Green Business Is Good Business

"Oil Hits $100, Jolting Markets."

On Jan. 3, 2008, this headline blared across the front page of the Wall Street Journal. What a roller coaster of energy prices we’ve been on since. After rising to more than $145 per barrel in just six months, the price of oil plummeted over 50 percent as markets around the world crashed. Now companies are breathing sighs of relief at prices that not that long ago seemed astronomically high (as of writing this paper, the price is still four times higher than it was 10 years ago. )

But the short-term gyrations, while hard to stomach, are not the real story. Most energy experts agree that a long-term rise in energy costs is in the cards, and the recent drop will only exacerbate the problem. A few recent comments
from the Wall Street Journal demonstrate why:

• “Delayed exploration projects … could lead to a supply crimp in the next few years if and when demand comes roaring back.”

• “Oil Companies’ Ability to Tap New Sources May Have Peaked.”

• “Credit Crunch and Falling Oil Hit Oil-Sands Projects.”

The point is this: Lower prices and the recessionary credit crunch only restrict investment in what’s already a tight, near-peak supply, thus slowing any expansion in supply that we’d need to meet the rise in demand. The era of cheap energy and resources is over. The long-term rise in energy costs is just one of the powerful reasons that green business is good business.

Using less energy and fewer resources clearly saves money. If energy prices were the only reason to make environmental thinking a core part of strategy, it probably wouldn’t be enough to drive fundamental change (especially given the incredible volatility that makes some people say, “Just wait for prices to drop again”). But the pressures on business are more complicated than that, and they are here to stay. Green is no fad or temporary blip in strategic focus; it’s a new way of doing business. A new norm has arrived.

To set the stage for the rest of “The Sustainable Enterprise Report,” I point to five of the biggest shifts making green business unavoidable, then turn to some top-line thoughts on how to handle these pressures and profit in this new eco-world.

Mega-Forces

Of the seismic changes shifting how the world works, two in particular seem to be moving much faster than most businesses can get a handle on.

1. Commodity Prices: It’s Not Just About Oil
Rising costs are a shock to the economic system, but also to our assumptions. Inputs that were once minor expenses are becoming hugely important to the bottom
line. Until fairly recently, energy was a negligible part of the total cost of running a data center. Today, some of the largest server farms are spending half their variable costs on electricity for power and cooling.

Along with energy costs, wheat, copper, iron and many other basic materials tripled or quadrupled in price in recent years. (Even with the more recent commodity decline, prices are historically high.) Increases in metal prices make New Age materials like carbon fiber, used most famously in Boeing’s new Dreamliner 787, more price competitive. Businesses are rethinking how to design, make and ship things to reduce resource use.

Past price shocks were driven mainly by supply forces, such as an ornery cartel. But now we face a fundamental mismatch between slower-growth supply – the easy-access resources are gone – and surging demand, inexorably rising with standards of living in India and China.

To survive, companies must get lean and do it fast. Those who produce the goods and services we all need using drastically less material and energy will profit mightily. The resource inefficient will wither and die.

2. Transparency: Open Up and Share
When you fly into Charleston, W.V., it’s hard to miss the massive mining facilities: large splotches of dirt where large hills once stood. So-called “mountain-top removal” coal mining leaves a large wake of destruction. One very small nongovernmental organization(NGO) called Appalachian Voices is fighting this devastating industrial practice.

The NGO took publicly available data and mapped all the mining sites on the popular view-from-above program Google Earth. Enter your zip code at www.ilovemountains.org and you’ll see exactly which hills were destroyed to power your home. So tiny Appalachian Voices discovered a new way to battle its much larger foe, using an outsized tool I call “forced transparency.” Imagine how utilities and mining companies feel about this openness.

Many companies are jumping ahead of the curve and voluntarily disclosing operational information. On Dole Food’s Web site, you can see the farm in Peru where your organic bananas were grown (using that pesky Google Earth again). Patagonia launched “The Footprint Chronicles” online to publicly analyze the environmental impacts of some key products “from design through delivery.” HP simply released a list of every supplier; a voluntary effort for HP, but a bit more forced for the suppliers.

Your company’s biggest stakeholders now expect unheard of levels of openness about operations and specific products. Business customers, consumers and employees are all demanding more every day.

