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Responsefalls shortof ecologicalchallenges
When it comes to waterconsumption, Unilever islooking beyond its ownuse, to that of the people
who buy its products.Working with a non-governmental
organisation in the Indian states ofTamil Nadu and Andhra Pradesh, theAnglo-Dutch consumer goods groupcalculated that a laundry product ithad formulated could – by reducingthe amount of rinsing required – gen-erate potential water savings in theregion of 14bn litres a year.
Of course, for companies in somesectors, the heaviest environmentalimpacts may reside in their ownoperations or at the manufacturingstage of their goods.
However, the Unilever approach isan example of how companies takinga lead in this area are looking morebroadly at what “sustainable busi-ness” means.
“Companies are understanding thatthis is a business matter, and it’s hereto stay,” says Mindy Lubber, presi-dent of Ceres, a coalition of investorsand environmental groups.
Still, companies are not beingdriven by their business agendasalone. External factors are also chang-ing corporate behaviour, and the leg-islative landscape is a source of grow-ing pressure.
Despite legislative setbacks on curb-ing greenhouse gas emissions – theUS administration was this yearforced to abandon its proposal for acomprehensive cap-and-trade system –the regulatory environment is shift-ing.
“Even though we don’t have a cap-and-trade system in the US, effec-tively companies now need to under-stand and manage their greenhousegases from a SEC (the US Securitiesand Exchange Commission) disclosureperspective,” says Chris Deri, head ofcorporate social responsibility andsustainability at Edelman, the globalcommunications consultancy.
Government incentives on cleanenergy are also taking effect. A USfederal tax credit for solar power thatis guaranteed until 2016 has led to anincrease of more than 100 per cent inthe residential solar market in 2009,according to the Solar Energy Indus-tries Association.
Legislation in Europe and, morerecently, the state of California, nowcontrols the use of chemicals that aretoxic or damaging to the environ-ment. And while such regulations arelimited to products sold in those juris-dictions, the rules covers the productsof any company wanting to sell intothose markets, regardless of wherethe business is located.
“Policy is crucial because it createsa level playing field,” says Ms Lubber.“It means everyone is brought intothe same systems, rather than havingthe leaders spend more time on thisand the laggards ignoring it.”
In addition, the investment commu-nity is helping the drive towards moresustainable forms of business, withinstitutional investors and large pen-sion funds starting to take account of
issues such as climate change in theirinvestment strategies.
About 2,500 organisations globallynow measure and disclose their green-house gas emissions and climatechange strategies through the CarbonDisclosure Project (CDP), a non-profitthat represents 534 institutional inves-tors, with combined assets undermanagement of more than $64,000bn.
Even the private equity sector isstarting to consider sustainability inits investments. Earlier this year, Car-lyle, the US private equity group,launched EcoValuScreen, a due dili-gence tool developed with Environ-mental Defense Fund, an advocacygroup, to use environmental risks andopportunities as another filter to lookat potential acquisitions.
On the risk side, the dangers arebecoming clearer. In recent yearsmuch attention has been paid to thedamage caused to the environment byindustrially-generated greenhousegases, but awareness is also growingthat shrinking natural resourcescould start to damage companies’profits.
“We have seen a massive decline innatural capital and ecosystem serv-ices, and increasing competition fromemerging economies for that naturalcapital,” says Dax Lovegrove, head ofbusiness and industry at WWF UK.“And that, in turn, presents a hugebusiness risk.”
On the other hand, companies arealso looking at the potential opportu-nities associated with sustainabilitystrategies, the most clear-cut beingenergy efficiency, through which com-panies can achieve substantial sav-ings on their energy bills.
Some are making these savings byturning to alternative technologies.Walmart recently announced it wouldbe installing thin film solar panels onthe roofs of up to 30 new sites. Whenin place, the panels are expected togenerate more than 22.5m kilowatt-hours of energy a year, providing upto 30 per cent of each site’s electricity.
Other opportunities lie in meetinggrowing customer demand for sustain-able products, as Marks and Spencerfound several years ago when itlaunched its “Look Behind the Label”initiative, which promoted ethical andsustainable sourcing for productsranging from clothing to food.
Some companies have even takenenvironmentally damaging products
off the market. Mr Lovegrove cites theexample of B&Q, the home improve-ment chain, which in 2008 announcedit would stop selling patio heatersonce its stock had come to an end.
Mr Lovegrove says: “It was a prod-uct that was selling well. But B&Qthought that to be serious about sus-tainability, it needed to edit it out.”
The implications of such a move areintriguing. Should companies that arereally serious about sustainabilitysimply stop producing and sellingthings altogether?
This might sound an absurd ques-tion. But in certain sectors of indus-try, there is the potential for compa-nies to shift from producing goods tooffering services. The leasing model isstarting to appear in new areas ofbusiness. For example, companiessuch as Zipcar and Zilok are runningcar-sharing services.
But whether companies shift fromselling products to leasing them, oreven move into new, related busi-nesses (the airline industry, for exam-ple, might start to offer business trav-ellers videoconferencing services),such strategies will involve a radicalrethink of business models.
This, says Mr Lovegrove, is going tobecome increasingly necessary. “Thedilemma faced by the private sector isthat if business growth continues,even with some efficiencies, the netresult is higher impacts. And thatcan’t go on forever,” he says.
