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Business & Sustainability

Rachelle Sampson

RH Smith School of Business

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Firms must be part of the solution

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Thinking about sustainability in markets:

1. What does sustainability mean for firms?

2. The bad news:Pressures against greater ‘sustainability’ efforts by firms – why don’t firms always act sustainably?

3. The good news:Where are the opportunities? How can firms do well by doing good?

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What does it mean for a firm to act ‘sustainably’?

• Ensuring the firm’s continued operation?

• Preserving intergenerational equity?• What does this mean? How much resource use now versus in

future?

• Becoming ‘carbon neutral’ and/or minimizing energy usage?

• Reducing pollution?

• Managing the life cycle of products and not just the production? Using recycled inputs?

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The bad news: Why don’t firms act sustainably?

The market rules:® Focus on earnings targets, a function of production costs® Future discounted heavily

· investments with uncertain, long term paybacks discouraged

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Pacific Lumber

Long held family firm:®Sustainable logging practices

· Selective cutting– only up to 70% of mature trees

· Leave most vigorous young trees standing to reseed and prevent erosion

· Never cut more than forest could replace in 1 year®Held no debt in 1980®Had 100 year plan for sustainable cutting

· Led to deliberately lower profits

What are the implications of this strategy?

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What happened to Pac Lumber?

Hostile takeover in 1985:®CEO replaced®Commenced clear cutting of redwood forests to

realize value of asset (logging rights to land)

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The bad news: Why don’t firms act sustainably?

The market rules:® Focus on earnings targets, a function of production costs® Future discounted heavily

· investments with uncertain, long term paybacks discouraged

Competitive implications:® Improving social & environmental outcomes may increase costs® Compete with firms with lower cost structures

· Will the consumer discriminate?

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• Product line development: 1.5 years (versus ¾ year for competitors)

• Sustainable fabrics: ® 20-30% higher cost than competitors® Organic cotton: 50-100% higher than conventional & supply chain didn’t exist

• Pricing: 15-20% higher than other specialty makers

• Is this a strategy for all firms?® “Our growth is small, which is fine because we don’t have the same

shareholder expectations that a publicly traded company would have.” Patagonia CFO, Martha Groszewski

Cyber Monday Ad

• Ad boosted sales

• Argues that stole existing customers from competitors

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Why don’t firms act sustainably?

The market rules:® Focus on earnings targets, a function of production costs® Future discounted heavily

· investments with uncertain, long term paybacks discouraged

Competitive implications:® Improving social & environmental outcomes may increase costs® Compete with firms with lower cost structures

· Will the consumer discriminate?

What is sustainability for traditional energy firms? (e.g., BP)® Voluntarily abandon fossil fuel assets?

Regulatory uncertainty:® What will be regulated? Energy efficiency? CO2?

Not clear what actions are helpful:® What is sustainable banking? Carbon offsets?® Some actions make no difference® Uncertainty over what is necessary to make a difference® Measurement of benefits challenging – only manage what can measure!

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Landfill flare in Florida – credits sold on CCX

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What actions will be necessary?

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How to measure firm sustainability efforts?

‘Triple Bottom Line’Source: John Elkington, SustainAbility, Inc.

Social

Environmental

Economic

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The good news: Where are the opportunities?

Political change® EPA implementing new program to regulate carbon emissions: rules to be

issued this summer for power plants® Investment will follow

Demand conditions changing® Activist groups successful in targeting visible brands® Better information on products, allowing consumers to discriminate

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Greenpeace efforts against McDonald’s use of chicken fed with Brazilian soybean

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Imagine every product with a label ranking each of the categories on the left…

3 phases:

1. Supplier questionnaire

2. Lifecycle analysis database

3. Labeling tool for customers

Small steps now, potential for enormous change…. will allow consumers to discriminate & push change up

More transparent labeling…

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The good news: Where are the opportunities?

