Daily Archives: January 28, 2008

Sustainability: Rounding the Bend

Eric Hiller gave us a granola definition in his first post on sustainability over on Cost Cents. Eric’s take on the debate is that a business should understand how to cost or value the profit of a sustainability initiative, since businesses have to be sustainable themselves before they can “go green” or “save the planet”. When attempting to evaluate whether a sustainability initiative is a good decision or not, Eric advises you to see how it impacts the cost statement – as it affects the cost statement the same way ANY cost does in terms of material cost, labor cost, direct overhead cost, amortized and capital investment costs, and period / indirect overhead costs. For example, the cost of material = cost of commodity + cost of disposal + cost of secondary effects. For example, if we are evaluating materials for a SUV, then we are interested in fuel economy as a secondary effect. It can be costed as the part mass times the cost per kilogram times the material strength to weight factor (since magnesium has better strength to weight than aluminum which has better strength to weight than steel, for example). In other words, just like analyzing the carbon footprint can tell you whether Britons should import roses from The Netherlands or Kenya, analyzing the cost can tell you whether or not the effort has value.

Over on Buyer Analytics, Dave M took a stab at defining sustainable procurement. Dave points us to the International Council for Local Environmental Initiatives (the ICLEI) for a definition of sustainable procurement. Sustainable procurement aims to integrate environmental considerations into all stages of the purchasing process with the goal of reducing the impact on human health and the environment. Then Dave tells us what he believes the cornerstone of sustainable procurement to be – ethical sourcing. Dave defines ethical sourcing as an organized social approach which promotes selling goods which adhere to standards for international labor, environmentalism, and social policy. He then gives us a few reasons for insisting on ethical sourcing which include the facts that there are 2.7B people in the world who have to exist on less than $2/day and the fact that rights groups estimate there are as many as 60 Million children working in violation of the Child Labor Act. (More reasons can be found in my summary of the John Lewis Partnership Responsible Sourcing Workbook.) He also points out that just because you don’t purchase from suppliers in developing countries that this does not mean ethical sourcing doesn’t apply to you – you still need to ask who your suppliers themselves purchase from and trace the chain.

Andy Monin on Vendor Compliance also tackled the sustainability issue in his latest point about the contradictory dual view of the average (North) American. In his post, he points out that we all want to sustain the forests, clean beaches, and good air. However, at the same time, the average (North) American wants to sustain two cars, a morning latte, and the drive-through fast-food life style. He might be a bit greener than he was in the 90′s, carrying reusable sacks to the grocery store, installing compact fluorescent lighting (CFL), and even driving a Pius … err-r-r … Prius … but this is all for naught if he continues to want a bigger house filled with more gadgets. A few CFLs isn’t going to significantly make up for the additional energy consumption of a 15% larger house with more electronics. Andy then tries to address where the true sustainability impact will come from.

According to Andy, achievable sustainability must not degrade quality of life, must create simultaneous ripples that compound the benefits and impact felt around the world, and must have champions (like Eric’s AlGorites) that can embrace the concept based on the inherent incentives and benefits. This means large institutions, like Wal-Mart, will likely be the drivers of the greatest impacts, at least in the short term. However, we must note that Wal-Mart is not really the biggest fish in the pond. It’s just one player in a large retail industry. Furthermore, from an industry perspective, US hospitals alone represent over 1 Trillion dollars (which is nearly 5% of US GDP) and could make a real difference. He then gives four good reasons why hospitals should attempt to be the catalyst of the movement and make the jump: it’s good common sense, it will make them more competitive and attractive, it will improve their ROI, and it is socially responsible. Furthermore, hospitals have to make difficult, ethical decisions every day – who better to lead the sustainability charge and truly do no harm?

Sustainability and The Economist: Part II

The latest issue of The Economist, not wanting to be outdone, just ran a number of articles on sustainability that are, at the very least, worth a mention. Today we tackle the last five.

In do it right, we are reminded that the industry has been more or less shaken into adopting CSR policy, that globalization is largely responsible for bringing the issue into the spotlight, but that an economic recession would be bad news for the CSR industry – as companies might then see it as a luxury that could be done without. It also tries to deduce, should corporate goodness continue to flourish, how CSR might evolve. Will it be a wave of disruptive innovation that features a new breed of “social entrepreneur” that takes over as the driving force, following Mr. Benioff’s example of committing 1% of equity, profits, and time to community good? In comparison to the state of affairs today, where the same few and familiar names pop up again and again, an entrepreneurial model of tackling social and environmental problems would stir up the CSR world.

In just good business, we are told that although CSR is now mainstream, few companies are doing it well. With such a broad focus that spans everything from volunteering in the local community to looking after employes, from helping the poor to saving the planet, many companies are finding it hard to know what to focus on. CSR today appears to be composed of three broad layers. The basic layer is corporate philanthropy where companies allocate about 1% of pre-tax profits to worthy causes. On top of that is risk management to prevent disasters and worker exploitation. On top of that is an opportunity layer, where they try to find value in CSR.

In the feel-good factor, we are told that many people like CSR because helping the environment and others makes them feel good. The WFP connection is partly why three out of four applications apply to TNT. KPMG employees now donate 40,000 hours a year. Volunteer programs at Salesforce.com involve 85% of its workforce. The trend is catching on – and those companies that buy in are more likely to attract talent than those that do not.

In the next question, we’re told that, clearly, CSR has arrived. But is it working? First of all, sceptics still matter as they are found, disproportionately, in senior management. The reality is that the welfare a company creates in the form of jobs, products, or innovation still dwarfs anything they do, or are likely to do, in the name of CSR. Furthermore, a socially conscious and bankrupt business is no good to anyone. In addition, since the focus of business should be to return value to the shareholders, they are probably limited to focussing on the “sweet spot” where initiatives are good for profits and social welfare, which might, in actuality, and unfortunately, be quite limited for the average business. But interest in Socially Responsible Investment (SRI) is on the rise, along with a general surge in interest in anything climate-change related. So CSR will march, or at least stumble, forward.

In a stitch in time, we are told that business leaders embrace CSR for a number of reasons. When the CEO of Wal-Mart realized that it’s “not just our customers, but our communities, our countries, and even the world”, he converted. Yahoo! started to accept it in the aftershock of being blamed for the jailing of two Chinese dissidents. And some companies are lured by the glamour of joining organizations like the Clinton Global Initiative. The rhetoric might be about doing the right thing, but a large driver appears to be risk management – about limiting the damage to the brand and bottom line that can be inflicted by bad press, boycotts, and the burdens of legal action. Not the best reason, but maybe beggars can’t be choosers.