developing value the business case for sustainability in emerging

Developing Value The business case for sustainability inemerging markets

Highlighting business benefits and risks from social and environmental improvementsbased on 240 cases from Africa, Asia, LatinAmerica and Central & Eastern Europe

InternationalFinanceCorporation

SustainAbility EthosInstitute

Developing ValueContents

Forewords

Executive summary

Chapter 1Identifying the business case

Case Study 1Bank of Shanghai, China

Chapter 2The best opportunities

2.1 Save costs by making reductions to environmental impacts and treating people well

2.2 Increase revenues by improving the environment and benefiting the local economy

2.3 Reduce risk through engagement with stakeholders

2.4 Build reputation by increasing environmental efficiency

Case Study 2Zimele, Anglo American, South Africa

Case Study 3Cembrit, Czech Republic

2.5 Develop human capital through better human resource management

2.6 Improve access to capital through better governance

2.7 Other opportunities from community development and environmental products

Case Study 4Natura, Brazil

2.8 The best opportunities in summary

Country Study 1Sustainability in Brazil

Chapter 3The diversity of the business case

Country Study 2Sustainability in the Philippines

Country Study 3Sustainability in South Africa

Chapter 4Getting started on sustainability

Chapter 5Roles for other players

Chapter 6Six themes

Centers of excellence

Glossary

Endnotes

Acknowledgements

Websiteswww.sustainability.com/developing-valuewww.ifc.org/sustainability

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Sorting cashews, Mozambique

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Quick overview

Executive summary

Chapter 6Six themes

The business case



Website www.sustainability.com /developing-value

Emerging markets contexts



Country StudiesSustainability in BrazilSustainability in the PhilippinesSustainability in South Africa


Roles of other stakeholders


The case studies


Case Studies Bank of Shanghai, ChinaZimele, Anglo American, South AfricaCembrit, Czech RepublicNatura, Brazil

Website www.sustainability.com/developing-value

The methodology


2.8 The best opportunities in summary


How to implement

Chapter 4Getting started on sustainability



Developing ValueEntry points

Entry points into thereport and websitefor specific interests

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The sustainability concept


Sustainability factors1 Environmental process improvement2 Local economic growth3 Stakeholder engagement4 Human resource management5 Governance & management 6 Community development7 Environmental products & services

Glossary

Website www.sustainability.com/developing-value

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Boxes

1 What is sustainability? 2 Defining emerging markets3 Who are stakeholders?4 Methodology explained5 Social and environmental credentials6 Alternative business models7 Corporate governance8 Private provision of public goods9 ‘The right thing to do’? 10 Developed and developing markets11 Socially responsible investing

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Developing Value2 Developing ValueForewords

Kavita Prakash-Mani

Jodie Thorpe

Peter Zollinger

SustainAbility

For business, sustainability is about ensuring long-term business success whilecontributing towards economic and socialdevelopment, a healthy environment and a stable society. It is rapidly moving up theagenda as a prime business concern acrossthe globe.

Since its foundation in 1987 SustainAbilityhas guided business towards new pathwaysto sustainable development, both asstrategic advisors and an independent thinktank. The business case — showing thatcompanies find business benefits fromsustainability efforts — has been central tothis work and, in 2001, together with theUnited Nations Environment Program(UNEP), we published our first business case report, Buried Treasure: Uncovering thebusiness case for corporate sustainability.Recognizing the growing importance ofengaging developing countries in thisagenda, SustainAbility has begun to lookmore systematically at the role of businessin this part of the world.

Developing Value is our first report with this focus. It aims to help business managersin emerging markets to understand theopportunities, risks and bottom lineimplications of sustainability strategies. It analyzes company examples from Africa,Asia, Latin America and Central & EasternEurope, and shows how their sustainabilityefforts have improved business performance. We hope our findings will trigger action andresult in making companies in emergingmarkets more sustainable and morecompetitive.

We are delighted to have had theopportunity to partner with IFC and Ethos,which have brought to the project uniqueemerging markets expertise.

Kavita Prakash-ManiJodie ThorpePeter ZollingerSustainAbility

SustainAbility, the International FinanceCorporation and the Ethos Institute are very grateful to Ireland Aid for its financial support

Forewords

3Developing ValueForewords

Ethos Institute — Business and Social Responsibility

The lack of systematic research onresponsible management practices fromcompanies in emerging economies and theimpact of these practices on business havebeen one of the greatest obstacles to thosededicated to the promotion of corporatesocial responsibility.

In order to understand the business case for corporate responsibility deeply, we want to explore the contribution that these local experiences bring to the debate.This initiative offers the opportunity forcompanies and interested organizations to systematically examine evidence fromLatin America, Africa and Asia, and tofurther develop, in a permanent process of reflection and evaluation, the evidenceneeded to build the business case forcorporate responsibility/sustainability.

