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BUSINESS& THE ENVIRONMENT

www.ft.com/business­environment­2011 | twitter.com/ftreports

FINANCIAL TIMES SPECIAL REPORT | Tuesday March 22 2011

Better awarenesspromises actionand solutions

Whether climatechange-related ornot, recent severeweather events

have focused business leaders’attention on their companies’ecological footprint and vulnera-bility to environmental disas-ters.

Meanwhile, looming waterand food crises have promptedsome companies to expand theirfocus from greenhouse gases tobroader environmental issues.The question is to what extentawareness is being translatedinto action – not only on thepart of leading companies butthroughout the entire businesscommunity.

Certainly, many large globalenterprises are bringing sustain-ability considerations into theirbusiness decisions.

Some strategies go beyondcompanies’ direct operations, asin the case of Walmart, the USsupermarket group, which nowrequires suppliers to report onthe environmental impact oftheir products.

There is even evidence thatsome are taking a longer-termapproach to the environmental

sustainability of their opera-tions.

In December, Paul Polman,Unilever’s chief executive,announced that his companywould, among other things, bepurchasing all its soyabeans,fruit and palm oil from sustaina-ble sources by 2015. Most nota-bly, he said the company wasnot interested in attractinginvestors who demandedincreased results on a quarterlybasis.

At the same time, some com-panies are starting to lookbeyond carbon emissions to theconservation of naturalresources such as water and bio-diversity.

“The risk if you focus only oncarbon is that you reduce yourgreenhouse gas emissions but,for example, create waterstress,” says Fokko Wientjes,sustainability director of DSM,the Dutch life sciences andmaterials sciences group, whichis working with InternationalUnion for Conservation ofNature to explore the company’sbiodiversity impact.

“If you’re investing in biotech-nology, you’d better make sure

that these resources will bethere by the time the develop-ments go mainstream,” says MrWientjes. “Otherwise you’reinvesting in the wrong area.”

Peter Lacy, head of sustaina-bility for Europe, Africa andLatin America at Accenture, theconsultancy, believes two newpressures could hasten the rateat which companies’ integratebroader environmental consider-ations into their businesses.

“When you have pendingwater and food crises in differ-ent parts of the world, once theawareness phase kicks in, theshift to the solutions phasecould in some regions movemuch more quickly,” he says.

In Europe, legislation is help-ing drive corporate action onthe environment. Rules nowgovern everything from waste –electronics manufacturers, forexample, are now responsiblefor collecting and recyclingtheir products – to carbon trad-ing, while state subsidies inmany countries encourageinvestment in renewable energyand energy efficiency.

Elsewhere, however, regula-tory progress on environmentalissues is sluggish, if not non-existent.

The latest round of climatetalks in Cancún last year pro-duced only a modest agreementon global climate change gov-ernance. Meanwhile, in the US,not only has Congress failed topass cap-and-trade legislation

Some companies arethinking beyondcarbon emissions toconservation andbiodiversity but thereis a long way to go,writes Sarah Murray

Going green: Unilever says it will be sourcing all its palm oil sustainably by 2015 AFP

The climate talks inCancún produced onlya modest agreementon global climatechange governance

Inside this issueHidden savings Why sendequipment tolandfill whennew plantoften bringsminimalbenefits?Page 2

L’Oréal case studyGreen facelift at cosmeticsgroup Page 2

Tesco case studyThe supermarket group istaking the initiative Page 2

Banking Lenders havepotential to help protect theplanet. Finance is a bigissue in the drive forsustainability Page 3

Engaging employeesKeepingbees is oneway to do it,and it makesfinancialsensePage 3

KKR profile The buy­outspecialist puts green into itsportfolio Page 3

Water trading Exchangesystem mooted as analternative way to allocateliquid assets Page 4

Water and investorsShareholders seektransparency on securityand sustainability Page 4

BiodiversityPutting avalue onnature, suchas forests,can cut costsPage 4

VW de México How thecarmaker has kept waterrunning Page 4

2 ★ FINANCIAL TIMES TUESDAY MARCH 22 2011

Business & the Environment

ContributorsSarah MurrayFT Contributing Editor

Andrea FelstedRetailing Correspondent

Joseph Milton,Rod NewingFT Contributors

Andrew BaxterCommissioning Editor

Steven BirdDesigner

Andy MearsPicture Editor

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Continued from Page 1

Better business awareness promises actions and solutionsbut, in addition, Republi-cans are seeking to removeenvironmental regulators’power to cut carbon emis-sions.

Dan Esty, newlyappointed commissioner ofConnecticut’s consolidatedDepartment of Energy andEnvironmental Protection,says that regulators shouldfocus not only on trying tosolve environmental prob-lems but also on fosteringbusiness opportunities thatcould promote a cleanenergy economy.

“They need to shift theapproach away from oldcommand and control regu-lation,” says Mr Esty, whois also author of Green toGold: How Smart Compa-nies Use EnvironmentalStrategy to Innovate, CreateValue, and Build Competi-tive Advantage.

“They should developmarket mechanisms to

engage the business com-munity and get the privatesector into the business ofbeing solutions providers,”he adds.

Prospects for regulatorsto lead the charge on cor-porate sustainability maybe uncertain, but thereis evidence that investorsare pressing companies toadopt environmentalresponsibility.

In this year’s round ofproxy voting in the US,shareholders filed 96 envi-ronmental resolutions, 20 ofwhich have since beenwithdrawn because thecompanies met investors’demands.

Even so, in a 2010 surveyof 766 chief executivesconducted by Accenture forthe United Nations GlobalCompact, only 12 per centof respondents said it wasinvestor pressure that ledthem to incorporate sus-tainability into their busi-ness operations.

“The trend is good. Someof those groups are beingmore integrated into [sus-tainability] conversationsthan in the past,” says MrLacy. “But the real pictureis that analysts and inves-tors who move markets arenot asking the questions,whatever the SRI [sociallyresponsible investing] com-munity would like tothink.”

He argues that for inves-tors to start playing a big-ger role in driving corpo-rate performance on envi-ronmental sustainability,companies must producemanagement informationand performance data thatdemonstrate why they arein a better position thanrivals in their industry.

“Sustainability in theround is difficult to quan-tify,” says Mr Lacy. “Butthere are lots of ways inwhich we can understandand map out sustainabilitymetrics relative to core

business drivers such asrevenue growth, cost reduc-tion, risk management andintangible assets.”

