What used to be considered green virtue has now morphed into a crucial competitive tool.
That business has a role to play in improving the environment and dealing with climate change is certain. What is much less so is how to do that, and for some, whether to try. After all, companies feel comfortable doing business as usual, and few want to threaten their competitiveness in favor of green virtue.
Our point is that this is not an either or question. A growing number of examples—from diverse industries—show that sustainable business practices can be good for business from the bottom-line up. For example, Unilever (UN -1.70%) has developed washing-up fluids that use less water—and sales are growing fast, particularly in water-scarce markets. And most everyone can name a favorite product or two whose brand is intimately associated with its green credentials. My point is that sustainability can be much more—that it has a role in any and all sectors.
Here are a few examples that McKinsey has been involved with that prove the point. (For confidentiality reasons, we cannot use the company names).
⦁ A major brewer identified some 150 possible improvements that could reduce GHG emissions—while saving $200 million over five years.
⦁ When a water utility benchmarked its performance against that of other utilities, it figured out where the biggest opportunities were—in this case energy and chemicals. After four years, the results were in: less leakage, fewer customer complaints—and $178 million in savings—a 25 percent reduction in operating costs.
⦁ A state-owned industrial company in China increased the energy yield of its coal significantly simply by tracking it better, making sure the first mined was the first used. That improved energy efficiency as well as carbon intensity, while reducing costs 13 percent.
The nitty-gritty of sustainability programs can get complicated. But the principles are actually pretty simple—and should be familiar to executives. First, and most important, is to acknowledge that sustainability is serious. The case is not that difficult to make. In a McKinsey survey of 340 executives, more than 90 percent said risk management—whether from consumers, regulators, or the market (for example, high resource prices)—was an important factor in pushing them toward sustainability initiatives, check chiropractic techniques.
Once the decision is taken, define priorities, set measurable targets, evaluate costs and benefits, and create consistent incentives, including those related to executive compensation. For example, Nike (NKE -2.05%) tracks its suppliers on a range of metrics, including quality, timeliness, cost—and sustainability. Falter for long on any of these, and the consequence is fewer orders. Result: many more suppliers are hitting their sustainability mark. DuPont (DD -1.22%) has no trouble justifying its sustainability initiatives to shareholders: it is generating billions in revenue from products that reduce emissions. Intel (INTC -0.32%) has a dedicated finance analyst whose job is to calculate the value of its sustainability efforts. To reduce emissions and improve other environmental metrics in its food chain, Wal-Mart (WMT -1.48%) tracks not only GHG output, but also yield, water use, and other factors per ton of food produced. In addition to achieving environmental improvements, it cut the price of food and vegetables in the United States by $3.5 billion.
It is important to define targets that are both specific and achievable; it’s better to say “Eliminate X million pounds of packaging,” than the vague “Reduce the footprint of our packaging.” As of August 2014, though, a McKinsey analysis found that only one in five companies in the business marketing 500 had explicit, long-term sustainability goals, even though more than a third (36 percent) said sustainability was a top-three priority.
The larger point is this. Real sustainability efforts are core business efforts; because they are not always easy, they can help a company to raise its game and perform better in all kinds of ways. In mid-2014, McKinsey did a study that found a strong correlation between resource efficiency and financial performance; the companies with the most advanced sustainability strategies did best of all. In a study for the Harvard Business School that drew similar conclusions (higher return on equity and assets for higher-sustainability companies), the authors concluded, “developing a corporate culture of sustainability may be a source of competitive advantage in the long run.”
To think of sustainability as a niche gets it wrong. To do it right, companies need to be rigorous, goal-oriented, and accountable. The evidence is building not only that sustainability initiatives work, but that they are an important factor in creating long-term value.
Jeremy Oppenheim is a director of McKinsey & Company, based in London and a global leader in the Sustainability & Resource Productivity network. In 2014, he served as program director for the Global Commission on the Economy and Climate. Martin Stuchtey is Director of the McKinsey Center for Business & Environment and is based in Munich.
By Mary Stokes
Despite it’s catchy name, 3BL isn’t the newest craze in boy bands. 3BL , also known as The Triple Bottom Line, was a phrase first coined by John Elkington in his 1994 book, Cannibals With Forks. He identified it as a method of reporting profit that considers a business’s impact on the environment and society, in addition to its regular bottom line. Its foundation – sustainability of people, the planet, and profit – is just as applicable today as it was 22 years ago.
Clients and employees alike pay more attention to businesses if they are committed to people and the environment. Utilization of 3BL positively affects a business’s publicity by creating accountability to the public concerning societal and ecological bottom lines.
Clients want to purchase products and services that come from responsible businesses; in fact, in the Cone Communications 2015 consumer study, “91% of global consumers expect companies to do more than make a profit but also operate responsibly to address social and environmental issues.”
Employees are more engaged when they feel their employing business has the same values they do. 3BL also encourages businesses to give back to their communities through charity, volunteering, and other means. Implementing 3BL also has the benefit of both short-term and long-term profitability, just as other formats of sustainability do.