“There’s an inevitable ecologicalcrunch looming, where companies aregoing to have to think quite differ-ently.”
It also means bringing aboutchanges in consumer behaviour. “Zip-car doesn’t change your access totransport,” says Mr Deri. “But it’sasking consumers to have a differentrelationship with their means oftransportation.”
But while entrepreneurial compa-nies such as Zipcar and Zilok are com-ing up with innovative ideas, andestablished companies such as Uni-lever are reformulating products tohave less impact at the consumer end,there is evidence that many compa-nies have not even measured theirown impact effectively, let alonereduced it.
A recent UN Global Compact studyled by Accenture, the consultancy,found that while 85 per cent of chiefexecutives believe companies shouldintegrate the measurement of sustain-ability into their businesses, only 64per cent thought their company did soeffectively.
And the CDP’s most recent assess-ment found that although climatechange is moving up the boardroomagenda – with 65 per cent of the Glo-
bal 500 setting emissions reductiontargets – only 19 per cent of thesecompanies have shown significantemissions reductions.
“There’s room for optimism,” saysMs Lubber. “But we need to massivelyjump-start this.”
Mr Lovegrove agrees: “It’s startingto happen among a minimum of lead-ing businesses. But the response isnot equal to the global sustainabilitychallenges we face.”
Even so, some companiesare demonstrating thatthey understand shrinkingnatural resources willdamage the bottom line.Sarah Murray reports
On FT.comThe Year of Urban AgricultureSeattle has legalised the keeping oflivestock and encouraged the growthof fruit and vegetables. It also has acommunity garden programme with2,500 plots, writes Jane Bird
Unlikely partnershipsCocaCola and WWF assert that the$20m tieup launched in 2007 – onwater, energy efficiency, supply chainmanagement and communications –is one of the most successfulcorporatenonprofit groupings.Ross Tieman reports
Bad for biodiversity isoften bad for business
The gribble was the scourgeof mariners and shipbuild-ers for centuries, destroyingwooden ships by eatingholes in their hulls.
Today, scientists are hop-ing this tiny, woodlouse-likeinsect could save the world.
Enzymes from gribblesthat help the minute crea-tures digest wood are beinginvestigated as sources ofbiofuels. If the enzymes canbe replicated, then wastecould be turned into a bio-fuel to replace petrol.
Found only on the islandof Madagascar, the rosyperiwinkle is a pretty littlepink flower that could eas-ily be overlooked.
Folklore on the islandascribes to it the power ofcuring diabetes – but mod-ern day researchers havefound that it could do evenmore.
The plant is a source ofvinblastine and vincristine,two substances that havebeen found useful in treat-ing cancers, including child-hood leukaemia.
Pyrethrum take manyforms, some of which –native to the Balkans, Cau-casus and surroundingregions – look like commondaisies.
But their unremarkableappearance belies extraordi-nary properties – the flow-
ers contain a substance thatappears to be toxic to mos-quitoes and other bitingbugs.
It has long been used tokeep away parasites, andattempts are now underway to grow it commer-cially for use in repellents.
The gribble, the rosy peri-winkle and pyrethrum havejoined scores of otherunlikely plants and crea-tures that could provideanswers to some of human-ity’s most pressing prob-lems.
They are living examplesof the worth of biodiversity,says Peter Seligmann, chiefexecutive of ConservationInternational. They remindus that “we need nature”,he says. “If nature getscooked, we get cooked.”
The value of nature is
often overlooked by busi-nesses.
Apart from industriessuch as agriculture, foodand pharmaceuticals, manycompanies seem to havefew obvious ties with thenatural world.
But, warns Pavan Sukh-dev, head of the GreenEconomy Initiative at theUN Environment Pro-gramme, even companiesthat seem to rely little onplants or animals should be
Saving speciesEnvironmentaldegradation hasfarreaching effects,says Fiona Harvey Gribble: fuel of the future
Continued on Page 3
‘We have seen a massivedecline in natural capitaland ecosystem services,and increasing competitionfrom emerging economiesfor that natural capital’
SUSTAINABLE BUSINESSFINANCIAL TIMES SPECIAL REPORT | Monday October 4 2010
www.ft.com/sustainablebusiness2010 | twitter.com/ftreports
Power surge: Walmart is installing thin film solar panels on the roofs of up to 30 new sites. The panels are expected to provide up to 30 per cent of electricity Walmart
2 ★ FINANCIAL TIMES MONDAY OCTOBER 4 2010
FINANCIAL TIMES MONDAY OCTOBER 4 2010 ★ 3
ContributorsSarah MurrayContributing Editor
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Jane BirdFT Contributor
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Jessica TwentymanFT Contributor
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Businessneedsnature’sdiversity
aware of how much their wealthdepends on preserving naturalecosystems.
Mr Sukhdev, formerly head ofDeutsche Bank’s global marketsbusiness in India, led a studycalled The Economics of Ecosys-tems and Biodiversity (TEEB),intended to estimate the costs ofneglect and degradation of natu-ral environments.
He says: “All economic activ-ity and most of human well-being whether in an urban ornon-urban setting is based on ahealthy, functioning environ-ment. Nature’s multiple andcomplex values have direct eco-nomic impacts on human well-being and public spending.”
The TEEB study found thatpreserving biodiversity in someareas most at risk of species losswould yield about $4,000bn to$5,000bn a year in benefits.
Environmental degradationcan have far-reaching effects.