Technology is a powerfultool in this respect. Track-ing and measurement soft-ware enables companies toestablish baselines andreduce everything fromemissions of greenhousegases to water consump-

tion. Many companies areusing this technology tosupport greater transpar-ency in their sustainabilityreporting, too.

This kind of transparencyis critical in moving to alow-carbon and resource-efficient economy, saysJuan Costa Climent, global

leader for climate changeand sustainability servicesat Ernst & Young, the pro-fessional services firm. “Ifwe don’t know what theenvironmental impact orsocial consequences of ourbusinesses are, it’s very dif-ficult to make any improve-ments,” he says.

Mr Costa Climent believesthat putting a real price onnatural resources and pollu-tion is a critical next step inshifting the global economytowards sustainable devel-opment.

Some companies arestarting to see the benefitsof doing so. Energy savingsare emerging as a clear ben-efit of carbon reduction pro-grammes, for example.

A recent report* by theCarbon Disclosure Projectand A.T.Kearney, the man-agement consultancy, foundthat 50 per cent of largebusinesses and 25 per centof their suppliers had madecost savings as a result of

efforts to manage their car-bon emissions.

Trading schemes are alsohelping put a price on natu-ral resources and pollution.Carbon trading has been inoperation in the EuropeanUnion since 2005.

Meanwhile, fledglingwater trading schemes inAustralia and China aredemonstrating that whileuniversal water pricingremains politically unac-ceptable to many, marketmechanisms for pricingwater could help promoteits conservation.

Even more innovative isthe concept of payments for“ecosystem services”, withthe idea being that localcommunities in areas richin natural resources couldbe given financial incen-tives to act as stewards ofthose resources.

“We have to change theprice system that moves theworld economy,” says MrCosta Climent. “[This is]

because we are not allocat-ing an economic value tomany of the environmentalservices that are providedby the global ecosystem.”

Pricing these servicescould also help bring theanalytical rigour to themeasurement of corporatesustainability performancethat would prompt moreinvestors to take note.

Mr Costa Climent believesthat, without transparencyand pricing mechanisms,the move to a resource-efficient, low-carbon worldeconomy cannot take placefast enough.

“Unless we understandand begin to explain whichpieces of the global ecosys-tem we’re taking advantageof in our day-to-day busi-ness activities, then it’sgoing to be difficult to makeany changes.”

*The Carbon DisclosureProject 2011 Supply ChainReport

Supermarketgroup storesup savingsby going green

Companies that considerthemselves “green” often statepublicly that they want to seetighter environmental rules inplace, to create a “level playingfield” and “greater certainty”in the business landscape.

However, Lucy Neville-Rolfe,corporate and legal affairsdirector of Tesco, says theworld’s third biggest grocerafter Walmart and Carrefour,favours as little regulatoryintervention as possible. “Ialways prefer a non-regulatorysolution,” she says.

This is why Tesco, which hasoperations in 14 countries, hasforged ahead with its ownprogramme to cut emissions.The measures the supermarketchain has put in place includethe goal of being a zero-carbonbusiness by 2050. Its efforts tocut emissions include a newgeneration of green stores,built to a new low-carbonblueprint.

In 2009, it opened its firstzero-carbon store at Ramsey inCambridgeshire, southernEngland. The store has thelatest environmentally-friendlydesign features, and acombined heat and powerplant, generating its ownrenewable energy.

Tesco also has a zero-carbonstore in the Czech Republic,and is opening another inThailand later this year.

In other parts of its estate,including in its distributioncentre in California, it uses alarge number of solar panels.

Tesco does not seek to patentthe green technology it uses,which allows others to followin its footsteps.

Other moves include workingwith third parties, such assuppliers, to cut theenvironmental impact of thesupply chain, and encouragingits customers to be greener.

It estimates that, in the UK,consumers account for about70 per cent of greenhouse gasemissions.

To help consumers choosesustainably, it has introducedcarbon labelling on more than1,000 products, not just in theUK but also in South Korea.

The efforts are not just

helping Tesco and itscustomers to be greener, theyare paying off in economicterms, too.

In the UK, Tesco is savingabout £100m from the climatechange programmes that it hasput in place.

“It has been good for thebusiness, and good for theplanet too,” says Ms Neville-Rolfe.

Where regulations areintroduced, the frameworkshould be a clear, simple andconsistent, the store groupmaintains.

Ms Neville-Rolfe cites theexample of the Copenhagenclimate talks in December 2009,when governments struggled toset proper targets.

As a result, businessesmoved ahead in deciding ongoals in the hope thatgovernments would also besetting targets worldwide.

“There remains a need for aframework . . . by internationalagreement,” says Ms Neville-Rolfe. The next chance to dothis is at the coming round ofclimate change talks atDurban, South Africa inDecember.

Ambitious targets from theEuropean Union would also beuseful in creating a levelplaying field, Tesco says.

Further afield, Tesco

supports the nationalgovernments of the countriesit operates in to help themmeet carbon reduction targets.

The fortunes of its stores aretied to the success ofeconomies – and if these areaffected by climate change, thisis bad news for its business.

But there are several areaswhere regulatory interventionwould be useful in helpingTesco cut emissions.

One would be a planningsystem that favoured greeninvestments.

“If you have a greeninvestment, it is morecomplicated, and often it takeslonger to go through theplanning [system].

“In places where they arevery interested in reducingcarbon, they are beginning tothink about such things,” shesays.

Changes to the planningsystem could see it takeaccount of the value of featuressuch as combined heat andpower plants, and windturbines

Tesco would also like to seethe municipal tax systemfavour greener buildings, bothin the commercial anddomestic property sector.

Other areas where a morelevel playing field could beuseful include removingrestrictions on some low-carbonvehicle technology, whichremain in place in parts ofEurope and Asia, and a betterflow of traffic across borders.

“All these small thingstogether – every little helps ifyou like. [They] can helpindividual countries, andindividual businesses to reducecarbon,” says Ms Neville-Rolfe.

Case StudyTescoThe UK company istaking the initiativeon sustainable issues,writes Andrea Felsted

In the UK, thesupermarket chain issaving about £100mfrom its climatechange programmes

Tesco director Lucy Neville­Rolfe

Hidden sources of green value

Using resources moreefficiently to reducecarbon footprint alsoreduces costs. How-

ever, many organisations arefinding additional hiddensources of value, either throughunexpected ways to reduce theirconsumption or by generatingnew revenue.

