Speeches

Sustainability- the Biggest Business Opportunity of the 21st Century

Shattering of a huge ice shelf Larsen B weighting 500 million billion tons in Antarctica last week must enliven the environment debate once again. Is it the clinching evidence of climate change through global warming that we have been waiting for?  What is grave is that the total area of ice shelves which have disintegrated  since 1945 is 7700 sq. km., whereas Larsen B. alone is 3250 sq. km. There have been several warnings before of Antarctica heating up.  Scientific evidence is mounting. The annual melt season has gone up to three weeks in 20 years.  Mount Kilimanjaro has lost 75% of its ice cap since 1912. The ice on Africa’s tallest peak could vanish entirely within 15 years. Lake Baikal in eastern Siberia now freezes for the winter 11 days later than it did a century ago. Montana will lose all the glaciers in Glaciers National Park by 2070 if their retreat continues at the current rate. Venezuelan mountains tops had six glaciers in 1972. Today only 2 remain. Scientific analysis of bubbles in the Vostok ice from Antarctica show CO₂ in the atmosphere at the highest level in  420,000 years; it took only 100 years of industrial combustion to bring this about. Global temperatures in the next century are expected to exceed a 10,000  year record.

 After George Bush has rejected the Kyoto protocol, a new breed of authors has emerged whose basic task is to berate environmentalists through perhaps with some justification, because of their exaggeratedly alarmist approach to environment. Environment debate for long has not been about protecting eco systems but ego systems. Bjorn Lomborg is a statistician at the University of Aarhus in Denmark whose book “The Sceptical Environmentalist” is the latest to join the bandwagon. He asserts that environmentalists are wrong in every aspect of their claim about environmental degradation. Lomborg criticises their exaggerated forecasts of the impending doom and gloom. He does support his arguments with scientific data but as a statistician he presents only those facts that support his point. As an economist of substance he makes an astonishingly ridiculous statement:  “even if America’s trash output continues to rise as it has done in the past, and even if the American population doubles by 2100, all the rubbish America produces through the entire 21^st century will still take up only the area of a square, each of whose sides measures 28 km (18 miles). That is just one-12,000^th of the area of the entire United States”.   

Lomborg is making the same mistake as the environmentalists whom he is lambasting. When dealing with the environment we cannot simply fast forward our projections in a linear fashion. The whole domain of environment is highly complex. Seemingly contradictory trends in the environment and society are not mutually exclusive. Environment can be degraded and standards can go up. The fact that humanity has made astonishing progress or the average life spans have increased phenomenally and the developed world of today is enjoying highest standards of living does not render the forecast of the environmentalists wrong.  Both can be right. The ability to accelerate a car which is low on fuel does not prove that the tank is full.  Each one of us is focusing on one piece of a very complex system. Each is seeing its piece correctly like the proverbial blind man  touching the  elephant. None is able to perceive the whole. Solution for a complex problem like environment cannot be found in a piece meal approach. Environmental problem cannot be resolved without understanding their interdependence and interconnectedness.

A bizarre irony lurks behind the environment debate. The end game of all the experts such as Bjorn Lomborg is to protect the trillion dollar strong fossil fuel based industry. Lomborg does not deny global warming. He says, “carbon-dioxide emission are causing the planet to warm. The best estimates are that the temperature will rise by some 2º-3º C in this century, causing considerate problems, almost exclusively in the developing world, at a total cost of $5,000 billion. Getting rid of global warming would thus seem a good idea. The question is whether the cure will actually be more costly than the ailment.” His quarrel is with Kyoto alternative which he thinks is very expensive and inadequate.  He thinks its cost can approach $1 trillion, more than five times the cost of worldwide water and sanitation coverage. Secondly, its effect will be miniscule. “It merely buys the world  6 years”, he says. Six additional years for 25 billion people forecast in 2100.

Lomborg’s calculations ignore the fact that from 1976 to 1983 the CO₂ emissions in US were brought down by one third bringing in savings worth $150 billions in energy cost. During this period while the US economy grew by 19%, total energy use shrank by 6%. In fact with the increase in technology, there is an enormous scope in saving energy. The environment debate is clearly designed to subserve the interest of petroleum companies who do not wish to accept the fact that we can cut down energy cost and meet our requirements through alternative sources of energy more efficiently and cheaply. Investing in greatly increased energy efficiency offers considerable advantages as the cost of reduction  can be as much as 78 percent lower than that of making it according to a study conducted by Swedish Sate Power Board. The governments need to encourage innovation and offer incentives and subsidies for saving energy as they do for making renewables. One of the strongest economic advantages of focusing on energy efficiency instead of energy production is that building energy saving devices such as super windows and efficient-lamp factories instead of power stations and transmission lines requires a fraction of the expenditure and offers much greater employment opportunities. Also, such investments pay their costs back ten times as fast.