We are certain that this study will discloseunexpected, interesting and importantinformation for all types of readers, and will confirm the wealth of these unexploredexperiences for the construction of business cases.

The Ethos Institute considers this project to be an extremely important study, and we are delighted to be able to contributethe experiences of Brazilian businesses. We are thankful to IFC and SustainAbilityfor their invitation to participate in thisimportant endeavor and to the sponsorsand project teams for their participation.

Nelmara ArbexValdemar de Oliveira NetoEthos Institute

Peter Woicke

Deborah Feigenbaum

Glen Armstrong

Stefanie Held

Bernard Sheahan

Nelmara Arbex

Valdemar deOliveira Neto

International Finance Corporation (IFC)

For decades, three myths have hindered the advance of sustainability principles inthe world of business. The first myth is thatwhile sustainability might work for soft-hearted visionaries and futurists, it doesnot for mainstream, hard-nosed businesspeople in search of markets. The second is that sustainability efforts belongdownstream in the production cycle afterthe ‘real’ business is completed, rather than in ongoing operations. The last andperhaps most damaging myth is thatsustainability makes sense for richcompanies in developed nations but not for the private sector in the emergingmarkets.

This report on the business case forsustainability challenges all three mythswith factual evidence and case studiesdrawn from virtually every region of theworld. It makes clear that sustainability is not an all-or-nothing, one-size-fits-allproposition; that sustainability canincrease all elements of the triple bottomline and contribute to the public goodsrealm rather than simply adding economiccosts; and that sustainability is apragmatic pursuit, not an ideologicalexercise. In short, this report makes thecase that sustainability is about increasingopportunities, not limiting them.

We at the International FinanceCorporation are fortunate to have had twoexcellent partners — SustainAbility andEthos — in this endeavor and are verygrateful for their contributions. We believethat these types of partnerships, whichenable us to draw from a wider pool ofexperience, will become more common.More important, our collaborative processsets the stage for what we most hope tosee next: a wider, deeper and moretangible development of sustainability.

Peter WoickeExecutive vice presidentInternational Finance Corporation

4 Developing Value

Many businesses in emerging markets aregaining valuable business benefits frominitiatives which help progress towardssustainable development — sound environ-mental practice, social and economicdevelopment.

Developing Value aims to help businesspeople in emerging markets identify theseopportunities to increase profits by makingprogress on sustainability. It is aimedprimarily at owners and managers who are relatively new to sustainability (although some may be addressing aspects of sustainability without describing it assuch) and others who are interested inexploring the cost:benefit equation of their investments. This report also provides tools to help managers assess and construct their own case.

Sustainability has real relevance in emerging markets

Based on more than 240 real-life examplesin over 60 countries, Developing Value is the first large-scale study analyzing the ‘business case’ for sustainability in emergingmarkets — the opportunity for businesses to achieve benefits such as higher sales,reduced costs and lower risks from bettercorporate governance, improvedenvironmental practices, and investments in social and economic development. It pinpoints the many opportunities availableto diverse businesses in Africa, Asia, Centraland Eastern Europe, the Middle East andLatin America.

The companies examined are ordinarybusinesses taking practical steps to address specific issues, though some haveintegrated sustainability more strategically.The evidence confirms that there arecompelling commercial reasons to takeaction, despite a common assumption thatsustainability is a luxury which emergingmarkets cannot afford.

Concerns about sustainability issues andabout development among policy-makers,consumers and investors have risendramatically during the 1990s and willcontinue to grow, further fuelled by eventssuch as the 2002 UN World Summit onSustainable Development in Johannesburg.These growing concerns, accompanied by the rising importance of the private sector,have provoked fears about the impact of globalization on progress towardssustainable development. Contrary tocommon assumptions, this cocktail ofconcerns is often greater in emergingmarkets than in developed countries.

It means that emerging market businesses,too, face growing risks — and opportunities— as a result of increasing publicapprehension about sustainability-relatedissues. Businesses which were unaffected by these issues three years ago are todayaffected, and businesses that seemunaffected today may well find themselvesaffected three years from now.

This trajectory is summed up by RafaelWong, executive vice president ofReybancorp in Ecuador, ‘In five years, therewill be no access to international markets for companies that do not show respect forthe environment. It is becoming fundamentalto international trade.’ 1

Many opportunities exist

As in all business activities, there are noguarantees of success from improvingenvironmental, social or corporategovernance performance. Being able toidentify the risks and capitalize on theopportunities will become increasinglyimportant as the sustainability trajectoryaccelerates.

The most significant opportunities availablethrough actively pursuing more sustainableapproaches to business are to:

— save costs by making reductions to environmental impacts and treating employees well;

— increase revenues by improving the environment and benefiting the local economy;

— reduce risk through engagement with stakeholders;

— build reputation by increasing environmental efficiency;

— develop human capital through better human resource management;

— improve access to capital through better governance.