Political change® Carbon will be priced…EPA ‘stick’® Investment will follow

Demand conditions changing® Activist groups successful in targeting visible brands® Better information on products, allowing consumers to discriminate

Better design & managerial standards emerging® LEED – energy efficiency & renewable resource standards® Cradle to Cradle – closed loop product life cycles & manufacturing

trends® ISO 14001 – standards for environmental management

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Typical manufacturing ‘cycle’ vs. closing the loop

Extraction UseDisposal / landfill

Energy EnergyEnergyEnergy

WasteWaste Waste

ManufacturingPackaging & shipping

ManufacturingPackaging & shippingExtraction

Recycled &/or

renewable materials

Renewable Energy

Use

Renewable Energy

Renewable Energy

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Adoption of C2C Design at Herman Miller

Eco-effectiveness vs. eco-efficiency

® “Waste equals food” vs. conservation

Impact on Design® Ease of disassembly

· parts can be composted or recycled

® Recyclability and recycled content

· Materials classification

® Requires systems thinking

The Mirra Chair

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Interface Flor (carpet)

Design changes:® Recycled inputs (Nylon 6,6)

· Fully re-usable, no loss of value® Separable carpet backing

· Re-usable· No monstrous hybrids

Business model changes:® Option to buy function instead of product

· Can rent carpet· Tiles replaced as worn, rather than replace old carpet

® All carpet returnable to Interface at end of life for complete recycling

Results: elimination of waste alone represented 28% of operating income in 2004

Subaru: Zero landfill facility in Indiana

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Focus on eliminating waste, not clean up

® Dumpster diving® 5 year plan took 2 years

Impact on Manufacturing® Change welding practices to

reduce copper slag® Switch to waterborne paint® Replaced old spray guns with

more precise paint applicators

(Big) Side benefit: …engaged employees

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The good news: Where are the opportunities?

Political change® Carbon will be priced…EPA ‘stick’® Investment will follow

Demand conditions changing® Activist groups successful in targeting visible brands® Better information on products, allowing consumers to discriminate

New design & managerial standards emerging® LEED – energy efficiency & renewable resource standards® Cradle to Cradle – closed loop product life cycles & manufacturing

trends® ISO 14001 – standards for environmental management

Better measurement of benefits from sustainable actions:® Tangible benefits: increased rents, market value® Less tangible benefits: BIDS system at Carnegie Mellon

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What do we know about green building value?

Rent premium on green building (ENERGY STAR or LEED):

® Premium in effective rent ~7%® Premium on sale ~16%

· Premium has more value in smaller markets and peripheral parts of large metro areas, where location rents are smaller.

These effects are above the effects of reduced energy costs.

® Energy benefits: 10% decrease in energy consumption increases building value by 1% over and above rent premium

Source: Eichholtz, Kok & Quigley (2010) “Doing well by doing good? Green office buildings.” American Economic Review

Casa Feliz: San Jose, CA

‘Affordable green housing’ ($300-$600/month)

Energy efficiency puts $$ back into pockets:• Average low income household spends 17% total

income on energy

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Castle Gardens: Harlem, NY

• Put hot water boilers on the roof• Use trickle vents to encourage

airflow

Money saved put towards energy saving features – 30% more efficient

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Productivity benefits vs. saved energy

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Do

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r em

plo

yee

Source: Loftness et al (2007) “Building Investment Decision Support (BIDS)” http://www.nwcouncil.org/energy/rtf/meetings/2007/08/BIDS_study.pdf

Productivity increases: breakdown

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Source: Loftness et al (2007) “Building Investment Decision Support (BIDS)”http://www.nwcouncil.org/energy/rtf/meetings/2007/08/BIDS_study.pdf

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The good news: Where are the opportunities?

Political change® Carbon will be priced…EPA ‘stick’® Investment will follow

Demand conditions changing® Activist groups successful in targeting visible brands® Better information on products, allowing consumers to discriminate

New design & managerial standards emerging® LEED – energy efficiency & renewable resource standards® Cradle to Cradle – closed loop product life cycles & manufacturing trends® ISO 14001 – standards for environmental management

Better measurement of benefits from sustainable actions:® Tangible benefits: increased rents, market value® Less tangible benefits: BIDS system at Carnegie Mellon

Better understanding of how people make decisions:® Using behavioral biases to encourage pro-social/environmental behavior

Follow social norms, good or bad

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Petrified national forest

2 Signs:

1. “Many past visitors have removedpetrified wood from thePark, changing the natural state ofthe Petrified Forest. Please don’t.”

(Showed pictures of people stealing wood.)

2. “Please don’t remove thepetrified wood from the Park, in orderto preserve the natural state ofthe Petrified Forest.”

(Showed picture of lone visitor stealing a piece ofwood, with a red circle-and-barsymbol superimposed over his hand.)

