.K. office of ERM, where he is a lead practitioner in ERM’s sustainability and assurance consulting practices. He has worked for more than 14 years in the United Kingdom delivering consulting and assurance work to FTSE 350 companies in a variety of industries. Recently, Dominique has been involved in developing key sustainability standards such as the AccountAbility 1000 Assurance Standard and the BITC CR index. Prior to joining ERM, Dominique led Deloitte’s U.K. environmental and sustainability services for six years, and before that he led the Bureau Veritas CR supply chain service line, delivering work for leading retailers and consumer companies.
Photograph: Cabot Trail in Nova Scotia, Canada by Nicolas Raymond, Montreal, QC, Canada.