These opportunities are documented in manyexamples throughout the report, as well as in four in-depth case studies from Brazil,China, the Czech Republic and South Africa.

The business case varies by region and company size

Overall, the business case exists for allcompanies although the specific elementsmay vary. While companies of all types in allregions can achieve measurable commercialreturn by investing in their employees and in environmental process improvements,there is diversity in the business case, withinteresting differences between regions aswell as between types and sizes of company.

Developing ValueExecutive summary

Executive summary

Stock exchange, Brazil

‘ In five years, there will be no access to international markets for companies that do not show respect for the environment. It is becoming fundamental to international trade.’Rafael Wong, executive vice president Reybancorp, Ecuador

5Developing Value

For small and medium sized enterprisesthe emphasis is very much on cost savings,although they also benefit from higherrevenues and improved market access,especially through environmental productsand services. National companies andmultinational corporations based inemerging markets gain benefits in all areas, led by cost savings fromenvironmental process improvement. Foreign multinationals (headquartered indeveloped countries with operations inemerging markets) also experience moreintangible benefits such as risk reduction and human capital development.

Export-oriented companies whichdemonstrate adherence to sustainabilitystandards and management systems benefitfrom better access to markets and cansometimes apply price premiums to theirproducts. Companies focused on thedomestic market are more likely to gainfrom local economic and communitydevelopment, which strengthens their licenseto operate and can deliver revenue growth.

In most geographic regions, eco-efficiency— cost savings from better environmentalmanagement — is the most significantrelationship. South Asia appears to be the exception: the strongest evidence of a business case is for higher revenue fromlocal economic growth, and communitydevelopment leading to improved reputation.These geographic differences are also afunction of the different business contexts in these areas.

The business case matrix

A significant output of this study is the business case matrix which relates key aspects of sustainability to a set ofrecognized business success factors —demonstrating graphically where a viablebusiness case exists. This matrix has been adapted from previous work bySustainAbility, Buried Treasure, 2 whichexamined the business case for sustainabilityin developed countries.

A comparison of the two studies shows thatemerging market companies focus more onshort-term cost savings and revenue gains,while intangibles like brand value andreputational issues are more significant indeveloped countries. Community investmentand development are seen primarily as anoverhead in developed countries, but inemerging markets they are shown to beimportant in retaining the ‘license tooperate’ and in reducing risk.

Developing Value — a practical guide for change

Developing Value takes this discussion a step further, suggesting practical stepscompanies can follow in the implementationof sustainability activities and strategies,from understanding the business priorities to implementation and monitoring.

The business case is constantly evolving,reflecting changing expectations andrelevance. Companies will need to be flexible in their approach to sustainabilityand monitor change. Sustainability is itself a continuous process — from small activitiesthat bring quick returns to incorporation instrategies that bring long-term competitiveadvantage. Companies need to choose their focus.

Enhancing the business case

While the evidence demonstrates thatbusinesses can benefit while helping toachieve sustainable development objectives,other players also have responsibilities andcan help to strengthen the business case. Governments in emerging markets need toprovide good governance, regulatorycertainty, and an appropriate mix of policytools, including clear and enforceableregulatory standards and appropriateeconomic instruments.

Investors and lenders, both local andinternational, could strengthen the businesscase by including companies’ sustainabilityperformance in funding assessments.

Business customers in developed countriescould work with emerging market suppliersin meeting higher technological andmanagement standards. Consumers shouldact on their values — question companies’sustainability performance and followthrough in their purchasing decisions. NGOscan help by applying appropriate pressure oncompanies, and exploring collaboration andnew partnerships involving business,governments and other players.

Developing Value is just the start of adiscussion. It answers some questions butalso raises many more. The full report can beused in several ways. Readers may select anentry point appropriate to their own interestsand concerns, whether that be sustainability,the emerging market context or the specificbusiness case. We hope that this work will bepicked up and used by others in the field tofind the business cases for specific regionsand industry sectors — and by businessmanagers seeking to customize the businesscase for their own operations.

www.sustainability.com/developing-valueprovides information on all the case studiesexamined in this report through a searchabledatabase. It also links to sustainability toolsand resources.

Developing ValueExecutive summary

Sustainability Factors

Governance & engagement

Environmental focus

Socio-economic development

Governance& manage-ment

Stakeholderengagement

Environmen-tal processImprovement

Environmen-tal products& services

Localeconomicgrowth

Communitydevelopment

Humanresourcemanagement

Businesssuccessfactors


Revenuegrowth &marketaccess

Cost savings &productivity

Access tocapital

Riskmanagement& license to operate

Human capital

Brand value& reputation

Figure 1 The business case matrix

6 Developing ValueChapter 1

Many opportunities exist for businesses inemerging markets to benefit from actionswhich advance sustainable development.