Deforestation, for instance,causes floods and mudslides,but also water shortages anddust storms, because the treescreate catchment areas forwater, and help to hold soiltogether. Restoring forests canyield enormous benefits.
The TEEB study looked at thetransformation of HiwareBazaar, a village that now hasone of highest average ruralincomes in India.
In the 1970s, the village suf-fered severe water shortages,partly the result of increasedrun-off owing to deforestationand vegetation loss.
Then villagers started toregrow trees. The shortage wasalleviated, agriculture saved,and poverty drastically reduced.
Businesses must play a bigrole in maintaining biodiversity,says Dax Lovegrove, head ofbusiness and industry at WWFUK.
“There’s a dangerous assump-tion that companies can con-tinue to rely on ecosystem serv-ices, especially when those eco-systems are in such rapiddecline,” he says.
He warns that the rate ofdecline poses a real economicthreat. “Businesses need tothink differently or fail. Theincreasing competition aroundthe globe for natural resourcesand ecosystem services, whichare already in steep decline,means companies have to adaptfast to the declining availabilityof natural capital.”
These views are not confinedto green campaigners. This sum-mer, the consultancy McKinseyidentified biodiversity as “thenext environmental issue forbusiness”.
The company’s survey of topexecutives found just over halfthought biodiversity should beone of the top 10 items on thecorporate agenda – “the sameshare that, in 2007, said climatechange should be a priority”.
Water scarcity headed the listof concerns, but respondentsalso mentioned other risks,including infectious disease,food insecurity, flooding,droughts and desertification,and soil degradation.
Their reasons for worryingwere also revealing. Only 12 percent said their companies faceda significant risk of a shortageof crucial inputs resulting frombiodiversity problems. Manymore said they expected to facepressure to change their opera-tions to reduce their impact onbiodiversity. Overall, companiesalso saw a positive side – aboutsix in 10 saw protecting biodi-versity as more of an opportu-nity than a threat.
Continued from Page 1
Political spendingdoes not alwaysmatch CSR values
In January this year, a USSupreme Court ruling removedlimits on corporate spending inpolitical campaigns.
The decision, which isexpected to release into the elec-tion process a wave of corporateand special interest money, hasrevived questions about howcompanies claiming to espouseprinciples of corporate responsi-bility should behave when itcomes to their lobbying andpolitical activity.
Even before the decision wasmade, some had been question-ing corporate behaviour withrespect to influencing politicsand legislation.
A 2005 report produced byAccountability, the UK researchand advisory institute, and theGlobal Compact, the UN citizen-ship initiative, identified a gapbetween the public corporateresponsibility statements andsustainability commitments ofmany companies and their lob-bying activities that push fornarrow commercial interests.
“You’ve got to be consistentin making these commitments,”says Bennett Freeman, seniorvice-president for socialresearch and policy at Calvert,the socially responsible invest-ment management company.
“It just doesn’t cut it to besaying one thing in a CSRreport and then directly or indi-rectly lobbying in Washington,London or Brussels to under-mine the same objectives.”
Much of the indirect lobbyingcompanies engage in is con-ducted through business associ-ations. Here too, contradictionshave been emerging betweencompanies’ sustainability agen-das and what the business asso-ciations are pushing for.
In the US, the Chamber ofCommerce has come under thespotlight, with several compa-nies – including Apple and Nike– withdrawing from the cham-ber or expressing dissent inother ways at the organisation’sopposition to the introduction ofa cap and trade system to tackleglobal warming.
Moreover, few trade associa-tions – beyond those focused onsustainability – are members ofthe Global Compact. “We haveyet really to penetrate the ranksof traditional business associa-tions,” says deputy directorGavin Power. “This is a strate-gic imperative for the next 10years.”
Bruce Freed, president and afounder of the Center for Politi-cal Accountability (CPA), aWashington-based non-profitorganisation, points out that forcompanies, the gap betweentheir policies and those of thebusiness associations that repre-sent them can be about morethan values.
“The whole area of risk is cen-tral to this,” he says. “On cli-mate change, for example, somecompanies have developed abusiness strategy based on car-bon trading.”
Reputational damage is also arisk for companies, when theirpolitical spending does notmatch their broader values.
For example, Target, the USdiscount retailer, has faced pub-lic ire over its contributions to agubernatorial candidate in Min-nesota opposed to gay rights.
“The company has very good
policies on diversity yet whenthey made a political spendingdecision they didn’t look at howit would impact the companymore broadly,” says Mr Freed.
Mr Freed argues that trans-parency and accountability onpolitical spending should beconsidered part of a company’sresponsibility credentials.
To start the ball rolling, theCPA has launched a corporatepolitical accountability and dis-closure database to track directand indirect corporate politicalspending and allow comparisonsbetween companies.
Meanwhile, shareholders arestarting to put more pressure oncompanies to align their valuesand their political spending andlobbying activities, and becomemore transparent about howspending decisions are made.
In August, investors includingCalvert, Walden Asset Manage-ment and Trillium Asset Man-agement filed shareholder pro-posals with both Target andBest Buy, which also madedonations to the Minnesotagubernatorial candidate. Theresolutions drew attention tothe mismatch between the con-tributions and the companies’corporate values and requesteda review of political spending.