Many organisations lack thespecialist expertise to identifyall possible savings in the firstinstance. A recent report by theCarbon Trust, a not-for-profitcompany, analysed more than1,000 projects to reduce energycosts.

The perception of chieffinancial officers was that theaverage internal rate of returnwould be about 20 per cent, butit was actually 48 per cent.

“There is a perception thatenergy is not a material businesscost and offers low investmentreturns,” comments Hugh Jones,managing director of CarbonTrust Advisory, its consultancy.

“Projects need assessment byexperts who can really under-stand the benefits, but we haveseen a fall in the number ofsustainability-focused peopleemployed. Organisationshaven’t prioritised them enoughto get a comprehensive assess-ment of the true opportunity.”

Another issue is the pressurefrom manufacturers to upgradeto more energy-efficient equip-ment, causing huge emissionsduring the installation process.Organisations are being urgedto consider the whole lifetime ofany new purchases.

“Sometimes, new doesn’tequal better,” says MarkMcGinn, managing director atVerismic, a systems manage-ment company. “It just makesreturn on investment furtheraway.”

Steve Barker, head of energyefficiency and environmentalcare at Siemens Industry, anautomation technology supplier,says the initial purchase price ofmany products is a tiny propor-tion of the overall lifetime costs.

For instance, a 75kW electricmotor could be purchased forless than £5,000, but cost morethan £1m to run in energyconsumption and maintenanceduring its useful lifetime.

Askar Sheibani, chief execu-tive of Comtek, a communica-

tions equipment repairer, saysmany manufacturers tout theenvironmental benefits of theirmost recent products and with-draw support for older products.However, repair can extend thestated life of most electronicproducts by as much as fourtimes.

“Replacing equipment that isstill functioning often bringsminimal improvements at con-siderable financial cost andunnecessary wastage,” he says.“Organisations should breakwith the ‘throwaway’ culturethat leads to toxic materialsgoing to landfill.”

Similarly Cognizant, an out-sourcing company, embarked ona “Go Green” programme thatuncovered opportunities toimprove equipment efficiencies,which were usually 20 per centmore than design benchmarks,saving 30 per cent in lifetimeoperating costs.

“Overworked and undermain-tained equipment dies young,”says Premkumar Pandurangam,the programme’s director.“If it is used smartly and main-

tained regularly with an eye onperformance and efficiency, itwill last longer with lower main-tenance and operational costs.”

Rod Ellsworth, vice-presidentfor sustainability at Infor, anenterprise software vendor, saysthat up to 80 per cent of energyconsumed is wasted.

Organisations tend to startwith the objective to reduce thetotal utility bill, which does notrecognise the consumption ofindividual equipment. So subme-ters are crucial on individualpieces of equipment to identifyand rectify inefficient processes,parts or machinery.

“There is a perception thatequipment will continue to oper-ate as efficiently as it did on dayone,” he says. “Machinerywhich utilises compressed airrepresents one of the largest cul-prits of waste energy, as thepressure results in leaks as theequipment ages.”

Tarquin Henderson, founderof ReEnergise Renewables, anenergy efficiency consultancy,refers to a plastic container pro-duction plant where fixing com-

pressed air system leaks halvedelectricity use in that process,which accounted for 20 per centof the plant’s total consumption.

Similarly, fixing water leaksfrom deficient equipment in atextile dyeing plant reduced theplant’s total water consumptionby 40 per cent, as the dyeingprocess is extremely water hun-gry.

Business Stream, Scotland’slargest non-domestic water sup-plier, advocates smart meters toidentify leaks and claims tohave delivered consumptionsavings of 8,035 tonnes of carbondioxide since 2007.

“Few businesses considerwater efficiency,” says MarkPowles, the company’s chiefexecutive, “so customers areoften surprised to see how muchcan be saved by analysing wateruse.”

One way to save costs is togenerate your own electricity.However, additional value canbe created by selling it back tothe grid, which often attractspremium prices (see box).

“The vast majority of busi-nesses are unaware that thesepayments are designed toreward them for the energy theygenerate that goes back into thegrid,” says Kevin Parslow, chiefexecutive of Evance Wind, aproducer of small wind turbines.

“It helps governments to meettheir renewable energy targets.”

He says that a small 5kWwind turbine with an annualwind speed of 7 metres per sec-ond will produce about 17,000kWh of energy per year. WithUK feed-in tariffs at 28p a kWh,an investment of £25,000 couldearn £90,000 over 20 years.

Chris Smith, sales and mar-keting director at on365, a datacentre specialist, suggests thatemergency generators couldeither be used to feed the grid,or to power the data centre intimes of peak grid demand, withthe organisation being rewardedfor disconnection.

InterfaceFlor, a carpet tilemanufacturer, takes back carpetwith a nylon face and a vinylback from any manufacturer. Itnow harvests more nylon andvinyl than it can use, so it hasan unforeseen revenue streamof $2.3m from the post-consumerplastics market.

“Technological advances willlet the company realise futurerevenue from other types ofcarpet,” says Eric Nelson, vice-president of strategic alliancesfor Interface Americas.

“The rising cost of petroleumwill increase the value of thematerials that recyclers pro-duce.”

Savings strategiesExperts can helpgroups to come clean,writes Rod Newing

Case study L’OréalIn 2009, L’Oréal, the cosmetics group, committeditself to halving greenhouse gas emissions, wateruse and waste per unit of finished product from2005 levels by 2015.

“We are in the beauty business and want to begood citizens of the world,” says MiguelCastellanos, managing director for theenvironment. “We know it is a hard goal, but weare going to get there. We are thinking of furthergoals after 2015.”

The company is using solar panels at suitablefactories. Yichang, China has 2,000 solar tubes forpre­heating water; Pune, India preheats washingwater; and in Mexico City, one of the largest solarinstallations in South America charges thebatteries of forklift trucks and produces heat forthe factory. In the US, North Little Rock, Arkansas,is using hydropower.

The group is also investing in biomass facilities.In November 2009, the first went onstream at itsLibramont factory in Belgium, which is in thecountryside surrounded by farms.

