Excerpt — The Sustainability Sweet Spot
Business leaders with a superficial understanding of sustainability think of it as a distraction from their main purpose, a chore they hope can be discharged quickly and easily. "We're responsible corporate citizens, so let's write a check to the United Way or allow employees to volunteer for the local cleanup drive or food kitchen and get back to work."
This approach reveals a fundamental misunderstanding. Sustainability is not about philanthropy. There's nothing wrong with corporate charity, but the sustainable company conducts its business so that benefits flow naturally to all stakeholders, including employees, customers, business partners, the communities in which it operates, and, of course, shareholders.
It could be said that the truly sustainable company would have no need to write checks to charity or "give back" to the local community, because the company's daily operations wouldn't deprive the community, but would enrich it. Sustainable companies find areas of mutual interest and ways to make "doing good" and "doing well" synonymous, thus avoiding the implied conflict between society and shareholders.
The vision of a company that renews society as it enriches its shareholders may seem remote, and for most companies it is. But we propose a way to think about your company's current operations that might suggest an avenue for moving in that direction.
Think about sustainability as the common ground shared by your business interests (those of your financial stakeholders) and the interests of the public (your nonfinancial stakeholders). This common ground is what we call the sustainability sweet spot: the place where the pursuit of profit blends seamlessly with the pursuit of the common good. The best-run companies around the world are trying to identify and move into their sweet spots. And they are developing new ways of doing business in order to get there and stay there.
General Electric (GE) has long been considered an environmental scofflaw. It fought the U.S. Environmental Protection Agency (EPA) for years, trying in vain to avoid responsibility for polluting the Hudson and Housatonic Rivers with over one million pounds of toxic waste. Jack Welch, GE's CEO and chairman, personally led the attack, which included arguing over settled science and challenging the entire federal hazardous waste cleanup program as unconstitutional, tactics widely considered irresponsible.
When Welch retired, many of the flattering reviews referred to GE's environmental record as Welch's one black eye. Now Jeffrey Immelt, his successor, appears to be plotting a new course - not because he and the company are born-again environmentalists, but because being pro-environment is smart business for GE.
In 2005, GE announced an initiative called Ecomagination. It is a powerful example of finding and working toward the sweet spot. It's "action that goes beyond compliance to benefit both society and the long term health of the enterprise," according to Ben Heineman, GE's senior vice president of law and public affairs. Ecomagination's main thrust is to create clean technology to help GE's customers reduce their environmental impacts, primarily carbon emissions. GE has announced it will double its annual investment in clean energy technologies to $1.5 billion by 2010 and will also double its revenues from eco-friendly products during the same time period.
Addressing climate change presents GE with a huge business opportunity. GE's wind energy business has already quadrupled in revenues since it was acquired in 2002 from Enron, and its fuel-efficient jet and locomotive engines and natural gas turbines may prove to be essential to customers needing additional ways to reduce their emissions. GE has sold over $1 billion worth of wind and natural gas turbines to China since 2003.
GE has found a significant overlap between its business interests and protecting the environment. And to expand the area of overlap, the company appears to be saying that the time has come for climate change regulations that will ultimately impose carbon restrictions on businesses in the United States. GE is thus working to nudge the circle representing stakeholder concerns closer to the circle representing its business interests. The bigger the overlap, the better for GE.
GE's Ecomagination embodies the observation by Ian Davis, managing director of the management consulting firm of McKinsey & Company, that "large companies need to build social issues into strategy in a way that reflects their actual business importance." Of course, if GE continues to spend more money advertising Ecomagination than developing and marketing climate-saving technology, the campaign will be more hype than strategy-but that remains to be seen.
The overlap between winning increased market share and supporting healthier lifestyle habits is a sweet spot for PepsiCo. If the idea of healthy products sounds like a stretch for a company famous for its sugary sodas and salty snacks, think again. Having purchased Tropicana and Quaker Oats, PepsiCo has made the healthy-product sweet spot the fastest-growing segment of PepsiCo's North American product portfolio by far, with 2004 revenue growth about twice that of its traditional products. Social responsibility has thus helped PepsiCo earnings per share grow at a prodigious 13 percent a year in 2004 and to surpass Coca-Cola in market cap for the first time in history.
PepsiCo is working toward other sweet spots. Its business goal of cost reduction overlaps with a series of environmental improvements to reduce energy, waste, and packaging. Its goal of risk reduction overlaps with steps to address long-term water supply and quality concerns for communities in which its plants are located and for its crucial suppliers (such as farmers who supply corn for Frito-Lay brand chips). These responsible actions will benefit the environment and PepsiCo's neighbors and business partners even as they increase shareholder value and put the company's operations on a more sound, sustainable footing for decades to come.
The sweet spot embodies the literal meaning of "sustainability," making your company viable for the long term by managing according to principles that will strengthen rather than undermine the company's roots in the environment, the social fabric, and the economy. A business that occupies the sustainability sweet spot (or that strives to fit as much of its activities into that favored zone as possible) should have real long-term advantages over its rivals.
Imagine a company that historically earns its profits from a finite resource whose extraction and use degrades the environment-providing oil or coal, for example, which exist in limited supplies and generate harmful pollution. Such a business isn't sustainable in the long run; either the resources or the social tolerance for pollution on which it relies will eventually run out. Costs will rise as supplies dwindle and as social concerns translate into higher taxes, additional cleanup costs, and increased liability.
If it were possible for such a company to shift its business so as to eventually supply clean and renewable energy (such as wind or solar power) or conservation services while maintaining or even increasing revenues, that would be a responsible and profitable choice.
This is not a hypothetical case. British Petroleum (BP) adopted this long-term strategy when it rebranded itself "Beyond Petroleum" in 1998. BP has since reduced greenhouse gas emissions from its own production processes (saving an estimated $650 million thanks to improved efficiencies along the way) and has invested heavily in alternative energy sources, including solar power, the market for which is expected to grow 35 percent for the next three to five years. BP is not yet sustainable by any means, but it is acting responsibly as it marches toward an ever larger sweet spot.