“We’ve seen dozens of share-holder resolutions focused ondisclosure of political contribu-tions, and I think we’ll see anupsurge in resolutions focusingon closing the gaps in compa-nies’ CSR positions and theirlobbying,” says Mr Freeman.
Part of the reason behindthese gaps is organisational.
Over the past decade, compa-nies have gradually been bring-ing a wider range of depart-ments – from legal to procure-ment – into discussions aboutCSR and sustainability. How-
ever, their government affairsteams rarely participate.
Mr Power notes: “The incon-venient truth here is that thevast majority of companies stillhave government affairs discon-nected from their CSR strategiesand policies. Typically, theyhaven’t been brought to thetable.”
And while companies havecommittees on compensation,governance, auditing and com-pliance, says Mr Power, “veryfew have board-level committeesdevoted to looking at key globalissues as defined in public pol-icy terms”.
One of the ways the CPAhopes to help change this isthrough the publication of ahandbook on Corporate PoliticalActivity by the ConferenceBoard, a research organisation.
“It’s about how to infuse thisthroughout an organisation,”MrPower says. “And how to ensuresenior-level executives under-stand that their decisions haveto be driven by these types ofvalues.”
Greater transparency andaccountability on political fund-ing and lobbying will help com-panies protect themselvesagainst reputational and busi-ness risks, yet the corporate sec-tor also has the potential to useits lobbying as a positive forceon labour standards, climatechange or corruption.
“Companies should get on thefront foot and lobby for positiveaction on issues that will benefitnot just society but also theirbottom line,” says Mr Power.
LobbyingSarah Murray sayscompanies have notinvolved theirgovernment affairsteams in this area
Data will be crucial to the better use of energy
More than half the world’spopulation lives in cities.
That level of urbanisa-tion is unprecedented and,according the UN’s Popula-tion Division, the trend isset to continue.
By 2050, the UN esti-mates, the urban popula-tion will grow by 2.5bn,reaching 70 per cent of thetotal. City-dwelling on thisscale will bring many chal-lenges. Minimising theimpact on the environmentis just one and there ismuch to be done.
In a recent survey of2,250 residents of 15 citiesworldwide, conducted by
the Economist IntelligenceUnit, one-third of respond-ents said poor air qualityhad a severe negativeimpact on quality of life.One in two cited conges-tion as a big concern.
On a more positive note,almost three-quarters (74per cent) claim they wouldprobably change theirenergy and water consump-tion if they had betterinformation about theirusage.
That points to the signifi-cant role that the informa-tion and communicationstechnology (ICT) sector hasto play in making citiesmore sustainable.
Technology companiessuch as IBM, Cisco, Micro-soft and Google clearlysense a bonanza.
A large element of theirprescription for sustainablecities involves a transfor-mation of the power gridfrom a largely electro-
mechanical system to adigital network, or “smartgrid”, across which infor-mation about consumptionflows seamlessly betweenutilities, consumers andgovernment.
The smart-grid opportu-nity, Cisco chief executiveJohn Chambers has said,“may be bigger than thewhole internet”.
IT companies will pro-vide the networks, hard-ware and software neededto store, analyse andpresent consumption datain ways meaningful to bothutilities companies and theconsumers they serve.
However, a vital prereq-uisite will be the installa-tion of “smart meters”capable of taking thesereadings, says Andy Slater,Emea marketing directorat US-based meter com-pany Sensus.
Sensus provides metersfor electricity, water and
gas and is working as partof a consortium, alongsideBT, broadcast signal distri-bution specialist Arqivaand BAE Systems subsidi-ary Detica, on a pilotproject to roll out smartmeters to 200,000 homes inReading, UK.
This trial, he says, willform the basis of the con-sortium’s pitch for the UK-wide, government-backedSmart Metering Initiative.
The idea behind the con-sortium’s proposal, says MrSlater, is simple. “It’s a sin-gle, intelligent networkthat can measure water,electricity and gas tohomes and businesses
across the UK and collectthe data in a central reposi-tory, from where it can besent to the relevant utili-ties companies.”
But to make a real differ-ence to the environment,information collected bysmart networks must findits way into the hands ofcorporate and residentialend-users, says Darrin Hill,an energy specialist withPA Consulting, the man-agement consultancy.
“Different sections of thepopulation will respond todifferent incentives,” hesays.
“Some may wish to curbtheir consumption purelyfor the good of the planet;others will be motivated bythe prospect of a lowerelectricity bill.
“Either way, users needthe information to helpthem make the rightchoices.”
Much will depend on the
willingness of energy pro-viders to share data withcorporate and residentialcustomers and to introducevariable pricing rates thatreflect real-time demand.
For example, they mightoffer a cheaper rate,encouraging consumers torun washing machines orcompanies to perform vitalcomputer backup routinesduring off-peak hours.
With that in mind, bothGoogle and Microsoft haveunveiled online energymanagement tools thatpromise to connect custom-ers to utility companies’systems and allow them tomonitor how much electric-ity they are using – and atwhat price band.
Meanwhile, in San Fran-cisco and Amsterdam,Cisco Systems haslaunched Urban EcoMap,an interactive websitethat helps raise citizens’awareness about carbon
emissions in their area.Users can look up emis-
sions by neighbourhood incategories such as trans-port, energy and wastemanagement, set goals andchart their progress.
In the rush by technol-ogy companies to sell sys-tems and software to thelargest utility companies –often lured by the prospectof the generous govern-ment funding such compa-nies are receiving – initia-tives that focus on the end-user seem small.