Developing Value reaches this conclusion on the basis of the first large-scale study to analyze the extent and nature of thefinancial benefits that companies inemerging markets gain from soundenvironmental practice, social developmentand economic progress — which we describeas the ‘business case’ for sustainability. (For a definition of ‘sustainability’ see Box 1.)This study documents more than 240 real-life examples from over 60 emerging markets(see Box 2) which show how owners andmanagers of businesses of all sizes and types have enjoyed business success as a result of improved environmental, social or governance performance, despite some of the risks.

The evidence from 176 companies 3 showsthat many emerging market businesses have been involved in areas such as social development or environmentalimprovements, and have achieved costsavings, revenue growth and other businessbenefits. The companies range from smallbusinesses to multinational corporations inAfrica, Latin America, Asia, the Middle East,and Central & Eastern Europe.

This is important because sustainability is rapidly moving up the business agendaglobally, while the business environment hasbecome significantly more competitive andvolatile. The greater importance of theprivate sector in all regions and countries at all stages of economic development hasfuelled concerns about globalization, the role of markets and global governance.Consumers, investors, policy-makers andNGOs have raised issues about worseningenvironmental and social problems, and the unequal distribution of benefits fromglobalization. 4

Emerging markets context

The sustainability debate has been mostvisible in developed countries. But inemerging markets, too, public interest andthe intensity of debate is rapidly increasing.A recent analysis 5 shows that through the second half of the 1990s, interest inglobalization grew exponentially in Asia and Latin America, although it has declinedin Latin America in the last couple of years. Events like the 2002 UN World Summit onSustainable Development (WSSD) inJohannesburg help recharge the debate and ensure that sustainable developmentcontinues to increase in importance.

They also help focus attention on the needs of a world which will soon have to accommodate 8 billion people, whereenvironmental resources will be undergreater stress, while new health and securityrisks emerge, and issues of equity and access to resources, technology and marketswill grow in importance.

Rafael Wong, executive vice president,Reybancorp, Ecuador, commented, ‘When we first obtained financing from IFC, theenvironmental standards seemed like anobstacle, but we now realize that they havehelped us to build a strong business. In fiveyears, there will be no access to internationalmarkets for companies that do not showrespect for the environment. It is becomingfundamental to international trade.’ 6

While the trajectory of sustainabledevelopment’s profile is likely to continuerising, the subject will continue to bevolatile. New issues are likely to emerge,often unpredictably. The challenges of three years hence will be very different from those three years ago.

These challenges will have to be met in adifficult political and economic environment,with falling commodity prices and weakglobal economic conditions. Companiescontinue to struggle against corruption,crime, lack of infrastructure and unrealisticregulation, and have had to face economiccrises in major markets like Argentina andTurkey, political unrest in Central andSouthern Asia, and concern in SouthernAfrica over Zimbabwe and the falling rand.

Net private capital flows to the majoremerging markets fell from $169 billion 7

in 2000 to $132 billion in 2001.8

The growth of trade slowed and the trend in real commodity prices relative tomanufactured goods prices shows no sign of improving. As a result, growth of realgross domestic product (GDP) in developingcountries was forecast to increase by 1.3% in 2001, down from 3.8% growth in 2000. 9

Poverty remains endemic — almost a quarterof the population in emerging markets livedon less than $1 per day in 1999,10 while 28%of the world’s children under five years ofage are malnourished. HIV/AIDS incidence isincreasing — 36 million people were affectedaround the world in 2000, with the majorityliving in Southern Africa and South and EastAsia. Over 1 billion people worldwide do nothave access to safe water sources. 11

Chapter 1Identifying thebusiness case

Kunda Nordic Cement before changes

7Developing ValueChapter 1

However, there are some encouragingstatistics. The economies of Central andEastern Europe were spared most of theupheaval of 2001’s global slowdown, withGDP growth rates averaging 5%.12 Further,the situation for emerging markets as awhole is set to improve in 2002, with privatecapital flows expected to recover — rising to $160 billion.13 Many developing countriesare on track to achieve one of theMillennium Development Goals: universalprimary education by 2015, and some aresignificantly reducing infant and under-fivemortality.14 It is against this background, andin the context of globalization and growingconcerns over the role of private firms inaddressing environmental and social issues,that we have undertaken this study.

Key audiences for the report

This report is aimed at helping businesspeople in emerging markets who arestruggling to find the right balance betweenfinancial pressures on the one hand, andgrowing sustainability challenges on theother. It analyzes the benefits derived fromimplementing better governance, social and environmental practices and provides a starting point for companies to developtheir own sustainability path. The analysis is based not on model companies who got it all right, but on ordinary companies thathave implemented some sustainabilitypractices and found value. While many ofthese findings might be intuitive, e.g. costsavings from environmental efficiency, thisanalysis provides a hook and basis for theintuition. It also raises new ideas andopportunities that companies can tap into.