It is admitted that business does not believe in altruism. Milton Friedman is right when he says the business of the business is to do business. The fact remains that with the value migration business will increasingly find that its market capitalisation is determined by the social good that the businesses are perceived to do. Anita Rodrick is purely a businesswoman who did not set up Body Shop to feed the world’s poor or to upgrade the environment. She was early enough to be wise to piggy back her business in the environmental mode by coming out with the slogan: “we do not test our products on the animals”. It paid high dividends in making her the darling of millions of teenagers.

There are today 2 billion teenagers, a third of the world population, a segment that today influences more that 50% of all purchasing decisions. This has caused a growing mismatch between shareholders expectations and customer  aspirations. Shareholder values are created by purchases made by these teenagers. The fact is that while the profile of shareholders is 30 plus the difference created in the shareholder values comes from the businesses that appeal to under 30s. In this context, the company’s perceived image is of utmost importance. Both investors and customers are looking for companies which are more transparent, more ethical with strong commitment to environment and social values. In the millennium survey  of 25000 people across 23 countries and 6 continents last year, 56% said that the brand equity of company depended on corporate citizenship, 40% said it was because of quality. Only 34% said it was because of management practices.

Sensible corporations of the 21^st Century are acutely and increasingly conscious of their environmental image. You only have to see the websites of companies such as Shell, BP and Mobil. One would think as if they are in the business of environment management. These initiatives ought to be welcomed. While it is difficult to reorder the economy to mimic natural biological processes to ensure no waste, the companies do recognise that waste indicates a process failure and operational inefficiency. Companies acknowledge that environmental costs must be factored in the production cost and taken care of at the design stage itself. Just as the slogan of the eighties was “quality should be built in”, today’s slogan is “ waste should be designed out”. There are a lot of indirect benefits being reaped by companies conscious of environmental costs: reduction in operational costs, reduction in  cost of capital, less time in planning permission, host community’s acceptance of company’s “license to operate”, recruitment of new staff and retention of existing staff through improved moral and motivation and resurgence of a new culture of creativity and innovation. All this is eventually converted to increased value for the shareholder.  

SUSTAINABILTY - THE END GAME

Corporate sustainability is becoming therefore a highly attractive business proposition   for corporations with their eyeballs creating long term shareholder values. They are integrating economic, environmental and social success factors in their business design and operational strategies. Sustainability driven companies are poised for a brighter future when public becomes increasingly aware of environmental catastrophes such as shattering of Larsen B. No amount of soft pedalling by the likes of Lomborg would pacify their outrage at companies who are reported to damage the environment. Public hostility faced by Shell, Nike, Reebock, Ikea and Monsant is a sharp reminder for those who ignore this warning. Being proactive and innovative with regard to sustainability factors is increasingly regarded as a crucial competitive advantage. Sustainability leaders embrace the opportunities and manage the risk which derive from the increasing concern of the markets with environment. They are increasingly attentive to the voice of all stakeholders including employees, customers, suppliers and investors.

Businesses driven by sustainability issues set industry wide best practices with regard to sustainability factors. Dow Jones has developed a sustainability index based on following five principles:

Strategy: Sustainability leaders integrate long term economic, environment and social aspects in their business strategies.

Innovation: Sustainability leaders invest in product and service innovations that focus on technologies and systems, which use financial, natural and social resources in an efficient, effective and economic manner.

Governance: Sustainability leaders implement the highest standards of corporate governance, including management quality and responsibility, organisational capabilities and corporate culture.

Shareholders: Sustainability leaders meet shareholders’ demands for sound financial returns, long-term economic growth, long-term productivity increases, sharpened global competitiveness, superior intellectual capital and reputation.

Employees and other stakeholders: Sustainability leaders encourage long lasting social well being in communities where they operate, engage in an active dialogue with different stakeholders and respond to their specific and evolving needs thereby securing a long term “license to operate”, as well as superior customer and employee loyalty.

No one can seriously argue that we have unlimited stock of natural resources let alone take pride in the amount of garbage we create. As far as we know the earth is the only home we have and it is not growing while everything else is growing. Our resources such as water, minerals, oil, trees, fish, soil, air as well as the living systems such as grasslands, wetlands, estuaries, oceans, coral reefs and rain forests are deteriorating worldwide at an unprecedented rate. Our markets are terribly flawed as they do not tell correct prices. How is it that our pricing system tells us it is cheaper to destroy the earth than to conserve it? We have developed an economic system which is contrary to nature’s biological processes.  It is based primarily on extraction, depletion, waste and disposal and confuses capital liquidation with income. Is it normal to have an economic system that discounts the future and sells off the past? Wasting scarce natural resources to achieve the immediate profits does not lead to value creation and wasting environment to achieve economic growth is neither economic nor growth.