Cow dung is collected and processed in ananaerobic digestion plant developed byEneco, a Belgium energy company, andBio­Energie Europa, a biogas producer.“We always partner with people whohave relevant expertise,” says MrCastellanos.

The plant produces methane gas,which feeds three electricity generators.The energy produced is recovered andused to heat water, some of which issent to gas boilers to produce steam, tomeet the processing needs of thefactory.

The facility processes 54,000tonnes of biomass a year,producing enough electricity forall the factory’s needs, and

sufficient warmth for 80 per cent of its heatingneeds.

The facility was designed with capacity in excessof current requirements to allow for futureproduction increases. This means that in 2010 itgenerated 40 per cent more electricity than itneeded, so was able to inject enough into the gridto supply 4,500 homes. The facility has saved8,700 tonnes of emissions a year, of which 5,900tonnes relate to the factory and 2,800 tonnesrelate to the houses served by the grid.

Mr Castellanos is keen to point out that thebusiness case was built entirely on supplying thefactory and did not take account of feeding thegrid. “We didn’t want a payback that would rely onproduction of electricity to be sold,” he says. “Ifwe increase production, we will use the electricitywe are producing ourselves. Our vision was to cutcarbon dioxide [emissions], not generate revenue.”

A second biomass facility is being built atL’Oréal’s Spanish factory in Burgos. Using woodfrom local forests, it will be operational in 2012.

Last year’s electricity production from solarpanels in the Spanish factory was all sold to the

grid, and the proceeds represent a netreduction of about 15 per cent a year in thefactory's electricity bill.

“In Spain you sell electricity at a muchhigher price when it comes from solarpanels,” explains Mr Castellanos.

“It is five times the cost of the electricityitself. The subvention was of interest in

reducing the long pay­back periods ofthis sort of investment.”

Rod Newing

‘Few businessesconsider waterefficiency. Customersare often surprised tosee how muchcan be saved byanalysing water use’

Castellanos:We want to be ‘goodcitizens of the world’

Kick the habit: organisations are being urged to break with the ‘throwaway’ culture that leads to toxic materials going to landfill Bloomberg

Dan Esty:regulatorsmust shiftaway from‘commandand control’

FINANCIAL TIMES TUESDAY MARCH 22 2011 ★ 3

Business & the Environment

Profile KKR takes its portfolio greenWith strategies such as energyefficiency and waterconservation increasingly seenas creating corporate value, itmakes sense that sustainabilitycould be of interest to a firmthat is in the business ofacquiring companies andincreasing their profitability andcompetitiveness.

This was the reason thatKohlberg Kravis Roberts, one ofthe pioneers of the leveragedbuy­out industry, decided to gointo partnership withEnvironmental Defense Fund, aUS environmental advocacy.

“The private equity modellends itself to environmentalinnovation,” says Gwen Ruta,director of the Fund’s corporatepartnerships programme.

“One way of creating value isimproving the operations of thecompanies they take over andmanage. So the focus on bettermanagement is consistent withbetter environmentalmanagement.”

In addition, private equityfirms tend to hold theircompanies for five to sevenyears, says Ms Ruta. “So,getting returns on environmentalinvestment might be easier thanfor those doing quarterlyreporting.”

For the Fund, the partnershiprepresented an opportunity tohave an impact on a broadrange of companies within theKKR portfolio. “Private equityholdings represent about 10 percent of GDP in the US, so it’s avery big chunk of the economy,”says Ms Ruta.

Starting initially with three ofits companies – US Foodservice,Sealy and Primedia – KKR andthe Fund have developed a“Green Portfolio” within thefirm’s portfolio of companies.

Clearly, however, theenvironmental issues facing acompany such as USFoodservice, a food distributor,are very different from thoseencountered by Sealy, amattress maker, or Primedia, amagazine publishing company.

“What we tried to do wasdevelop a framework thatapplied to any company,” saysElizabeth Seeger, who helpsmanage KKR’s responsibleinvestment efforts. “It’s not somuch prescriptive as to helpcompanies think through theseissues and identify what’s mostrelevant to them.”

The firm also wanted to

manage the environmentalimprovements in its companiesin the same way it managesimprovements in areas such assupply chain management,procurement and product roll­outs – through its KKRCapstone team of operationalexperts who work with KKRportfolio companies.

The KKR Capstone team isresponsible for working with thecompanies in the Green Portfolioprogramme to measure, manageand improve their environmentalperformance.

“When we built theprogramme we wanted to makesure it made sense to the wayKKR interfaced with itscompanies in general,” says MsSeeger.

Moreover, lessons learnt inone company can in fact beapplied to others. “One of thesurprising benefits of theprogramme is that, even whencompanies are completelydifferent from each other, thereare shared challenges andopportunities to share bestpractices,” says Ms Seeger.

So far, the partnership haspaid off in both environmentaland financial terms. Across eightcompanies in the Green Portfolio,the programme has avoided thegeneration of 345,000 tonnes ofgreenhouse gas emissions and1.2m tonnes in solid waste andmade collective operating savingsof $160m.

“That got people’s attention,”says Ms Ruta. “And it’s totallyconsistent with what they do –they take over companies andfigure out how to manage themmore efficiently. We’re justadding an environmental lens tothat.”

Sarah Murray

Seeger: KKR programme hadsurprising benefits

Lenders havepotential tohelp protectthe planet

As banks look toenhance their environ-mental credentials,many have embarked

on energy efficiency pro-grammes in their offices to cuttheir carbon emissions.

However, in addition to look-ing at their own ecological foot-print, banks have a potentiallyfar bigger impact on the envi-ronmental health of the planetin their role as lenders, deal-makers and providers of projectfinance.

For banks offering consumerservices, loan products can bedesigned to encourage thingssuch as energy efficiency anduse of renewable energy.Through energy-efficient mort-gages and home improvementloans, for example, banks canmake it cheaper and easier forconsumers to obtain loans ifthey invest in home insulation,window glazing, smart metersor domestic solar panelling.

“There’s a real opportunity forfinancial services companies inlinking together the pieces ofthe financial services ecosystemand government goals on car-bon reduction,” says DanielMeere, financial services spe-cialist at PA Consulting Group.

Moreover, financing will becritical when it comes to thelarge infrastructure projectsneeded to meet these goals. Arecent study* by Accenture andBarclays found that reducing

European emissions to 83 percent of 1990 levels by 2020 wouldrequire €2,900bn ($4,054bn) infunding to finance the develop-ment, procurement and imple-mentation of 15 commerciallyviable low-carbon technologies.

