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December 1, 2008

Sustainability – An Economic Imperative in the Current Economy

Tim Carey
Director for Sustainability and Technology
PepsiCo-Chicago

Long-time sustainability denizens have seen it before: the economy slows, revenue and profit growth fall, and business directs investments away from projects with environmental or social sustainability benefits.  It’s a predictable cycle with unintended consequences – at best you emerge from economic downturns where you left off, and worse, further behind than when it started. Leading companies have eschewed this formula to emerge from downturns more cost efficient and stronger than their peers.

Some evidence for this conclusion lies in the Dow Jones and other sustainability indices. While not perfect, general trends show that more sustainable companies perform better. For example, from 2006 through year end 2007, the Dow Jones Sustainability World Index (DJSI) performed 7 to 10 points higher than the S&P 500 (Dow Jones, July 2008).

Similar trends exist for sustainability funds like Portfolio 21, which out performed the S&P 500 and the MSCI World Equity Index by 1 to 3 percent since its inception. Fund managers warn us that “past performance does not indicate future results,” but there are legitimate reasons to expect more sustainable companies to perform better over the long-term.

Integrate Sustainability into Business Systems
Companies that best integrate sustainability into business decisions will have greater economic performance.  This means killing environmental sustainability initiatives with poor economic returns and eliminating social initiatives that ignore adverse environmental or economic impacts.  When you hit the sweet spot – the intersection of all three, the economics of the project equal or exceed benchmark investment thresholds, environmental impacts are reduced, and social networks relevant to your company, its employees, and society are strengthened.

Resource Sustainability
Deciding when to fund conservation projects is easy. Projects that reduce packaging without increasing losses drive unit costs down. Water and energy used more efficiently lowers costs and has social value (e.g. air emissions are reduced). In both cases, simply assess the cost for proposed changes versus the projected payback.  It is not unusual to see returns of 20 to 30+ percent when implementing less wasteful practices, so all companies should have sustainability-based resource conservation programs. Increasing resource efficiency by several percent per year, while waiting for the economy to rebound, creates competitive advantage. In these times of economic turbulence, companies that derive advantage by embedding environmental efficiencies not only into operations but into the culture of the company will find themselves outpacing the competitors who still view these changes as merely a response to regulation or short term fixes.

For example, at PepsiCo we’ve been keeping detailed resource conservation records in our Quaker Oats, Tropicana, and Gatorade divisions since 2004 and in that time we’ve reduced our energy and water intensity by over 20% per pound of product. That’s saved our combined business approximately $30 million in utility costs.  While capital was not required for all these accomplishments, where it was, the returns on investment were typically 15 to 30 percent. Don’t worry if you’re short on conservation ideas, they don’t all have to come form inside your organization. There are equipment suppliers and consulting professionals that can identify quick-return opportunities as can industry trade associations because when it comes to reducing environmental impacts and protecting employee safety, competing companies are more willing to work together to reach a common, higher objective.

Product Sustainability
Estimating the return on product sustainability projects is more difficult because projecting increased sales, share gain, or margin is difficult. Address these issues when evaluating product sustainability projects:

Define Customer Needs: Sustainability experts rarely know what customers need or value in detail. Make sure experts (i.e., the person that can tell you if a new product design is better or worse for the environment) work closely with Marketing and Sales to jointly design new products, test how they are perceived by customers, and why they’re more sustainable.

Don’t Expect Price Increases: Customers generally won’t pay more for sustainability. Don’t charge more for your product unless the customer inherently understands why it’s more sustainable and that it’s relevant on a personal level. For example, people I’ve spoken with are willing to pay more for organic milk because they don’t want regular milk that could have hormones in it. They may not pay more for a cardboard box with higher recycled content because the benefit isn’t personal (unless they live near a landfill).

Mutual Benefits Are More Successful: Products that benefit both the manufacturer and customer have a better chance of gaining share or sales. For example, if a more sustainable product is cheaper to manufacture and cost savings is passed to the customer, they may buy more product. Similarly, reducing a product’s packaging footprint will open additional aisle space in stores, reduce re-stocking frequency (if more products fit on the shelf) and reduce the number of trips to the store to unload new product.

The message is that well selected sustainability projects will lower your costs and may gain you market share, or sales and price increases. Leading companies know this and have incorporated sustainability decision making into their business systems. If you wait for the economy to recover before addressing sustainability, you will have higher cost structures, less innovative products, or worse, may already be out of the game.

Tim Carey is Director for Sustainability and Technology at PepsiCo-Chicago.

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