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January 4, 2009

False Economies

Dinah McLeod
Head of Sustainability Practice
BT Global Services

Thanks to the sub-prime crisis and issues like the global credit crunch, many economies are in poor shape. Oil prices are continuing their upward spiral and rose by about 400 percent between 2001 and 2008 [1]. And food cost increases are affecting most countries around the globe, with prices for dairy products up 80 percent, cooking oils up 50 percent, and grains up 42 percent from 2006 to 2007 [2].

And as a result, it’s already been suggested that tax increases designed to wean us all off fossil fuels are at least postponed, if not abandoned. The fear expressed by some is that they will drive the developed world even deeper into recession. Commentators point to events like the World Economic Forum in Davos last year, where some argued that climate change was bumped off the agenda by the turmoil on the world markets [3].

I’d argue, however, that people – and companies – who think sustainability is merely a fair weather exercise have been missing the point all along.

And as Lord Stern, former chief economist of the World Bank and author of the UK Treasury’s Stern Review on the Economics of Climate Change said: “I think that difficult times should not derail this. There will be some ups and downs over the next fifty years but we have to push through that.” [4]

He’s right. When times are tough, the onus on every business is to save money, protect and build revenues and make sure core business assets are being fully utilized. The thing is that running your business in a sustainable way can be a key driver when it comes to meeting your goals – not just when times are tough, but actually because they are tough. In fact, I’d say there are three main reasons to ramp up your sustainability efforts when times are hard.
Firstly, it’s a good way of responding to the three ‘Rs’ – revenue, reputation and regulation. Take revenues. In times of rising prices, businesses need to manage their supply chains and business processes to ensure maximum productivity.

And according to McKinsey: “most companies in most sectors have profitable opportunities to save money by cutting energy consumption and gas emissions. Our studies indicate that a lot of companies can reduce them by 20 to 50 percent.” [5] Pfizer, the pharmaceuticals company, for example, saved $30 million a year between 2002 and 2005 with its programme to cut energy wastage and use more power from renewable sources [6].

And there are other ways to cut costs by running your company in a sustainable way too. According to Fortune Magazine, the retailer Wal-Mart found that it could save $26 million a year on its fleet of 7,200 trucks by installing auxiliary power units. These enable the drivers to keep their cabs warm or cool during mandatory ten-hour breaks from the road. Before that, they’d let the truck engine idle all night, wasting fuel. And it installed machines called sandwich balers in its stores to recycle and sell plastic that it used to throw away. Company-wide, the balers have added US$28 million to the bottom line [6].

Then there’s reputation. Abandoning environmental commitments can have a big impact on how a company is perceived – not something that any firm wants to attract when facing financial pressures, particularly when we live in world in which a 2007 survey of MBA students quoted in the Financial Times found that “77 per cent of them would willingly forgo income to work for a firm with a credible sustainability strategy.” [6]

Indeed, Just because times are tough doesn’t mean customers have altered their behaviour. And perhaps particularly when times are hard, they still want to see companies doing the right thing, environmentally, economically and socially. How would customers respond if, for example, for Marks and Spencer, the UK retailer which announced Plan A, a £200 million plan to become carbon neutral in five years, in January 2007 abandoned it because of fears of recession?

And then there’s regulation. Recession or no recession, governments worldwide have plans to introduce low carbon legislation – the European Commission plans to cut emissions by 20 percent by 2020, for instance, and both U.S. presidential candidates were talking about 65-80 per cent cuts by 2050. Clearly businesses need to take sustainability into account when they are developing regulatory strategies and doing so can help them manage risk effectively.

The second reason to ramp up your sustainability efforts when times are tough is that crises often spur innovation and (perhaps overdue) change. In its 2007 special report on innovation, the Economist quotes Vinod Khosla, the venture capitalist who was a co-founder of Sun Microsystems, as saying: “A crisis is a terrible thing to waste.” Talking about carmakers’ addiction to oil and the consequent warming of the planet, he said: “The energy and car industries have not been innovative in many years because they have faced no real crisis, no impetus for change.” [7]

Indeed, a Boston Consulting Group report [8] looking at the world’s top 50 innovative companies noted that they tend to develop more during a recession, rather than scaling back on creativity. As BusinessWeek says: “No finger-wagging Wall Street analyst is going to keep them from doubling down on smart bets that will position them well when the economy rights itself again.”

2008 leaders include the Mumbai-based conglomerate, Tata Group, which entered the list for the first time thanks to its paradigm-busting $2,500 “Nano” car for the masses. This is the world’s cheapest car, thanks partly to a distribution model that sells the auto in kits to entrepreneurs who assemble them for buyers. Also listed was U.S. firm General Electric whose CEO, Jeff Immelt, is so encouraged by his company’s ‘ecoimagination’ initiative that he’s raising the revenue target for green projects from $20 billion to US$25 billion by 2010.

Indeed, making sustainability part of your core business can lead to the creation of completely new markets for companies.

Take another of the firms on the 2008 innovation list – Toyota, creator of the new hybrid car market. Now probably one of the best known cars in the world today, the Japanese company plans to roll out a more fuel-efficient Prius in 2009 and expects to sell one million hybrids a year by the early 2010s.

Jeff Bezos, Amazon.com’s founder said recently: “I think frugality drives innovation, just like other constraints do. One of the only ways to get out of a tight box is to invent your way out” [9]. We are in a period of constraint at the moment. But that doesn’t mean we need to choose between averting climate change and growth and development. Far from being a bad time to think about sustainability, a downturn may prove the most fruitful time to do so.

Dinah McLeod is head of BT Global Services’ sustainability practice, where her key responsibility is to work with customers to encourage the adoption of more sustainable modes of business operation.

1. “Food matters”, BBC, http://www.bbc.co.uk/food/food_matters/foodprices.shtml
2. “Why Are Global Food Prices Soaring?”, Slate, April 2008, http://www.slate.com/id/2187882/
3. “Is big business still thinking green?”, BBC News, January 2008, http://news.bbc.co.uk/1/hi/business/7211706.stm
4. “The Stern Review on the Economics of Climate Change”, HM Treasury, http://www.hm-treasury.gov.uk/independent_reviews/stern_review_economics_climate_change/sternreview_index.cfm
5. “Business strategies for climate change”, The McKinsey Quarterly, April 2008, http://www.mckinseyquarterly.com/Business_strategies_for_climate_change_2125_abstract 
6. “Keep the green coat in a cool economy”, The Financial Times, April 2008, http://www.ft.com/cms/s/0/9feed3de-0b6b-11dd-8ccf-0000779fd2ac.html
7. “Something new under the sun ”, The Economist, October 2007, http://www.economist.com/specialreports/displaystory.cfm?story_id=9928154
8. “The world’s most innovative companies”, BusinessWeek, April 2008, http://www.businessweek.com/magazine/content/08_17/b4081061866744.htm?chan=magazine+channel_special+report
9. “Bezos on innovation”, BusinessWeek, April 2008, http://www.businessweek.com/magazine/content/08_17/b4081064880218.htm

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