“One of the big issues in thelow-carbon economy is finance,”says Nick Robins, head ofHSBC’s Climate Change Centreof Excellence. “Clean-tech solu-tions invariably have higherupfront capital costs, balancedby much lower operating costs,whether it’s efficient buildingsor wind farms. The question istherefore how you mobilise thatfinance to bridge the gap.”

Further out on the horizon,new mechanisms for managingresource consumption and offset-ting companies’ environmentalfootprints will create opportuni-ties for financial instruments.These include water tradingrights and forest bonds, as wellas ecosystem services payments,whereby local communitiesreceive financial incentives toprotect natural resources.

However, banks remain cau-tious when it comes to develop-ing these products and services.For some banks, environmentalsustainability may fall lower onthe list of strategic prioritiesthan returning to profitability.

A 2008 report** by Ceres, aUS-based coalition of investorsand environmental groups,found that only a handful of the40 banks surveyed had startedintegrating climate risks intotheir lending practices by eithersetting targets to reduce green-house gas emissions in theirlending portfolios or pricing car-bon into finance decisions.

Peter Lacy, head of sustain-ability for Europe, Africa andLatin America at Accenture, theconsultancy, sees a more posi-

tive picture when it comes tolarge institutions’ approach toenvironmental sustainability.

“Most of the top banks arenow aware that this is an impor-tant part of the future set ofcapital flows into areas such asinfrastructure,” he says. “Theyrecognise it as a trend thatrequires financing and thereforesomething they need to buildinto their portfolios.”

However, he also says that theactivity of the broader bankingcommunity in this area remainsmixed. While some are experi-menting with carbon tradingdesks and renewable energyproject finance teams, most ofthese initiatives remain smallscale.

“I’m not sure that the topleadership in a lot of banks hasreally switched on to the ideathat this is a serious growthdriver,” says Mr Lacy. “And tosome, it remains to be seenwhether it is. You have to havesome dispassionate caution thatsays most of the projections arestill just that: projections.”

But if private-sector institu-tions are not yet fully engagedin the financing of clean tech-nology and energy efficiency –and with substantial amounts ofmoney yet to flow into low-car-bon technologies – the publicsector could help.

For a start, governmentscould match the differencebetween the interest rate banksoffer when lending to sustaina-ble projects and that for com-mercial projects.

Mr Meere at PA says: “Thatmight be a way of sensibly allo-cating some of the governmentfunding behind these initiatives,providing an incentive for banksto offer these products and cre-ating the right conversionimperative for people to savemoney on a loan by choosingsustainable products.”

At a global level, the UnitedNations Environment Pro-gramme has recognised theimportance of the financial sec-tor in supporting environmentalsustainability.

In 1991 it launched the Unep

Finance Initiative, which isaimed at promoting the integra-tion of environmental considera-tions throughout the sector’soperations and services andencouraging private sectorinvestment in clean technolo-gies, products and services.

Mr Robins at HSBC also sees arole for the public sector. Hepoints to the potential for a“green bank” to support invest-ment in new low-carbon infra-structure.

“A public finance institutioncould help to ‘crowd in’ the pri-vate sector, for example, by co-investing, guaranteeing loans orproviding insurance againstconstruction risks,” he says.

“So, as well as a policyresponse, there is also a need foran institutional response to getfinance flowing.”

* Carbon Capital: Financing thelow carbon economy, Barclays/Accenture, 2011** Corporate Governance andClimate Change: The BankingSector, Ceres, 2008

BankingFinance is a bigissue in the drivefor sustainability,says Sarah Murray

Doubling up: HSBC Brazil has changed to dual­fuel (ethanol and petrol) cars to reduce CO2 emissions

Boosting staff involvementmakes good financial sense

As companies recognise theneed to be sustainable andenvironmentally responsi-ble, many are finding waysto involve their staff ingreen programmes.

Engaging workers is goodfor morale, with theknock-on effect of improvingrecruitment and retention,potentially helping toattract the best talent andsaving companies money.

Improving staff engage-ment is a serious financialconsideration. Gallup, amanagement consultancyestimates that disengage-ment in the US costs morethan $300bn (£186bn) everyyear in lost productivityalone, and in 2008 it esti-mated the cost to the Brit-ish economy at between£59.4bn ($95bn) and £64.7bn.

In the same year, a reportcompiled by the UK Insti-tute of Employment Studiesfound that increasinginvestment in engagementby 10 per cent generated anextra £1,500 of profit peremployee annually.

Ways in which comapniesinvolve their staff in greenactivities range fromencouraging people to makesure lights and computersare switched off to training“climate champions” withinthe organisation, and in onecase even installing bee-hives at company headquar-ters.

“We had an overwhelm-ing response when weasked staff if they wantedto train as beekeepers,”says Kitty Corrigan, deputyeditor of Country Livingmagazine at London-basedThe National MagazineCompany. “We now have 30volunteer beekeepers and30,000 bees. We harvested50lb of honey last summer.”

It’s all part of the com-pany’s drive to lead the wayin green matters. “Foryears now, we’ve done all

the more generic thingssuch as automaticallyswitching off computers,”says Diane Thorpe, head ofhouse services. “Now, wehave to think more laterallyabout engaging with ourworkforce.”

Forster, a UK-based pub-lic relations company with35 staff also prioritisesgreen engagement. It has apool of bikes and other use-ful gadgets. “We also havewormeries for compostablewaste and grow vegetableson site,” says Joanna Foy,Forster’s environmentalofficer.

The company also encour-ages staff to travel to worksustainably by offeringthem five minutes extraholiday time per day forwalking or cycling in,equating to 2.5 extra daysoff each year.

At the larger end of thescale, HSBC, which has wonseveral accolades for goodgreen practice and employsmore than 300,000 staffworldwide, has been run-ning a “climate champion”programme since 2007.

Recently expanded toinclude senior executives aswell as lower-level staff,2,200 people will have passedthrough the scheme by theend of this year.

“We ask participants totell their teams and bossesabout what they learned,”says Bill Thomas, globalhead of sustainability forHSBC technology and serv-ices. “We’re trying to embedsustainability into the think-ing of our managers.”

Sky, a British satellitebroadcaster, is anotherlarge company keen toengage staff in green activi-ties, by offering cashback asan incentive to buy hybridcars, for example.