Financial Capital as we understand today forms only a small part of the total world’s capital. Far more significant is the intellectual capital, social capital, cultural capital and natural capital. For globalisation to succeed prices must tell the economic truth. Socialism collapsed because it concealed the economic truth. Capitalism will collapse if it conceals the ecological truth. It has been estimated that the value of biological services flowing from natural capital is around $36 trillion annually. Capitalising it on the basis of current return of capital gives a capitalised monetary value of world’s natural capital at about $500 trillion. Compared to this, the world’s gross product is merely $39 trillions. Similarly, the World Bank’s 1995 Wealth Index found the total value of human capital to be three times greater than all financial and manufactured capital reflected in global balance sheets. This is a conservative estimate as it  counts only the market value of human employment, not uncompensated effort or cultural capital.

Today’s business faces multitude of challenges, increasing business pressure on all fronts, globalisation, shorter product life cycles, internet, over capacity, complex regulations, currency volatility, value migration etc. Meeting these challenges will bring about economic discontinuities that are unprecedented in rate and scope, and would require highly innovative approaches.  We have to leapfrog over existing technologies rather than incrementally improve them. Using Nicholas Negroponte’s expression for the times that we are living in “incrementalism is our worst enemy”. But innovation will bring tremendous resistance from vested interest. One only has to refer to Jim Utterback, an MIT Professor, whose case studies giving graphic account of pressures on electric companies brought by gas lighting companies in the 1880s, in his book “Mastering the Dynamics and Innovation” to understand  how hard it is to resist change and devise strategies to counter this resistance. Lomborg’s book is a classic example of the pressures of the fossil fuel based industry.

The good news is that businesses are far more agile and tuned to the changes around us. They know that this world belongs only to innovators. The car industry which has remained static for a 100 years is undergoing a transformation that will spell the doom of petroleum industry. It is shifting away from traditional models to Hypercars™ - fuel-cell powered vehicle that would be safer and more sporty, produce negligible pollution, cost both the producer and consumer less  and have fuel efficiencies as high as 250 miles per gallon, new houses designed with heat-trapping ‘super windows’ that can keep you cool at 46ºC with no air-conditioner and warm at -44ºC with no boiler, yet cost less to build than conventional designs.

We are on the threshold of a profound transformation. Prudent businesses are at the moment competing to radically increase the resource productivity just as they did with labour productivity 200 years ago. Paul Hawken, Amory Lovins and L Hunt in their landmark book “Natural Capitalism – the Next Industrial Revolution” details how companies are competing to change the automobile industry which has maintained the same level of fuel efficiency as 100 years ago. They also describe the speed with which business is turning sustainability agenda into the biggest opportunity of 21^st Century.

 “In April 1997, Daimler-Benz announced a $350 million profit joint effort with the Canadian firm Ballard to create  hydrogen-fuel-cell engines. Daimler pledged annual production of 100,000 such vehicle per year by 2005, one-seventh of its total current production. Six months later, the president of Toyota said he’d beat the goal , and predicted hybrid-electric cars  would capture one-third of the world car market by 2005. In December 1997, a decade earlier than most analysts had expected Toyota introduced its hybrid-electric Prius sedan. It dominated innovation driven Tokyo Motor Show, winning two Car of the Year Awards.  Entering the Japanese market for just over $16,000, the Prius sold out two months’ production the first day.  Ford meanwhile added more than $420 million to the Daimler/ Ballard fuel-cell deal.  The next month, GM riposted, unveiling at the Detroit Motor Show  three experimental four-seat hybrid models (gas turbine-, diesel-, and fuel-cell-powered) of its EV-1 battery-electric car. GM promised  production-ready hybrids by 2001 and fuel-cell versions by 2004. Automotive News reported that a marketable Ford P2000 – a 40 percent lighter aluminium sedan whose 60-70 mpg hybrid versions had been tested earlier that year – could be in dealerships by 2000. Chrysler showed light weight, low-cost, molded-composite cars, one of them a 70 mpg hybrid.

By mid-1998, Toyota, still expanding Prius production to meet demand and prepare for its U.S. and European release in 2000, revealed plans to market fuel-cells cars “well before 2002” ( later slipped to 2003). In October 1998, GM confirmed that the combination of fuel cells and electric drive has “more potential than any other known propulsion system.” In November 1998, Honda announced that its 70 mpg hybrid would enter the U.S. market in autumn 1999, a year before the Prius.

These innovations are the forerunners of a technological, market and cultural revolution that could launch an upheaval in not only what and how much we drive but in how the global economy works. Such Hypercars could ultimately spell the end of today’s car, oil, steel, aluminium, electricity, and coal industries – and herald the birth of successor industries that are more benign”.

Businesses have a choice – turn this change into a historic business opportunity or simply perish.

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