The key is that 3BL is more than just sustainable practices with regard to environmental impact; it’s about a balanced approach to business. While actual measurements for 3BL can be tricky, it is vital to study the interactions of each bottom line and understand how they affect one another. As a business begins to equalize each bottom line, profit does not decrease in importance. However, as each area becomes a focal point, the overall profit shifts from financial value alone to societal and ecologic value combined.
Some notables that have embraced 3BL are Patagonia, Southwest Airlines, and Seventh Generation. While these companies are somewhat larger, there is a movement within smaller businesses to utilize 3BL as well. Though they are not always as visible with regard to societal and ecological impact, there are similar benefits to implementing the practices of 3BL for smaller businesses, including “increased employee engagement, improved standing in the local community and the building of a sustainable business model.”
3BL is an invaluable system for evaluating your business’s profits on several levels. As Mitch Tyson, Chief Executive Officer of Advanced Electron Beams puts it,
“You can rationalize that the triple bottom line will make your company more successful, which it will, or you could pursue it because it reflects your values as a person. . . . The triple bottom line and sustainability aren’t new management techniques. They aren’t the latest management fads. They are concepts that challenge each of us to balance the way we successfully run our business and the world that our children’s children will inherit from us. 3BL is about creating a future for your business-a future in which it is financially, ecologically, and societally prosperous.”
Mary Stokes is a technical and creative writer based in Minneapolis, MN. Photo Credit: “Hands” by stokpic, licensed through C.C. by 2.0
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Sustainability initiatives won’t create lasting value if they’re poorly managed. Here are four lessons from companies that are doing it right.
Among retailers and consumer-goods manufacturers, commitment to environmental and social objectives can take many forms—whether it’s distributing fair-trade products, reducing materials used in packaging, or ensuring humane working conditions at suppliers’ factories. Unilever, for one, has a detailed Sustainable Living Plan, and among the company’s goals for 2020 is to halve the greenhouse-gas impact of its products over their life cycles. Swedish furniture maker IKEA has installed more than 700,000 solar panels in its buildings worldwide and has committed to own and operate more than 300 wind turbines. British retail group Kingfisher’s sustainability plan, which it calls Net Positive, aims not only to make frugal use of natural resources but also to restore and regenerate the environment—“putting back more than we take out,” as the company says.
These programs can be powerful agents of change, both toward greater alignment between customer and corporate interests and toward a culture of systemwide innovation in products and business models. Yet some skepticism remains as to whether sustainability efforts have any impact on financial performance in the short and medium term. Our recent research provides answers to both of these questions.1 In this article, we discuss how companies are creating value from their sustainability programs and what practices enable companies to keep these programs running smoothly and effectively.
How sustainability programs create value
In previous work, our colleagues have outlined the various ways that companies can use sustainability initiatives to manage risk, drive growth, or improve returns on capital (Exhibit 1).2 In our latest research, we sought to unearth examples of how companies are actually doing it. We found that companies that built sustainability into their operations saw immediate benefits, which gave them the momentum to do even more.
Of the companies we surveyed,3 more than 90 percent could point to a specific event or risk—such as consumer pressure or soaring commodity prices—that directly triggered their commitment to sustainability. More than half cited long-term risks to their businesses: 26 percent said they wanted to avoid damage to their reputations, 15 percent were seeking to prevent regulatory problems, and 15 percent said they wanted to eliminate unnecessary operational risks. Indeed, we found that the value at stake from risk-related sustainability issues can be as high as 70 percent of earnings before interest, taxes, depreciation, and amortization (Exhibit 2).
What do these risk-management efforts look like in practice? The US-based candy companies Mars and Hershey offer two examples. To secure their future supply of cocoa, both companies are investing in the sustainability of their suppliers. Mars supports smallholder cocoa farmers in Côte d’Ivoire by providing high-quality seeds and fertilizers as well as training; it is also investing in research to improve the quality and performance of cocoa plants. Hershey sends experts to teach its suppliers best-practice farming methods; its CocoaLink mobile-phone service offers advice and market information. The company also contributes to local education initiatives and the fight against child labor. Both companies have set a goal of having their entire cocoa supply sustainably sourced by 2020.
Nearly half the companies we surveyed (44 percent) cited business and growth opportunities as the impetus for starting their sustainability programs. Redesigning products to make them more sustainable, for instance, can yield tremendous financial benefits. Unilever developed a brand of dishwashing liquid, Sunlight, that is equally effective but uses much less water than other brands; sales of Sunlight and Unilever’s other water-saving products are outpacing category growth by more than 20 percent in certain water-scarce markets.
Apparel companies such as Europe’s C&A now use organic cotton, which is grown without synthetic chemicals or genetically modified seeds. Consumer demand for organic cotton is rising: in 2014, C&A sold 130 million garments made from the fabric, up from 85 million in 2012. C&A plans to use organic cotton in 100 percent of its cotton products by 2020.