“We also do lots of envi-ronmental volunteering,”says Jo Fox, head of TheBigger Picture, Sky’s pro-gramme to ensure sustaina-bility is at the core of itsbusiness. “More than 4,400staff took part over the pastyear alone.”

Although it is hard tomeasure, such movesappear, at least anecdotally,to have a positive effect onstaff morale, and on recruit-ment and retention.

An environmentallyresponsible image is becom-ing important for compa-nies that wish to attract thebest recruits.

“The green agenda is akey consideration for theyounger generation whenchoosing where to work,”says James Arnott, seniorexecutive in talent & organ-isation performance prac-tice of Accenture, the con-sultancy.

Ms Thorpe says appli-cants for jobs at TheNational Magazine Com-pany “are now asking howimportant green initiatives

are to the business”. Thesame is true at Sky: “Ifpotential applicants believewe have a strong environ-mental record, they’re morelikely to apply to Sky andbe happier to stay here,”says Ms Fox.

In terms of retainingexisting staff, Ms Foy saysthat 97 per cent of Forsteremployees agree the com-pany’s green initiativesmake it an appealing placeto work, while, at HSBC, MrThomas says employeeshave been overwhelminglypositive about the “climatechampion” programme.

“We’ve never had a pro-gramme before where 100per cent of the people said‘we really liked it’,” he says.“People do want to help theplanet, they just don’talways know how.”

When HSBC staff wereasked how they felt aboutworking at the bank, MrThomas says the highestscoring item was the com-pany’s sustainability work,and Ms Fox says 88 per centof Sky employees said envi-ronmental volunteeringmade them proud to workthere.

Mr Arnott at Accenturesays losing a staff membercosts between 0.8 and 1.8times the employee’s salary,so improving retentionsaves money.

But he thinks it would behard to tease out the finan-cial value of improved staffretention through environ-mental engagement alone,because there are many fac-tors in play when employ-ees choose where to work.

Mr Thomas agrees: “Wehaven’t measured the effecton retention at HSBC, andwe don’t have any plansto.”

But Ms Fox says Skyhopes to measure theimpact of green engage-ment by comparing staffthat volunteer with thosethat do not.

“We expect to see thosethat have volunteered per-form better, have betterattendance rates, and staywith the business longer,”she says.

That could be an impor-tant step towards pinning afinancial value on greenstaff engagement

Engaging employees

Positive effects areseen on morale,retention andrecruiting, saysJoseph Milton

‘People do want tohelp the planet,they just don’talways know how’

Beekeeping can give employees a buzz Dreamstime

4 ★ FINANCIAL TIMES TUESDAY MARCH 22 2011

Business & the Environment

Exchange system mooted for liquid assets

Water pricing has oftenproved a controversialmeans of managing theconsumption of this valu-

able resource. However, as globalwater scarcity attracts increasingattention, some argue that an alterna-tive means of imposing a price onwater could be through water trading.

“Markets are excellent at allocatingscarce resources,” says David Festa,head of land, water and wildlife atEnvironmental Defense Fund, a USenvironmental advocacy. “They sendscarce resources to the highest valueuse.”

In water trading, individuals, com-panies or governments in water-stressed areas make deals to buy fromthose in regions of abundance. Whileinformal water trades often take placein agricultural settings, formal watertrading systems have yet to become awidespread phenomenon.

However, examples are emerging. Awell-established one is the systemthat has been operating since theearly 1980s in Australia, where largevolumes of water are traded aroundthe Murray-Darling basin.

In China’s Ningxia region, newindustrial and energy plants thatwant to use water from the YellowRiver are now required to repair,maintain and improve irrigation chan-nels before they are allocated theirquota. More efficient irrigation savesbillions of gallons of agriculturalwater, which can then be used by thepower facilities and factories.

Models are likely to vary betweenformal trading structures, such as theexchange established in Australia,and individual dealmaking. Arrange-ments for water trading could be tem-porary or long-term.

Of course, unlike carbon, watertrading deals tend to be local orregional, since water is a heavy com-modity, difficult and expensive tomove over long distances. And whilenature’s infrastructure – water basinsand rivers – provides a means oftransferring water in some places,elsewhere this could require substan-tial infrastructure investment.

Moreover, water’s value variesaccording to its relative abundanceand quality. “Water is simply not aglobal commodity, largely because ofits weight, but also because of itsattributes,” says Piet Klop, actingdirector of the Envest (EnvironmentalIntelligence for Tomorrow’s Markets)research initiative at the WorldResources Institute, a US environmen-tal think-tank.

“Carbon from Bangladesh is thesame as carbon from Minnesota – withwater, it matters whether it’s water inMaine or water in Spain,” he says.

An even bigger obstacle to thespread of water trading is its regula-

tory complexities. A fundamental pre-condition to water trading, for exam-ple, is the separation of water rightsfrom land rights. Registries of waterrights also need to be establishedbefore such rights can be traded.

Complexity is increased by the factthat the amount of water availablevaries over time. “Water rights cannotbe an absolute number that you’reguaranteed to get every year,” saysMr Klop. “A water right has to bedefined as a share of the water that’sactually available.”

And because water is required forthe preservation of the natural envi-ronment and ecosystems, argues MrFesta, governments need to put a capon the amount that is available to betraded, leaving sufficient reserves forother purposes. EDF is pushing forthis in parts of the US.

Stuart Orr, freshwater manager atWWF International, agrees: “Whileit’s good to think about how to get theprice right and about functioningmarkets, we have to be careful thatwe don’t have people looking to makequick money in water rights withoutany consideration of social or environ-mental benefits or losses.”

He adds: “There’s a huge social andenvironmental component to waterthat makes just treating it as an eco-nomic good tricky.”

However, despite the complexitiesinvolved, as experts ponder how toput a fair price on water, many

believe some form of trading couldprovide an alternative to going downthe controversial road of universalwater pricing.

Mr Klop thinks that, if the rightregulations are in place, water tradinghas huge potential. “We can’t takewater for granted any more,” he says.“And if we can’t agree on raisingprices in line with scarcity across theboard, then we can do it through theback door with these emerging tradesand markets.”

For companies, water trading couldprovide greater certainty and reducethe regulatory burden of obtaining per-mits every time they need to, usingwater for business purposes. Mecha-nisms could be put in place that resem-ble carbon offsetting programmes,with companies buying water to putinto wetlands, for example.