The main audience for the report is businessmanagers who are relatively new to thedebate around sustainability. The reportcovers many kinds of companies whichoperate in emerging markets, from localsmall and medium sized enterprises (SMEs)to multinationals based in developedcountries. For those leading companies thathave already integrated sustainability intotheir vision, we hope the opportunities andcase studies highlighted in Developing Valuemay spark new ideas. It may also help ‘sell’the business case to any skeptics remainingin the organization, or to business partnerssuch as suppliers.

Company case studies

The companies highlighted in DevelopingValue have undertaken a wide range of actions, from the strategic to theopportunistic, from major investments torelatively small changes in the way thebusiness is run. In many cases the owners or managers were not explicitly addressingsustainable development, but were simplyimplementing what they saw as goodmanagement practices and sound business decisions.

Kunda Nordic Cement in Estoniademonstrates a more significant impact on the company as well as the community.Previously, the plant emitted high levels ofpollution, adversely impacting the health of people and livestock, degrading soil and water and reducing catches by localfishermen. The plant implemented highlyeffective pollution prevention measures,yielding environmental benefits for Kundaand the entire Baltic region.

Box 1What is sustainability?

‘Sustainability’ is about ensuring long-term business success while contributingtowards economic and social development,a healthy environment and a stable society.We use the term in this report to refer to the private sector’s contribution tosustainable development — generallydefined as ‘meeting the needs of thepresent generation without compromisingthe ability of the future generations tomeet their needs’. 15

There are three broad components ofsustainability. They are sometimesdescribed as ‘people, planet and profits’, or the ‘social, economic and environmental’dimensions. The need for businesses toaddress all three has been encapsulated in the concept of the ‘triple bottom line’.

As well as these three components, there is also a process element tosustainability, concerned withaccountability, transparency andengagement with stakeholders.

Sustainability is sometimes known as ‘corporate social responsibility’ or‘corporate citizenship’. Though we usesustainability here, we accept that in many respects the terms are synonymous.They cover the same broad aspects of thebusiness: good governance, treatment of employees, impact on the environment,impact on local communities and businessrelationships with suppliers and customers.

Kunda Nordic Cement after changes

Emissions were reduced by more than 98% of the 1992 level and the benefits inimproved air quality extended throughoutEstonia and as far away as Belarus, Finland,Norway, Poland, Russia and Sweden. This also saved Kunda operating costs of almost$173,000 per year. In addition, if the Kundafacility had failed to change its operations in1992, environmental and business concernswould probably have forced management to close the plant.

Kurzemes Piens, a Latvian dairy, is anexample of a small company benefiting from the practical application of basicsustainability concepts. It saw theinvestment in preventing leaks from itsrefrigeration system pay back in just fourmonths. It has avoided 12 tons/year ofammonia emissions, which has improvedhealth and safety for workers while saving$9,300 a year.

Structure of report

The relationships between the sustainabilityactivities and financial performance in thecases we have gathered have been compiledin a business case matrix which graphicallydemonstrates the links between specificsustainability activities and measures ofbusiness success — both financial indicatorsand drivers. Details of our analysis, the keyopportunities we found and the matrix itselfare in Chapter 2, where we also address thecounter-arguments from those who believethese issues are at best a distraction and atworst an attempt to disadvantage developingcountries.

The key opportunities we describe are alsodocumented in many examples throughoutthe report, as well as in four in-depth casestudies from Brazil, China, the CzechRepublic and South Africa.

While there is a business case to be foundacross all regions and types of companies, its specific nature varies. In Chapter 3 weexamine these differences, and include threecountry perspectives from Brazil, SouthAfrica and the Philippines.

The analysis highlights the dynamic nature of the business case. Risks and opportunitiesevolve rapidly — what was relevant someyears ago is not relevant today. Companiesneed to keep a long-term perspective inmind as they plan sustainability activities,even if they start with short-term actions.Chapter 4 provides practical guidance forbusinesses looking to mitigate risks andmaximize opportunities from sustainability.

Finally, although the private sector is being asked to contribute to social andenvironmental development, other playerssuch as governments, NGOs and citizens play an important role in achievingsustainable development. They canstrengthen the business case by providingcompanies with the right incentives andframeworks, as we show in Chapter 5.Chapter 6 wraps up the discussion andhighlights the key messages.


Box 2Defining emerging markets 16

The term ‘emerging market’ was originally coined by IFC to describe a fairly narrow list of middle-to-higherincome economies among the developingcountries, with stock markets in whichforeigners could buy securities. The term’s meaning has since beenexpanded to include more or less alldeveloping countries. Developing countries are those with a Gross NationalIncome (GNI) per capita of $9,265 or less.17

Box 3Who are stakeholders?