Sign 1 led to 3x theft vs. sign 2

Conservation messages printed on door hangers and left on homes

Influencing Users: OPOWER

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Schultz & Cialdini (OPOWER Scientists)Hewlett Foundation San Marcos Study

$$$

Turn off AC &Turn on Fan

Environment

Turn off AC &Turn on Fan

Citizenship

Turn off AC &Turn on Fan

Zero Impact on Consumption

Neighbours

Turn off AC &Turn on Fan

6% Drop inConsumption

A new power bill….

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Bill detail

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Effectiveness of behavioral strategies

Conducted a study of 35,000 households:• Study of 35,000 households:

• Program savings increased year over year• 2.89% (year 2) vs. 2.37% (year 1)

• Consistent with NYU study of 600,000 households (2% reduction in consumption)

• Consistent with Ayres study at Yale Law:• 75,000 households

• Sustained energy usage decrease over year

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Facilitating behavior with technology

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During setup Keep user in control Reinforce efficient behaviors

Want more behavioral applications?

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iNudgeyou.com

The good news: Where are the opportunities?

Political change® Carbon will be priced…EPA ‘stick’® Investment will follow

Demand conditions changing® Activist groups successful in targeting visible brands® Better information on products, allowing consumers to discriminate

New design & managerial standards emerging® LEED – energy efficiency & renewable resource standards® Cradle to Cradle – closed loop product life cycles & manufacturing trends® ISO 14001 – standards for environmental management

Better measurement of benefits from sustainable actions:® Tangible benefits: increased rents, market value® Less tangible benefits: BIDS system at Carnegie Mellon

Better understanding of how people make decisions:® Using behavioral biases to encourage pro-social/environmental behavior

Emergence of important new ideas for markets:® Rethinking mobility: Better Place® Rethinking product life cycles & manufacturing: Flor carpeting® Surmounting capital constraints: Solar power financing

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New market developments

Better Place = Electric cars + battery swapping stations + pay by the kilometer

Flor Carpeting = Rent commercial carpeting + recycled materials + ‘closed loop’ lifecycle

Clean Power Finance = solar panels without capital + buy electricity from finance firm at reduced rate

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The good news: Where are the opportunities?

Political change

Demand conditions changing® Activist groups successful in targeting visible brands® Better information on products, allowing consumers to discriminate

New design & managerial standards emerging® LEED – energy efficiency & renewable resource standards® Cradle to Cradle – closed loop product life cycles & manufacturing trends® ISO 14001 – standards for environmental management

Better measurement of benefits from sustainable actions:® Tangible benefits: increased rents, market value® Less tangible benefits: BIDS system at Carnegie Mellon

Better understanding of how people make decisions:® Using behavioral biases to encourage pro-social/environmental behavior

Emergence of important new ideas for markets:® Rethinking mobility: Better Place® Rethinking product life cycles & manufacturing: Flor carpeting® Surmounting capital constraints: Solar power financing

New models for business:• LC3s, B-corp, employee-owned cooperatives

The traditional for-profit company

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Community

Incentive alignment

Employee cooperative

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Community

Incentive alignment

B Corp:• can make social

mission central, over profit maximization

LC3:• Can take contributions

from non-profits for social enterprise

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How to get to a sustainable world?

No silver bullet….

Technology development, new markets, and new policy must all be part of the solution.

Context determines relevant solutions.

More material?• www.grist.org• dotearth.blogs.nytimes.com• Inhabitat.com• treehugger.com

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Sample questions from Walmart…

Energy and Climate: Reducing Energy Costs and Greenhouse Gas Emissions

1. Have you measured your corporate greenhouse gas emissions? 2. What is your total annual greenhouse gas emissions reported in the most recent year measured?

Material Efficiency: Reducing Waste and Enhancing Quality 3. If measured, please report the total amount of solid waste generated from the facilities that produce your product(s) for Walmart for the most recent year measured.

Natural Resources: Producing High Quality, Responsibly Sourced Raw Materials

4. Have you established publicly available sustainability purchasing guidelines for your direct suppliers that address issues such as environmental compliance, employment practices and product/ingredient safety?

People and Community: Ensuring Responsible and Ethical Production 5. Do you know the location of 100 percent of the facilities that produce your product(s)? 6. Before beginning a business relationship with a manufacturing facility, do you evaluate the quality of, and capacity for, production?