Returns on capital
Most of the companies we surveyed said their sustainability initiatives began with a focus on reducing resource consumption: 97 percent of them are conducting initiatives to increase energy efficiency, 91 percent to reduce waste, and 85 percent to save water in day-to-day operations.
Puma, the sporting-goods manufacturer, has been measuring its ecological footprint and that of its largest suppliers since 2005. It aims to reduce the waste it generates, as well as its water and energy consumption and carbon dioxide emissions, by 25 percent compared with 2010. The company is making steady progress: between 2010 and 2013, Puma reduced waste generated per employee by 35 percent and cut energy consumption by 4.2 percent.
Bringing discipline to sustainability programs
Even with a sustainability agenda in place, companies often encounter problems with execution. To bring more discipline to their sustainability efforts, companies would do well to follow four principles commonly associated with performance management: select a few focus areas, set measurable goals, conduct cost-benefit analyses, and create incentives for employees and suppliers.
Focus, focus, focus
We found that many companies choose more than 10 areas in which to concentrate their sustainability efforts; some choose more than 30. It’s hard to imagine how a sustainability agenda with such a large number of focus areas can get the necessary buy-in and resources to be successful. In our experience, the best approach for maximizing impact is to select three, or at most five, strategic priorities.
For example, Coca-Cola’s sustainability framework—which it calls Me, We, World—encompasses its initiatives to improve personal health and wellness, the communities in which it operates, and the environment. The company reports making material, tangible progress on metrics related to three specific areas of focus within this framework: well-being, women, and water.
To emulate Coca-Cola’s success in identifying focus areas that are a good fit with corporate strategy, a company should study what matters most along its entire value chain through internal analysis and dialogue with suppliers, customers, regulators, and nongovernmental organizations. The end product of these efforts shouldn’t be a mere laundry list of vague ideas but rather a systematic sustainability agenda.
Set measurable goals
For each focus area, a company then needs to set clear, quantifiable goals with a long-term orientation (five years or more) and communicate those goals both internally and externally. Notice the difference between a general aspiration to “reduce the impact of our packaging on the environment” and a specific, measurable goal to “eliminate 20 million pounds of packaging by 2016.” Another example of a specific goal comes from a coalition of apparel retailers and manufacturers including Benetton, H&M, Inditex, and Marks and Spencer: these companies are aiming for supply networks with zero discharge of hazardous chemicals by 2020.
Publicizing quantifiable goals motivates the organization, forces leaders to allocate resources, and promotes accountability. An analysis of companies that are part of the Carbon Disclosure Project found that those that announced their goals to the public did better when it came to cutting emissions—and also had better financial returns on such investments.
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Conduct cost-benefit analyses and communicate the results
Making the business case for sustainability might sound like an obvious thing to do, but apparently it isn’t. Only around a fifth of survey respondents reported that the financial benefits are clearly understood across the organization.
Many companies have struggled to quantify the financial impact of their social and environmental initiatives, in part because of the distributed nature of that impact: savings or profits arising from sustainability initiatives are commonly spread across various parts of an organization. It is therefore advisable to appoint an executive as the “owner” of each target, meaning his or her team continually tracks the costs and benefits of sustainability actions. Tracking should also extend to indirect effects, such as an enhanced corporate reputation and increased customer loyalty, which pay off over the longer term.
Marks and Spencer tracks progress against its sustainability commitments, as laid out in the company’s Plan A program. The commitments generated £145 million in net benefits in 2013–14. These benefits are regularly communicated to shareholders, employees, and consumers; for instance, the company’s latest annual report mentions Plan A more than 70 times.
Create incentives for employees and suppliers
The top reason that survey respondents gave for their companies’ failure to capture the full value of sustainability was the lack of incentives to do so. Only 1 company in 12 includes sustainability criteria in calculating performance-based compensation for executives, and only 1 in 7 rewards suppliers for good sustainability performance. Among survey respondents, 37 percent named short-term earnings pressure as a reason for poor sustainability results; about a third named lack of key performance indicators and not enough people being held accountable.
Companies could learn a lesson from sporting-goods maker Nike, which directs more of its business to suppliers that receive high scores on its Sourcing and Manufacturing Sustainability Index. This index, one of Nike’s tools for assessing factory performance, gives sustainability factors equal weight with quality, cost, and on-time delivery actionac.net. Nike requires lower-performing factories to resolve issues in a timely manner or else face penalties such as reduced orders or even a termination of the business relationship. The incentives seem to be working: between 2011 and 2013, Nike saw a 19-percentage-point improvement in the number of suppliers that met its standards.
Ultimately, each company must define its own sustainability philosophy in the context of its specific business and mission. The examples described here illustrate the competitive advantages that sustainability initiatives can offer. That said, even the most exemplary commitment to sustainability doesn’t change the fact that the earth’s natural resources are limited. A longer-term solution will therefore require new—circular and regenerative—business models that decouple economic growth from resource consumption.
Download the full report in which this article originally appeared, Perspectives on retail and consumer goods, Number 4, Autumn 2015 (PDF–7.01MB).