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The Commercial Realities of Sustainable Business

Take your average CEO’s agenda, and you’ll struggle to find sustainability at the top of their ‘to do’ list. Energy, climate change and sustainability are more often than not considered in a long-term perspective; any impact on profits is considered irrelevant in the immediate future. But now that the majority of firms are driving for topline growth as global markets pull out of recession the lack of concern about sustainability is surprising. Muddying the waters are the failure of the UN Copenhagen negotiations to deliver a new global framework for CO2 reductions, claims of bias against climate change scientists and the stalling of GHG cap-and-trade legislation in key markets like Australia and the US.

Despite today’s uncertainty, pushing sustainability to the bottom of the pile is a mistake CEOs cannot afford to make. In a global economy bouncing back from recession, sustainability is a mega-trend offering businesses multiple benefits and tangible growth at a time when merely breaking even is viewed in positive eyes. Sustainability plans are not a response to climate change. They deliver short-term operating efficiencies such as energy cost reductions and brand benefits are quickly achieved with small investments in renewable energy or reduced packaging. While double digit growth is a luxury few firms can contemplate, sustainability is already courting such figures. Verdantix research forecasts that the largest 450 firms in the UK will increase spend on climate change and sustainability initiatives from $5.3bn in 2010 rising to $8.4bn by 2013 representing annualized growth of 14%. Sustainability has switched from being a tactical project to a fundamental part of new business models and risk/reward structures.

The question of how to incorporate climate change and sustainability into business strategies can turn into a stumbling block for many firms. Heads usually nod in agreement that something needs to be done, but there is inevitably a big knowledge gap between middle management in environment, energy and CSR with the expertise relevant to change (they just lack the power to do anything) and executives who have access to budgets but do not fully understand what sustainable business means. A lack of data is one of the first hurdles companies face as they implement sustainability initiatives in their business, if firms don’t know what they are doing “wrong” how can they begin to fix it? Consultancies have been quick to bridge this management gap. Firms like CSC, Deloitte and WSP are investing to knit together their clients’ sustainability programmes. Additional innovation comes from sustainable business software providers like Hara, IHS and Verisae.

Moving towards a new business model isn’t always plain sailing. Just as climate change made a timid debut at board meetings in 2008, the global recession pulled it off the agenda, with energy costs falling, oil prices stabilising and GHG cap-and-trade regimes put on a hold as they were perceived to threaten jobs. A shift in business priorities meant that many ambitious plans were pushed to one side, a move that has generated mixed messages on many firms’ sustainability records.

Google is one such example. After flourishing a high-profile series of climate change initiatives in 2007, Google has gone worryingly quiet on the sustainability. Google may want to become carbon neutral, it has tracked its GHG emissions since 2006, but by keeping its emissions data hidden from annual reports or third parties such as the Carbon Disclosure Project, Google hardly inspires investor or consumer confidence. Google has gained ground towards becoming a sustainable business; increasing renewable energy use, adopting efficient servers and developing applications to support users’ sustainability goals are just some examples; but it risks losing credibility by keeping shareholders and clients out of the whole picture. One argument is that the firm does not disclose is CO2 data because it is too strategic. But a claim to carbon neutrality cannot sit side by side with non disclosure of carbon data.

Wal-Mart is another candidate who may be forced to move its own sustainability goal posts. In 2005 Wal-Mart launched its ‘Sustainability 360’ plan, filled with ambitious targets such as creating zero waste, selling products that sustain Wal-Mart’s resources and the environment, and a commitment to be supplied with 100% renewable energy. Five years later, GHG reduction targets have been rewrapped, with their 2011 target extended to 2015; renewable energy only represents a negligible proportion of overall energy consumption; and attempts to engage sustainability throughout the entire value chain have stalled, with questions raised as to whether or not consumers’ habits are even influenced by such practices.

Both of these case studies illustrate that if a firm is going to embrace sustainable business, it should do so realistically. Any advances made by announcing elaborate sustainability strategies will quickly be undermined if they fail to meet their targets. Keeping quiet isn’t an option either, as it only leaves room for doubt, while doing nothing at all gives competitors a head start and creates a negative brand image. If consumers perceive company initiatives as forward thinking, sustainable, and responsible, these actions can only have a positive impact on sales.

While CEOs use uncertainty as an excuse to sit on the fence over sustainable business models, it is clear that they cannot afford to stay there. Energy efficiency now features as a requirement on public procurement contracts; every year, GHG reporting legislation is tightened; and only those firms with a low carbon business model will truly profit in a carbon-constrained world. Defining a new sustainable business model with calculated risks requires strategic thinking, so execs should reconsider exactly where sustainability ranks among company priorities. This is even more the case as the global economy moves back into growth mode.

David Metcalfe is CEO and a founding director of Verdantix, the fastest-growing, independent, analyst research firm focused on sustainable business, climate change and energy efficiency. He co-leads the fact-based, forward-looking research conducted by Verdantix analysts that helps P&L owners, change leaders and entrepreneurs to win in the transition to a low carbon economy.

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