Stakeholder Pressures

For years, only one environmental stakeholder really mattered: the government. Abide by the law and you could call yourself an environmental steward. Stakeholder pressures have evolved rapidly. Here are three dynamic and powerful groups whose questions
will change the business landscape forever.

3. Your Business Customers: Greening of the Supply Chain

A few years ago, when Wal-Mart execs started talking seriously to outside advisors about sustainability, they were nudged toward a big realization: As large as the company’s direct environmental impact was, most of its footprint was actually embedded in the supply chain. Manufacturing and shipping all those products dwarfed even 4,000 stores’ worth of energy and resource use. The pressure Wal-Mart and retail peers around the world (such as Tesco and Marks & Spencer in the U.K.) now put on suppliers is changing business in profound ways.

But it goes far beyond just retail. In many industries, both individual players and groups of competitors are changing the ground rules. The Electronics Industry Code of Conduct set new supplier standards, and the Paper Working Group brings together a cross-industry sampling of big names (and big paper users) to increase the supply of environmentally preferable forest products. Both of these partnerships have been in the works for years. These and newer supply-chain efforts are evolving in two interesting ways.

First, the questions have expanded from simple checklist audits, meant only to ensure compliance to much broader inquiries. Some big customers are demanding detailed environmental metrics (such as carbon-foot print data) and asking for changes in supplier practices – from reducing packaging to redesigning distribution routes – to cut fossil fuel and resource use.

Companies are even designing their own pseudo-regulatory
standards. Wal-Mart’s supplier standard for how much lead is allowed in toys on its shelves is actually far tougher than the U.S. government’s regulation.

Second, “greening the supply chain” is morphing from demands flowing in just one direction – from customers to suppliers – to multilateral, real partnerships including
all the players in a full value chain. In the aviation industry, engine makers (GE), plane manufacturers (Boeing), airlines (Virgin), and airports (Port of Seattle) recently formed a partnership to pursue “carbon-neutral growth” for the industry. But will an initiative like this work or will it amount to nothing more than press releases? It’s hard to say, but it’s a good strategy to recognize the scale of the sustainability challenge and work together to tackle the big hurdles.

Where is all this upstream pressure headed? How does it tie to transparency and how much will companies need to share with their customers? All signs point to a near future where companies collect a great deal of information on every product, including energy and water use, toxic footprint, waste production, who manufactures it, where it’s made and whether workers are paid a living wage. In other words, having at your fingertips the full range of sustainability information will become the ante to play the game.

Companies that can answer basic and often extensive questions about sustainability performance will get the benefit of the doubt, along with more shelf space, market share and mind share with consumers.

4. Your Consumers: Conflicted and Searching
For nearly 40 years – roughly since the first Earth Day in 1970 – environmental groups have been waiting for a consumer values shift to drive purchases of green products. It’s not clear that it’s coming, or at least not in the way many have hoped. Will consumers pay more for green? Only a small percentage, perhaps. But a growing number are looking for environmental and social benefits in the products they buy; they just don’t want to sacrifice quality or price. They want it all, and why shouldn’t they get it?
BBMG, a green-minded marketing agency, conducted research on what consumers look for in products. The not-so-shocking part: When they ranked product attributes, “price” and “quality” took the top two spots. But after that, consumer priorities
got interesting. Three new issues rose above perennial top-tier attributes such as “convenience.” Where the product is made, how energy efficient it is, and its health benefits placed third, fourth and fifth, respectively. BBMG dubbed buyers with these concerns “conscious consumers.”

Consumers are redefining what they expect from products.  The most desired and successful product will soon be the one that has the lowest carbon footprint, uses the fewest resources, contains no toxic chemicals and is made by people earning a living wage, among other things. These sustainability attributes will become part of the new definition of “quality.” Are your products and services high quality in this new world?

5. Your Employees: Looking for More Than a Paycheck
When the career Web site monster.com asked college students what they looked for in a prospective employer, a full 92 percent wanted to work for a green company. Whether undergrads can define what they mean by green is almost beside the point. The next generation of workers will expect more from the companies they work for and buy from.  Even supposedly money-grubbing MBAs (and I was one) are showing some preference for social responsibility.