But they could be theones that make the real dif-ference.
“We can talk a lot aboutsmart cities, but in the end,it’s all about people havingthe information they needto make choices, behavedifferently and use energyand transportation differ-ently,” says Mr Hill.
“That’s what makes acity smart.”
IT & urbanisationJessicaTwentyman onsmart meters andother initiatives
Multistorey farms in acity centre near you
With agriculturalland under pres-sure from climatechange, soil erosion
and population increase, thesolution is to create “verticalfarms”, high rise buildings in ornear cities that could be used togrow food.
This is the view of DicksonDespommier, professor emeritusof public health at ColumbiaUniversity, New York,who invented the conceptin 1999.
He argues that it would ena-ble year-round crop productionsafe from droughts, floods andpests, make efficient use ofwater, and reduce fossil fuelconsumption by avoiding theneed for heavy machinery andtransport. Rural land could bereturned to nature.
But when he asked his stu-dents to design some prototypes,the results were discouraging.To feed 50,000, the buildingwould need to be the size of afootball stadium and 30 storeys
high, the students concluded –clearly impractical for manycities.
More recently, Prof Despom-mier has designed smaller farmsthat could be constructed incre-mentally. “They might start inresearch departments of univer-sities with sponsorship fromlocal government, graduallyintegrating with schools, hospi-tals and apartments in a seriesof smaller iterations that wouldspread out throughout the city,”he says.
Fitting farms into old citieswithout damaging their cultureand history is the main chal-lenge, says Augustin Rosen-stiehl, chief executive of SOA, aParis-based architect. “We can’trestrict urban farms to suchplaces as Dubai,” he says.
SOA is working on alternativemodels for urban agriculture.“A few farms could be the sizeof large industrial sites, otherson the scale of a Carrefour shop-ping mall, and some 300 sq mproperties suitable for smallbusinesses.”
Such buildings could deploy arange of growing techniquesincluding hydroponics (soil-lessgrowing), which uses tubes ofliquid, aeroponics – air and mist– and more recently ultrasonicfoggers to deliver a thicker brewof nutrients.
In the Netherlands, farmersare growing plants on plastics,rockwool, perlite and vermicu-
lite using small amounts ofnutrient-charged liquid.
As yet, a real vertical farmdoesn’t exist, says Mr Rosen-stiehl, who refuses to count res-taurants growing their owntomatoes and garlic. The barrieris not technology, he says, butpolitical will and the fact thatland is so expensive.
Unless city authorities areprepared to allocate land exclu-sively for agricultural use, itwill not be economic he argues.“The tomatoes will be tooexpensive.”
In northern Europe and the
US, urban farming tends to beseen as an aesthetic issue or ahobby, says Mark Redwood, pro-gramme leader of Canada’s gov-ernment-funded InternationalDevelopment Research Centre.
But in lots of developing cit-ies, urban agriculture is funda-mental,” he says. “It’s rare tosee an empty space that isn’tbeing put to productive use inplaces such as Ahmadabad,India, or Cairo, Egypt.”
IDRC is helping schools inSantiago, Chile, grow produce tosell in local supermarkets, andis working on urban farmingprojects in Lima, Peru; Dakar,
Senegal; Fortaleza in Brazil; andAmmam, Jordan.
One problem is a trend to useuntreated waste water, whichbeing nutrient-rich saves on fer-tilisers but contains pathogensthat can spread disease.
In Accra, Ghana, and inBamako, Mali, communities arelearning to reduce contamina-tion by avoiding specific parts ofthe plants, washing, and cook-ing them. In Mexico City, urbanfarmers are using raised bedsknown as chinampas, and, whenthe water is particularly con-taminated, growing flowersrather than food.
Urban agriculture was an oxy-moron 15 years ago, but now itis recognised as having a bigrole in food security and theeconomy, says Mr Redwood.
“The problem is that nobodyhas done any proper accountingto see much value is tied up inurban farming. Being able todemonstrate its economicimpact would be enormouslyhelpful,” he explains.
In addition to securing thefood supply, urban farming isincreasingly seen as a way tocreate a green city.
“If you’re going to have parks,why not make them produc-tive?” says Mr Redwood.
This is beginning to happenwith the integration of agricul-ture into the design of citiessuch as Beijing and Rosario,Argentina, he says.
Urban agricultureProjects are small fornow. Being able toshow economicimpact would help.Jane Bird reports
Upwardly growbile: an SOA architect plan for a highrise with a farm
BennettFreeman:‘You’ve got tobe consistent inmaking thesecommitments’
‘Different sectionsof the populationwill respond todifferent incentives’
Sustainable Business | The Future of Cities
4 ★ FINANCIAL TIMES MONDAY OCTOBER 4 2010
Sustainable Business
Investors push to know more about nonfinancial risks
The BP oil spill in the Gulfof Mexico has shown thatan environmental disastercan be as financially devas-tating for a company as adownturn in business – letalone the reputational dam-age.
Yet vulnerability to thistype of hazard is not some-thing you could spot bytrawling through a conven-tional annual report.
Investors increasinglywant companies to includeinformation about their
impact on the environmentin annual reports, to helpjudge potential risks.
Portfolio managers andinvestment companies wantto value businesses in abroader sense, says PatrickEastwood, managing part-ner at Further, a London-based branding agency.