A stakeholder is any individual or groupwhich can affect or is affected by anorganization’s or a project’s activities,either positively or negatively.‘Stakeholders’ are increasingly self-legitimizing — in other words, those who judge themselves to have an interestin an organization’s operations, value andperformance are de facto ‘stakeholders’.

These include employees, localcommunities, local elected officials and local and central governments,indigenous groups and their traditionalleaders, project sponsors, non-profitorganizations, customers, financiers,shareholders, business partners,competitors and regulators.

The Bank of Shanghai (BoS)was established in 1995through an amalgamation of99 urban credit cooperatives.It has grown rapidly and

remains the largest of about 110 ‘citycommercial banks’ in China. But it is stillrelatively small: 4,500 employees, 45branches and 198 business offices. The totalassets for BoS under Chinese accountingstandards were US$14.7 billion at the end of 2001. It is a full-service commercial bank but most lending is currently to SMEsin the Shanghai region.

Promoting the private sector by lending to small enterprises is considered a socialresponsibility as well as a commercialopportunity. But the Bank remains selectiveabout the businesses it backs, and hasensured that the loan portfolio is balancedwith infrastructure finance and largercorporate customers. It also aims to expandin consumer credit and housing loans.

But all the city banks face internationalcompetition following China’s entry into the World Trade Organization, as well ascompeting with the four state-owned banksthat dominate the sector and are undergoingextensive commercial restructuring.

Corporate governance and management systems

Corporate governance has improveddramatically since investment from the IFC,accompanied by the appointment of JohnLanglois (a former managing director of JPMorgan) as a director.

Previously the board’s function was mainly toapprove annual business plans and dividendpayments. It has now assumed an importantrole in its three core functions: strategydevelopment, accountability and control, andmanagement selection and remuneration.Board meetings have increased in frequencyfrom twice a year to at least four times ayear. The board has set up an auditcommittee, a compensation committee and a risk management committee. It is engagedin much more active discussions withmanagement on the strategic developmentof the Bank.

Board meetings now include discussions on specific subjects relating to the Bank’smanagement and special topic seminars toequip the directors with modern bankingconcepts and trends. The directors havefundamentally changed their thinking ondividend payments, and begun to emphasizethe importance of increasing retainedearnings to strengthen capital adequacy.

The management team has introducedimprovements in all operational areasreflecting international best practice,particularly in credit risk management and internal controls.

Business benefits

Improved corporate governance andincreased transparency helped to attractinvestment from HSBC and other foreignbanks, and are likely to bring forward thedate of a listing on the stock exchange. The Bank will need further capital to finance growth and to fund the necessaryinfrastructure improvements, e.g. IT systems.

There has also been a significant culturechange, part of which is greater long-termthinking, prompted by the more professionalboard focusing on strategy. Employees aregenerally more motivated, especially by thetransparency which now allows them to see the Bank’s financial progress, but somehave found it hard to adjust to internationalstandards and senior managers feel undergreater pressure to deliver. Staff training is critical to continued improvements andaddressing weaknesses more quickly. The new corporate governance standardshave also improved the Bank’s standing withregulators. The People’s Bank of China hasincluded BoS in a pilot corporate governanceproject aimed at improving standardsthroughout the country.

Fu Jianhua, CEO of the Bank of Shanghai,said, ‘The cooperation between BoS and IFChas been very successful and it has played a significant role in BoS moving towardsinternational standards and best practices in banking. We look forward to continuingour long-term partnership.’ Brand recognitionby customers will benefit from greateropenness. It is very important for BoS tohave established its credibility and brandname to retain its niche in the face ofcompetition from foreign banks and the state owned banks.

Key barriers, challenges or difficulties

The main difficulty has been the increasedpressure on management to addressweaknesses. The International AccountingStandards audits that are part of the newgovernance structure have created a sense of urgency which is not appreciated by allstaff. Some prefer the previous lack oftransparency which helped to hide problems.

9Developing ValueCase Study 1

Board meeting, Bank of Shanghai

The Bank of ShanghaiChina

10

The aim of this study was to assess thebusiness benefits, if any, which companies in emerging markets gain from soundenvironmental and social performance and good governance structures.

We tapped into business networks, spoke to local experts, searched throughdocumented cases and drew on IFC’s ownproject portfolio experience, ultimatelyanalyzing 240 cases from 176 companies.These cases include all types and sizes ofcompanies from small to multinational —though large national companies werepredominant. They cover a wide range ofsectors such as agriculture, manufacturing,infrastructure, and information technologyall over the world in emerging markets.