“Now is the time to start looking athow to bring markets back in to allo-cate water among users in a way thatis fluid, dynamic and flexible whilebeing policed appropriately,” says MrFesta. “This is complicated, but Iwould argue that it’s far less compli-cated than figuring out how govern-ments should replace the whole mar-ket in moving water around.”

Water tradingThe idea is an alternativeway to allocate resources,reports Sarah Murray

‘Water rights cannot bean absolute number thatyou’re guaranteed to getevery year. They have tobe a share of the waterthat’s actually available’Investors Seeking transparency on murky issues around water sustainability and security

“For a diversified investor with a long­term horizon and broadly invested insectors exposed to water­related risk,responsible corporate watermanagement is important.”

So write the authors of an investorexpectations report from Norges BankInvestment Management, whichmanages the Norwegian government’spension fund. The statement showshow investors are becomingincreasingly interested in corporateresponses to the threat of global waterstress.

However, compared with climatechange, water is relatively new to theinvestment community. In the venturecapital world, for example, most of theclean­technology investment focusremains on energy­related companies.

“It’s challenging to find waterinvestments to make where thecompanies are scaling quickly,” saysDiana Propper De Callejon, a generalpartner at Expansion Capital Partners,a venture capital firm specialising inclean­tech companies.

Ms Propper De Callejon puts thisdown to trends within two of thepotential customer groups for watertechnologies. First, governmentsresponsible for water provision are

experiencing severe budget cuts.Second, big water­hungry companiestend to be developing managementtools internally, focusing on reducingconsumption and recycling water.

Given the risks posed by theprospect of global water stress, theactivities of this latter group are ofgrowing interest to their shareholders.

“We’re talking about physical risk interms of availability and supply in thelonger term,” says Julie Frieder, seniorsustainability analyst at CalvertInvestments, one of the largest sociallyresponsible investment (SRI) funds.

Added to this is regulatory risk andthe way emerging local, national andinternational legislative frameworks arelikely to drive companies’ water costs.“For certain brands where there is aneed for a licence to operate, there isalso reputation risk,” adds Ms Frieder.

While awareness is growing amonginvestors of the need to know whetherthe companies they invest in areaddressing these risks, levels ofengagement vary. “We’re behind wherewe are on carbon with understandingand awareness,” says Marcus Norton,head of CDP Water Disclosure, part ofthe Carbon Disclosure Project thatrequests companies to report on their

environmental risks and opportunities.Part of the challenge for investors is

that water is a commodity shared bywhole communities. Dave Tickner, headof fresh water at WWF, says that evenif a company is highly water­efficient, anearby factory or farm could still bedepleting supplies. So, companies mayneed to work with local governmentsto ensure the water managementregime is a sustainable one.

Mr Tickner says investors should beasking companies whether they havemapped any of their operations andsupply chains in relation to areaswhere water is scarce, whether theyhave a water risk strategy in place andwhether they are talking to suppliersand local authorities about promotionof water efficiency. “Finally,” he adds,how are they sharing information onthis. Are they being transparent?”

Investors are increasingly showinginterest in transparency on waterissues. In 2011, the second year CDPhas asked businesses to report theiruse and management of water, thenumber of institutional investorssigning the request has risen from 137in 2010 to 354, with investors nowrepresenting $43,000bn in assets.

However, the challenge for investors

looking for company data on waterrisks is in establishing what form thatinformation should take and what levelof detail is required.

In the CDP Water Disclosurequestionnaire, questions are dividedinto three sections: water managementand governance; identification of risksand opportunities; and wateraccounting.

“I can envisage pushing towards lessglobal reporting and a greater focus onreporting on at­risk regions,” says MrNorton. “There’s a debate about whatthe right metrics are, but in the nextcouple of years, the field will moveforward. At the moment it’s a bit oflearning by doing.”

Ms Frieder warns against informationoverload and the danger of investorsimposing water­reporting demands oncompanies so onerous they provecounter­productive.

He says: “The challenge is to notcreate a new set of requirements forcompanies. We don’t want another 25pages in a sustainability report –[water management] has to beintegrated into a corporate socialresponsibility culture.”

Sarah Murray

Trading place: water is a scarce resource in Australia’s Murray­Darling basin, as shown by low levels in the Murray River Alamy

Valuing nature cancut business costs

Biodiversity brings stabilityto ecosystems, which pro-vide a wide range of “serv-ices” that businesses relyon, yet receive free ofcharge.

Because there is no finan-cial cost for these services,they have been treated asbeing without value.

This has resulted in cor-porate decisions that dam-age the ecosystem, reducebiodiversity and put theresources the businessrelies on at risk.

Trucost, an environmen-tal data provider, estimatesthe annual environmentalcosts from global humanactivity at about $6,600bn.“The top 3,000 companiesglobally alone are responsi-ble for $2,200bn of damage,”says Richard Mattison, itschief operating officer.

The solution is to valuethese ecosystem services sothat they can become partof planning and decision-making. “This is nothing todo with corporate socialresponsibility and the greenagenda, it is hard-nosed eco-nomics,” says Chris Knight,assistant director of the for-estry and ecosystems teamwithin PwC’s sustainabilitypractice.

“Companies are recognis-ing that the valuationframeworks applied in eco-nomic appraisal techniquesaround the world are goingto change.”

There are about 30 ecosys-

tem services. They includeproviding crops, livestock,water and fibre; photosyn-thesis and pollination; andregulating nutrients, airquality, pest control, localclimate, erosion, flood,drought and disease.

If the economic value ofthose services are takeninto account, decisionsautomatically promote sus-tainability. For instance,the cost of timber is notjust the cost of permits andextraction, but the ecosys-tem cost of growing the tim-ber and the role of a forestin erosion control, soil fer-tility, water management,eco-tourism, and so on.

Mainstreaming the Eco-nomics of Nature is a recentreport from The Economicsof Ecosystems and Biodiver-sity (TEEB), a study of theeconomic case for the con-servation of ecosystems andbiodiversity. It says thatvaluation is “a tool to helprecalibrate the faulty eco-nomic compass that has ledus to decisions that areprejudicial to both our well-being and that of futuregenerations.

“The invisibility of bio-diversity values has oftenencouraged inefficient useor even destruction of thenatural capital that is thefoundation of our econo-mies”.