“They need to includemeasures such as sustaina-bility data. BP was doingeverything right but for onesimple non financial issue.”
Hans-Joerg Hinkel, strate-gic planning manager atMitsubishi Electric, agreesthat analysts want data onnon-financial matters, suchas use of raw materials andenergy consumption.
“There is a strong feelingacross Europe that if wehad a better understandingof this, much of the finan-
cial crisis could have beenavoided,” Mr Hinkel says.
Reflecting this trend,more than 800 investorshave signed up to the UN’sPrinciples for ResponsibleInvestment, accounting for$2,200bn – 10 per cent of glo-bal capital markets.
The goal is to nudge com-panies to provide environ-mental, social and corpo-rate governance (ESG) datavoluntarily, rather than leg-islating.
Some 3,100 of the largestcompanies now producesustainability reports, com-pared with about 300 in1996, according to Further.
Financial directors arebecoming involved in sus-tainability because they areresponsible for data qualitycontrol, says Harry Morri-son, general manager of the
UK-based Carbon TrustStandard Company, aninternational initiativefocused on carbon measure-ment and reduction. “More-over, trading schemes andtaxes on emissions meancarbon data are money.”
But data are often toovague, lacking order andintegrity, and there is noagreement internationallyover what a sustainabilityreport should comprise.
The world’s most widelyused framework is the US-based Global Reporting Ini-tiative, developed in collab-oration with the UN. But:“The GRI is too big with toomuch information,” says MrMorrison. “It’s not a stand-ard, just a framework.”
Other initiatives includethe FTSE4Good IndexSeries and the Dow Jones
Sustainability Indexes. “Butthey tend to look at a broadset of challenges ratherthan focusing on one area,”Mr Morrison says.
The International Organi-zation for Standardization(ISO) is working on sustain-ability with the develop-
ment of its ISO 26000 stand-ard. But it is intended as aguidance document, not acertification.
In recognition of theneed for standards, the EUhas begun consulting onregulations to govern thenon-financial parts of
company reports. Amongissues being consideredare whether sustainabilityreporting should be compul-sory and if it shouldinclude key performanceindicators.
Whatever the outcome,companies should have thefreedom to report in a waythat is relevant for theirbusiness and sector, andalso be given options, so itis not too much of a burden,says Mr Hinkel.
In Mr Eastwood’s view,many organisations pay lipservice to sustainabilityreporting, but fail to under-stand how it can help inno-vate, reduce risk, enhanceinternal culture and buildexternal reputation.
“They treat it as a box-ticking exercise, and pro-vide too much information,
disclosing everything andmaking it difficult for read-ers to see the wood for thetrees.”
Mitsubishi Electric is wellaware of the potential ofsustainability reports toboost image and savemoney. Its reports haveevolved since 1994, whenthey were mainly about fac-tories and pollution, tofocus on energy consump-tion. Its efforts have beenrewarded with a high scoreby sustainability ratingagency, Oekom Research,based in Germany.
Darren Strange, Micro-soft’s head of environmen-tal sustainability, says ifyou are not one of thecompanies disclosingdetails of your carbonrecord, “questions areasked . . . This is driving
compliance much fasterthan legislation.”
Microsoft’s publishedmaterial commits it toreducing its carbon foot-print by 30 per cent in thefive years to 2012.
Most companies face “agiant leap” in taking sus-tainability reporting to thenext level, says PA Consult-ing. The trend towardsdirect consumer reportingwill force them to be muchmore open to scrutiny.
Ironically, BP was a pio-neer: Lord Browne brokewith oil industry traditionto meet Greenpeace and dis-cuss issues it felt wereimportant, says Mr East-wood. However, he notes,“Sustainability reportingneeds to be something thatruns through a business’sbones, or it will fail.”
Corporate reportsJane Bird says thelack of a globalstandard format isa stumbling block
NGOs have a crucial role to play
A sustainable business isone that can carry on oper-ating today, next year and adecade hence.
To achieve that, it needspartners: to ensure compli-ance with rules and regula-tions; to mitigate presentrisks; and to identifychanges in its operatingenvironment for which itneeds to start preparing.
Viewed through thatoptic, it becomes easier tosift the multitude of poten-tial partners in the sustain-able business landscapeinto groups equipped tohelp at different levels ofthe process.
For decades now, environ-mental awareness has beenclimbing the corporateagenda.
Protests about pollutionhave spawned environmen-tal legislation around theworld that companies mustcomply with.
Climate change initiativeshave delivered carbon cred-its, tax breaks and emissionreduction targets.
And communication, in-cluding with conservationgroups, has brought a belief
in many boardrooms thatthe companies of the futurewill be those that lead thetransition to a sustainableeconomy.
But as Greg Koch, manag-ing director of global waterstewardship at The Coca-Cola Company, says: “Instepping outside the fourwalls of the plant, we arestepping outside our busi-ness.”
Indeed, even within the“core” business, it hasbecome a challenge formany companies to keep upwith both compliance obli-gations, and opportunitiesto reduce their environmen-tal footprint.
Little wonder that diversepartnership models areemerging in the nascent“sustainability industry”,says Scott McGregor, chiefexecutive of Camco, a UK-listed company that advisesand assists governments andcompanies on sustainability.
At government level, theprivate sector, along withacademics and others, pro-vides expertise to helpdesign, say, a feed-in tarifffor renewable energy.