In multiple surveys, up to two-thirds of MBAs are looking for employers who share their values. Current employees are not immune to this values shift. In many companies, workers are forming “green teams” to channel the desire to do the right thing and reduce environmental impacts around the office. How you engage current and prospective employees on environmental issues will drive the passion, productivityand creativity of the entire enterprise.

Not Alone

Of course, the three stakeholders I’ve highlighted – business customers, consumers and employees – are not the only ones evolving. A few other examples:
• The financial community is taking climate risk seriously. Citigroup, JP Morgan and Morgan Stanley created the “carbon principles” that entail taking a much harder look at all possible coal plant investments. Yes, banks are busy right now just surviving, but you can be sure they will continue to look at risk in their investments, specifically carbon and environmental
risk, more closely in the years to come.
• Shareholders are getting restless, continuing to place resolutions on the ballot at annual meetings. The Rockefeller family, descendents of the founder of ExxonMobil, made a lot of noise this year to push the oil giant toward more climate-sensitive policies.
• Cities, states and countries are innovating in the realm of environmental policy to encourage expansion of renewable energy or increased recycling.
California alone has set its own aggressive greenhouse gas plan and recently changed building
codes to require green design principles.
• Media outlets like Discovery Communication’s 24-hour channel Planet Green have grown more numerous. The press is looking for stories of success,
failure and greenwashing.

Watch these developing pressures to avoid being caught by surprise. The rewards are ample for navigating all stakeholder demands.

Preparing for a New World

Even in a near global recession, the Green Wave marches on and the options for avoiding it are disappearing. How do you handle these pressures? It took me and my co-author a whole book to provide some kind of template. Here are a few guideposts for navigating the tricky path from green to gold:
• It doesn’t really matter anymore if everyone in the organization is convinced about environmental challenges (in particular climate change). Most industries are moving on from the debate and taking action. It’s bad for business to fight the changes and ignore what customers, employees and other stakeholders are expecting. The business
case is clearer than ever, so convince skeptics in the organization with hard numbers, not just pleas to do the right thing.
• You can’t sit on the sidelines anymore. Industries that didn’t think they had an environmental footprint, such as finance or IT, are finding deep connections to the issues. Many industries will find these changes absolutely fundamental. They present both enormous risks (think of the auto industry shakeup of 2008) and unprecedented opportunities; for example, the IT world can offer solutions to the vast data and measurement needs that transparency and footprint tracking create.
• You can’t determine alone what your issues are. Perceptions
from stakeholders matter nearly as much as the facts. If you have the biggest brand in your value chain, you will get attention, for good or bad.

Key Actions

• Develop a value chain perspective. The environmental impacts within your own “four walls” are unlikely to be a majority of your full footprint. The true risks and opportunities may fall outside your direct control.
• Start with measurement. Understand the impacts up and down the chain. See where you can wield the most leverage.
• Be transparent about your footprint, your successes and your challenges.
• Communicate openly with your employees and customers. Remember that acknowledging failings and hurdles is not enough. Start acting on them and show progress.
• Develop real, tangible programs, products and improvements before launching a large-scale marketing campaign. Start with pilot programs if necessary.
• Get resource efficient now. Oil prices may flatten out for the time being, but long-term, prospects for cheap energy and easy access to key resources are nearly zero.
• Help your customers/consumers. Your buyers are often confused about the choices they have. Be the provider of both information and solutions; reduce their footprint and solve any tradeoff that consumers see between green and quality, and you’ll win loyalty and sales.

The most effective companies will balance incremental, measurable steps with “swing for the fences” innovation. All the actions above are tactical and smart. But true leaders will see the scale of change demanded by the pressures of rising prices, transparency, and customer and employee needs. They will ask themselves some tough questions.

Tennant, a manufacturer of commercial cleaning equipment, had always sold big floor-scrubbing machines that used chemicals. Company execs and innovators in the R&D department asked themselves if it was possible to clean in a nontoxic way, reducing the customer’s environmental burden. The company’s new technology uses just tap water to clean hard surfaces better and faster than before.

Like a world-class athlete who redefines a sport or what’s considered fast or strong, some companies are redefining their products and their markets, shocking business partners, competitors and customers.

The five pressures outlined will force dramatic change in many industries. Is your company ready to take a giant leap forward?

*Footnotes