There is a feeling thatregulation and environmen-tal campaigns are notenough on their own andthat businesses mustbecome involved. TheWorld Business Council forSustainable Development, aglobal coalition of some 200companies, is about torelease a guide to corporateecosystem valuation.

“Much biodiversity andecosystem policy and regu-lation relies on the private

sector in its implementa-tion,” says James Griffiths,the Council’s managingdirector for ecosystems. “Itis often the private sectorthat has the resources andflexibility to develop andimplement solutions atscale, so it is essential thatobjectives are designed tobe relevant for business.”

Mr Mattison says thechallenge is to link scien-tific evidence with businessthinking. Valuing an envi-ronmental service allows abusiness to compare it withother costs and profitabilityand feed into its risk man-agement processes.

“Valuation of ecosystemservices has tended tobe in hectares of land, sothere might be a monetaryvalue for a hectare of tim-ber of a certain type,” hesays. “However, businessesrecord tonnes or cubicmetres of wood.”

Valuation typically onlyuses market values forcrops, meat and fish. JamesSpurgeon, technical direc-

tor for environmental eco-nomics at EnvironmentalResources Management, aconsultancy, believes “bene-fit” or “value” transfer islikely to become an impor-tant technique. Thisinvolves adjusting existingvalue estimates and is rela-tively inexpensive.

Damage to an ecosystem,such as coral reef, wetlandor forest, can be valued interms of lost productivity of

crops or fish. The valuecould be the cost of replac-ing a degraded ecosystemservice, such as water filtra-tion or sea defences.

An example is Bavaria,SABMiller’s business inColombia. Large areas ofmountainous uplands hadbeen cleared of vegetationto make way for crops andgrazing, allowing soil toerode into the river. Thecompany valued the watersupply on the basis of theprojected increased cost ofmore intense filtration.

The company is workingwith the Nature Conserv-ancy and Bogotá WaterCompany to pay farmers toprotect the ecosystem bymoving cattle lower downand planting native species,to improve the water supplyand quality.

“Companies face the sameresource risks as communi-ties and ecologies,” saysAndy Wales, SABMiller’shead of sustainable develop-ment. “The private sectorhas an important role toplay in partnerships whichseek to protect water andbiodiversity.”

Puma, the German sportswear business, claimed this

week to be the first interna-tional company to havedeveloped an environmen-tal profit and loss account.The aim, it says, is “to inte-grate the value of natureinto its business decision-making, with a desire toprotect the earth’s naturalresources”.

“We believe this will ena-ble Puma, and corporationsin general, to measure theirimpact on the environmentmore closely, and ulti-mately build a more sus-tainable business model,”says Jochen Zeitz, chiefexecutive of Puma and chiefsustainability officer ofPPR, its holding company.

When businesses measureand value the services theyreceive from the ecosystem,they can save costs, managerisk and develop new busi-ness opportunities.

“Valuation is coming andit is in the interests of busi-nesses to understand how itworks,” concludes Mr Spur-geon.

“It’s far from a perfect sci-ence, but having a betterunderstanding of the val-ues, even approximate, willlead to better, more sustain-able decision-making.”

BiodiversityMore companiesare factoring inecosystem servicesas part of planning,writes Rod Newing

‘Understandingthe values willlead to better,more sustainabledecision­making’

Seeing the wood for the trees is only part of the story AFP

Carmaker goes with f lowto keep water running

A reliable water supply iscrucial for all industrialoperations, particularlyVolkswagen de México’scar plant in the PueblaTlaxcala valley in Mexico.

It is in a region wherethe water-supply situationis particularly critical,threatening its annualwater requirement of 1.1mcubic metres.

“Although we treat andrecycle our waste water, ithas been obvious for yearsthat there would not beenough fresh water for thegrowing city of Puebla andthe industrial area nearby,” says Raúl Rodriguez,director of the company’senvironmental departmentin Puebla.

“Securing a reliablewater supply was criticalto ensure the stability ofour production.”

The company joinedforces with specialists fromthe Comision Nacional deAreas Naturales Protegidasand the Free University ofMexico City to examine thegroundwater situation.

They found that waterreplenishment in the valleydepended substantially onthe functionality of thedeforested slopes of thevolcanoes Popocatépetl andIztaccíhuatl in the Izta-Popo national park, thesource region of theriver Atoyac.

In 2008,Volkswagendecided toengage in amulti-

stakeholder reforestationprogramme in the region,to allow the ecosystem’swater provisioning functionto be restored. Some300,000 Hartweg’s pines, anative Mexican tree, wereplanted between the twovolcanoes at an altitude ofup to 4,000m.

To help the water cycle,a rainwater infiltrationproject was carried out.Some 21,000 pits were dugout and about 100 largerearth-banks were erectedthroughout the watershed.These help retain the

rainwater and encourage itto soak into the deeper soillayers to recharge theaquifer.

The project cost thecompany $500,000 and wascompleted in two years.The work will enable morethan 1.6m additional cubicmetres of water to be fedinto the ground reserves inthe source region eachyear, significantly morewater than Volkswagen de

México itself consumes ina year.

Over the long term, theadditional forest will alsohelp to lock in carbondioxide, improve livingconditions for the nativefauna, and allowreintroduction of nativespecies.

“This additional watersupply will supportVolkswagen’s long-termoperations in the region,”says Mr Rodriguez.

“From a broaderperspective, this projectwill create employmentopportunities, provide aspace for environmentaleducation, help preventwater rationing, risingwater prices and unrest inthe local population,therefore guaranteeingVolkswagen’s licence tooperate in Mexico.”

Volkswagen de Méxicowill lend further support tomaintaining and managingthe recultivated forestslopes until 2017, costing$120,000 a year.

It has also committeditself to a similar projectcovering another 200hectares, together with the39 suppliers that also wishto protect the waterresource and biodiversity.

This will require aninitial investment of$200,000 between all theproject members and anannual investment of$60,000 for the next 10years.

Mr Rodriguez saysrepairing an ecosystemrecognises the value ofwater and ensures asustainable future for thebusiness.

Case studyVW de MéxicoReforestation hasensured vital supply,writes Rod Newing

Rodriguez: seesbroader benefitsof the project toreforest slopesof two volcanoes

Over the long term,the additionalforest will help lockin carbon dioxide