Once legislation is inplace, companies turn tofor-profit advisers toachieve compliance or tohelp them exploit commer-cial opportunities. Thismight take the form of con-sultancy, or risk-sharingpartnership.
Increasingly, says MrMcGregor, “companies seesustainability as part of
building a competitiveadvantage”. So a cementmaker seeking to cut car-bon emissions may take arisk-sharing partner toimplement a heat-recoveryprocess at its kilns.
To help achieve its targetof a 10 per cent fall in CO2emissions, despite a 30 percent rise in sales, TetraPak, the packaging group,hired commercial consult-ants to develop energy-efficiency strategies, saysMario Abreu, director ofrecycling and supply chainsupport.
“They are experts in
energy audits, but canopen our eyes to new tech-nologies or applications”.
Companies seeking tomanage carbon cap-and-trade schemes, or takeadvantage of financialincentives to fund environ-mental projects, may usethe environmental arms oftraditional advisory firms,or companies such asCamco to design projects,sometimes also on a risk-sharing basis.
Yariv Cohen, chief carbonofficer at Camco, says:“When the risk is high, cli-ents ask us to share it.Once regulation is clearer,
it moves to the consultingmodel.”
Increasingly, companiesare viewing sustainabilityas a risk-managementactivity, says Mr McGregor.“A plant that generates itsown power from waste is atless risk from energy pricevolatility.”
The perception of sustain-ability as part of risk man-agement is also evident atHSBC Holdings, the bank-ing group, where FrancisSullivan, deputy head ofgroup corporate sustainabil-ity, works within the riskmanagement function.
“There is a genuine beliefin many companies – andHSBC would be one of them– that NGOs have an impor-tant role to play,” he says.“They are closer to anissue, speak more freely,and are not waiting for thenext cheque.”
HSBC draws on NGOexpertise in the formulationof its freshwater infrastruc-ture policy and forest landand forest products sustain-ability policy.
Put crudely, the bankdoes not wish to financedams that damage the envi-ronment or paper plantsthat use trees felled in ille-gal logging.
So it works with WWFand the Forest StewardshipCouncil to design policiesthat will protect its lendingand its reputation, andempowers its risk officers toveto non-compliant borrow-ing requests.
PartnershipsOutsiders can helpensure compliancewith rules andmitigate risks,says Ross Tieman
Tetra Pakhiredconsultantsto plan forenergyefficiency
Morrison:‘Tradingschemesmean carbondata aremoney’
Responsible sourcingmeans focus on details
When Walkers crisps examinedits carbon footprint, managersquickly realised most emissionslay outside its direct control – inthe ingredients: potatoes, sun-flower oil and seasoning.
As a result, the PepsiCo unit –advised by the UK government-funded body the Carbon Trust,which helps companies reducetheir greenhouse gas emissions– began assisting its suppliers tobecome more energy-efficient.
It is no accident that so manyof the businesses that havetended to be most conscious oftheir environmental perform-ance have been those in themost customer-facing sectors –such as PepsiCo, Coca-Cola, Uni-lever, Nestlé, Walmart, Tesco,and banks such as HSBC andBank of America Merrill Lynch.
These companies have strongbrands they want to protect –and often correspondingly longsupply chains. That can makecontrol hard to achieve, asWalkers found, involving notonly extensive information fromsuppliers, but working withthem to try to develop betterproducts. As Walkers alsofound, involving the supplychain is essential.
For some companies, the proc-ess of overhauling procurementprocesses can be huge. JoséLopez, executive vice-presidentof operations at Nestlé, says:“Our size and breadth mean thestandards we set our suppliersare incredibly important to ourbusiness and, increasingly, ourconsumers.”
The company drew up a set ofprinciples for “responsible prac-tices” across its supplier chain,he says, with a “rigorous sup-
plier code of our own to set non-negotiable minimum standardsthat all our suppliers, theiremployees, agents and subcon-tractors, must meet.”
Such processes can involveexhaustive detail. In the case ofDyson, the appliance maker, itextended all the way to workingout the carbon impact of eachcomponent of its Airblade handdryer – down to screws weigh-ing 0.9g each.
Many of the principles in-volved in “green sourcing” areidentical to those in ordinaryprocurement processes, saysSukhendu Pal, managing part-ner, Centrix Consulting. “Greensourcing is not a departure – it’san augmentation,” he explains.
“When considering the trade-offs between one material, serv-ice, or supplier and another, thesourcing function has tradition-ally measured the value of eachby analysing the economics of
the deal or the deal’s impact.Green sourcing starts with thesame considerations, but alsotakes account of the environ-mental impact of a choice.”
However, he adds, there arecomplications. “Green sourcingrequires deeper insight than atraditional strategic sourcingprogramme, because the choicesamong environmentally friendlyproducts and services can beextremely complex, and thus anetwork of suppliers that canprovide the necessary transpar-ency is essential.”
If the end product or service isto be truly green, the purchas-ing company must have accessto more information than is nor-mal in supplier agreements.“Many companies will need toreview their existing preferredlarge suppliers,” Mr Pal warns.
Heiko Schmidt, a sourcing
expert at PA Consulting, advisesthat as “green sourcing” caninvolve more detail than astandard supply agreement, it iseven more important to draw upa watertight contract.
“The contract should bedesigned to avoid any immedi-ate renegotiations,” he says.