We explored relationships between sevensustainability factors and six businesssuccess factors, with the results of theanalysis illustrated in a matrix (outlinedbelow). This business case matrixdemonstrates graphically the connectionbetween a particular sustainability action(environmental process improvement in this outline) and the resulting businessbenefit (cost savings). The shading in the cell indicates the strength of evidence for each particular link.

The full matrix appears at the end of this chapter, along with a more detaileddescription and acknowledgement of thelimitations of this approach. The mini-matrices which appear throughout Chapter 2 serve to orient the reader byhighlighting the matrix cell(s) beingdescribed in each sub-chapter.

Developing ValueChapter 2

Figure 2 How the business case matrix works

Chapter 2The bestopportunities

Stockbroker, Kenya



Environmental focus






Localeconomicgrowth







Access tocapital


Human capital


Analyzing our case studies based on thismatrix, we found the evidence was thestrongest for several key linkages that weexplore in depth in this chapter. They are:

1 Save costs by making reductions to environmental impacts and treating employees well;

2 Increase revenues by improving the environment and benefiting the local economy;

3 Reduce risk through engagement with stakeholders;

4 Build reputation by increasing environmental efficiency;

5 Develop human capital through better human resource management;

6 Improve access to capital through better governance;

7 Other opportunities from community development and environmental products.

These key links highlight the nuggets of good practice we have discovered whichpresent the best business opportunities,although the evidence for the last two links was not as strong as for the others.Environmental products & services currently show the weakest business casebut we believe there is potential herebecause of the scope for alternative business models and customer demand for sustainable products.


Box 4Methodology explained

The six business and seven sustainabilityfactors used in this study were determinedprimarily through a process of tailoringSustainAbility’s work on Buried Treasure 18

to fit the emerging market context as well as IFC’s internal framework forassessing the contribution of private sector investments to sustainabledevelopment. The final selection alsoreflects the combined experience of thethree author organizations in working with businesses in emerging and developedmarkets on the sustainability agenda.

The sustainability factors are divided into three main aspects of sustainability —governance & engagement, environmentalfocus and socio-economic development.The business factors are a mix of directfinancial performance measures that arekey to any business — cost, revenue andaccess to capital, and important financialdrivers — risk management, human capital,reputation and brand value.

The case studies included in the reportwere selected from a thorough search of company case studies from publiclyavailable information and reports thathighlight best practice, IFC’s own portfolioof projects, and conversations with expertsand company managers in emergingmarkets. Inevitably there is a bias towardscases that build the business case, becausecompanies are less willing to shareinformation on sustainability initiativesthat went wrong. Exploring this potentialdownside is an area for further work.

Fruit market, Bolivia

12

What’s in it for business?

Businesses can reduce costs by makingenvironmental improvements which deliveran immediate impact on the financialbottom line. We have also found strongevidence that treating employees well cangenerate financial returns by improvingproductivity — producing more with less —again resulting in direct cost savings.

Environmental process improvements

More than one in five of all the cases in our database demonstrated cost savings from environmental improvements — oftendescribed as eco-efficiency. Some savingsflow directly from using less energy andmaterials. Others come from lower pollutioncosts, in the form of charges for wastehandling and disposal, fees, licenses andfines for breaking environmental regulations.Reorganizing production processes, materialflows and supplier relationships can alsoproduce benefits such as higher productivityof capital and/or labor. For example, reducing waste volumes can reduce the need for labor and machines which handlewaste. The evidence comes from manysectors, all types of company and all regions.

Intercell, Poland’s second-largest producer of unbleached packaging paper forcommercial and industrial use, wanted to cut $2 million per year in environmental fees for discharge permits, penalties andwater consumption charges. In 1992 thecompany installed new equipment whichreduced water use by 7%, while chemicaloxygen demand concentrations in liquideffluent and hydrogen sulfide emissions were slashed by 70% and 87% respectively.Over the next seven years the discharge fee rates grew threefold. By meeting higher standards, the company savedapproximately $12 million in pollution tariffs over five years.

Smaller businesses can also benefit. Shivji and Sons, in Dar es Salaam, Tanzania,has just 45 permanent employees, makinglaundry soap through a process which uses steam from a diesel-powered boiler. The company replaced leaking steam valves and taps, halved the time required for heating the fat storage tank throughefficiency improvements and minimizedsteam consumption during the cooling stage. These measures cut diesel use by more than 50% and have resulted in annualsavings of $188,000 a year from an initialinvestment of $830. This represents apayback period of just 1.6 days.

Human resource management

Effective human resource management cancut costs and boost the productivity of theworkforce. Sound employment practices such as fair wages, a clean and safe workingenvironment, training opportunities, andhealth and education benefits for workersand families can all increase morale andproductivity while reducing absences andstaff turnover. As well as productivitybenefits, companies also save on costs forrecruitment and training of new employees.