As part of the contract, pur-chasers should ask for “an obli-gation of continuous improve-ment”, he says. Environmentalnorms are a moving target –companies are expected to lowertheir emissions year after year,in accordance with scientificadvice that global emissionsshould be halved by 2050.
In addition, “regulations areconstantly developing,” MrSchmidt adds. “Suppliers shouldnot be allowed to stand still.There should be an obligationfor suppliers continuously toimprove, meaning they shouldbe striving to innovate and toadopt regulations, as well asimprove the quality of servicethey deliver.”
One problem with writing allof this into a contract is that somuch about green procurementremains hazy and subjective.
How to measure a company’semissions, for instance? Thereare many standards businessescan choose. What counts as animprovement? For instance, if acompany’s emissions increase inabsolute terms, but fall per unitof output, is that a success?
What indicators are preferred?If a company reduces its use ofwater, or waste sent to landfill,but its overall greenhouse gasoutput remains static, is that asuccessful outcome?
In this emerging area, compa-nies must decide these issuesfor themselves. And that is tak-ing many procurement depart-ments into unexplored territory.
“This can be challenging formany companies and their pro-curement specialists, becausethere are no technologies andtraditional purchasing tricksthat can do these things,” saysMr Pal. “Only a forward-lookingmindset can make it happen.”
Supply chainEnvironmental impactis complex andassessing it requiresdata and transparency,says Fiona Harvey
Companiessee benefitsof ‘friendlier’formulas
California’s Green Chem-istry Initiative meansthat from next year,companies selling prod-
ucts in the state will be requiredto identify specific chemicals inthose products and reduce oreliminate any that are harmful.
While regulators are partlyresponsible for advancing the“green chemistry” agenda, com-panies are also seeing benefitsin reformulating products to usematerials that are less toxic anddamaging to the environment.
The concept of green chemis-try was developed in the early1990s, when Paul Anastas andJohn Warner, two academics,came up with 12 principles,including toxicity reduction,biodegradability, energy effi-ciency and renewability, toassess the impact of products.
Meanwhile, the legislativelandscape has been shifting –and California’s regulations arefar-reaching.
While they only apply to prod-ucts sold in the state, all compa-nies will need to comply, unlessthey make two versions of theirgoods.
“In the US, California is about20 per cent of the economy,”
says Peter Hsiao, a member oflaw firm Morrison & Foerster’senvironmental and clean techpractice.
“So having a legislative moti-vator in one jurisdiction affectsthe industry nationwide.”
The European Union hasplayed a similar role.
Its Registration, Evaluation,Authorisation and Restriction ofChemicals (Reach) legislationcovers chemicals used by com-panies producing everythingfrom aerospace engines to elec-tric kettles.
And the EU’s Restriction ofHazardous Substances Directive(RoHS) limits the amount of sixchemicals that can be used inelectronic products.
Producing for EU marketstherefore means complying withthe rules – regardless of wherethe company is based.
Meanwhile, manufacturers arestarting to re-examine the chem-icals they use. To reformulatemany of its cleaning products,SC Johnson uses something itcalls Greenlist, a rating toassess the impact of a materialon health and the environment.
Some companies are receivingaccolades for their efforts. In theUS, the Presidential GreenChemistry Challenge Award –presented by the EnvironmentalProtection Agency – recognisesenvironmentally sustainabletechnologies that move from theresearch lab to the marketplace.
Among this year’s winnerswere BASF, the German chemi-cals group, and Dow Chemical,one of the US’s biggest chemi-cals makers.
Together, the two companiesdeveloped a way to make pro-pylene oxide – one of the mostfrequently used industrial chem-icals – using hydrogen peroxide,which eliminates waste andreduces water and energy use.
As well as co-operationbetween companies, internalcollaboration is necessary forsuch developments, says NeilHawkins, Dow’s vice-presidentof sustainability.
To develop the new version ofpropylene oxide, departmentsfrom across the company had towork together.
Tricky trade-offs must also benegotiated when developing sus-tainable chemical products. Insome instances, toxicity may bereduced, but at the cost of othersustainability principles, suchas energy and water use.
Richard Denison, senior scien-tist at Environmental DefenseFund, the US-based non-profitorganisation, cites nanotechnol-ogy and nano materials.
“Some of those materials arebeing offered with the promisethat they might reduce thequantity of material that’s
needed by being more active perunit of mass,” he says.
“But there’s a growing body ofevidence indicating their pro-duction could well be more ener-gy- and water-intensive than thealternatives.”
Developing materials can beexpensive too. “You have to findcustomers that want to pay forgreener chemistry,” says MrHawkins. “Sometimes theirvalue chain will support it andsometimes it won’t.”
Nevertheless, for companiesthat are taking a lead in thisarea, benefits are emerging.
For a start, embracing greenchemistry can precipitate thedevelopment of technologiesthat improve products.
Bioplastics, for example, haveallowed food companies todevelop breathable packaging.
In addition, costs savingscan accompany sustainabilityimprovements.
“The principles of green chem-istry are that you increase theefficiency of the conversion ofraw materials from supply tothe product itself,” says MrHsiao.
Green chemistryMore sustainableproducts can meantricky tradeoffs inenergy and water use,notes Sarah Murray
HPPO plant: the process uses less water and makes less waste
Heiko Schmidt:‘There shouldbe an obligationfor suppliersto improvecontinuously’