The Argus Group is one of the largestclothing manufacturers in the Caribbean.Alfonso Hernandez, the founder, realized that 85% of absences were caused byemployees having to miss an entire day of work to reach state-provided medicalfacilities. In an effort to reduce absences he decided to offer free, full-time medicalservices on-site and health care for eachemployee’s family. The investment in medicalservices has paid off in an absenteeism rateof 4%, compared with an industry average of 10%.

Laredo, a sugar company in Peru, improvedthe working conditions in its facilities and saw a reduction in accidents of 38%. This has improved employee relations andreduced costs.

2.1Save costs by making reductions in environmentalimpacts and treatingemployees well

Developing ValueChapter 2.1



Environmental focus






Localeconomicgrowth







Access tocapital


Human capital


Flower exporter, Kenya

Highlighting cost saving & productivityresulting from environmental processimprovement and human resourcemanagement. Full matrix is on page 31.

13

Action on HIV/AIDS is another area wherecompanies can deliver important benefits to workers and their families, and save costsat the same time. Volkswagen do Brasillaunched an AIDS Care Program in June1996, spreading awareness using thecompany radio, internal newspapers, bulletinboards and special brochures. Condommachines were installed in factories andoffices. The program includes access toinfectious disease specialists, social workers,nutritionists, psychologists, referrals tospecialized hospitals and home caretreatment. Patients are also given access toclinical tests and drugs. By the end of 1999,the company reported a 90% reduction inhospitalizations, a 40% reduction in the cost of treatments and care under its HealthPlan, and found that 90% of the patientswere active and without symptoms due toawareness, prevention and treatment ofstaff. There were also savings from reducedabsenteeism and turnover of employees, and employee satisfaction with the companyhas increased.

Ignoring these issues can also result inhigher costs. Thor Chemicals, a Britishcompany, set up a mercury reprocessingplant at Cato Ridge, South Africa in 1978. In 1991, tests showed that 87% of workershad mercury levels above safe limits, and a formal enquiry by the Department ofManpower found gross negligence leading to the poisoning of at least 29 workers. In 1994, the South African governmentforced the plant to close. In 1998, thefamilies of workers who died from mercurypoisoning sued Thor in British courts andreceived almost $2 million. In 2000, a further20 workers brought a second class-actionlawsuit against Thor in Britain and obtaineda settlement of $400,000. The companysettled out of court without admittingliability. 19


Sustainability factor 1Environmental process improvement

Also termed ‘eco-efficiency’, environmentalprocess improvement involves producingthe same level of output with fewerresources, emissions and less waste. Eco-efficiency can be increased by usingalternative raw materials, redesigningequipment or techniques, using moreefficient technologies, reorganizing thesupply chain and/or siting productionprocesses in a manner that reduces overallenvironmental impacts.

Why it mattersReducing the use of energy and rawmaterials and limiting emissions and waste from production processes are keycontributions that business can make totackling the environmental challengesfacing the world. Emissions from industrialactivity can have serious impacts onhuman health and the naturalenvironment. They also contribute toclimate change, ozone depletion, acid rainand contamination of surface and groundwater and soils. Maintaining finiteresources is key for future growth anddevelopment.

Future trajectory Concern for the environment is likely togrow in importance in emerging markets as populations grow, living standardsincrease, and environmental standards andexpectations rise. Local communities arelikely to become more concerned aboutenvironmental standards as awarenessgrows of the health and other impacts ofpollution. Greater awareness is also drivenby NGO activity and by greater access toenvironmental information, especiallythrough the internet.

At the international level, climate changeand loss of biodiversity are key concerns.The private sector is seen as a criticalplayer and many multinationals haveadopted environmental policies whichextend through their supply chains in the form of requirements for suppliers toadhere to sustainability certification (see Box 5).

Box 5Social and environmental credentials

Companies can demonstrate environmentaland social responsibility by obtainingcertification or labeling based onadherence to a management or productstandard. These schemes are oftendeveloped independently of the industryconcerned, although in consultation withcompanies as well as NGOs, and usuallyrequire some form of external verification.Some are international, while severalcountries also have their own codes, likethe Kenya Flower Council Code of Practiceand the Thai Green Label scheme. The mainexamples cited in this study are:

— ISO 14001, which prescribes corporate environmental management systems. Over 20,000 companies have been certified to ISO 14001 — nearly a fifth of which are based in emerging markets. 20

www.iso.ch— SA8000, which focuses mainly on labor

standards in manufacturing industries. Over 100 factories were certified at the start of 2002, three-quarters of which are in emerging markets. 21

www.cepaa.org/sa8000_review.htm

— Forest Stewardship Council (FSC), for wood from sustainably managed forests. FSC certification has been spreading from developed countries to markets such as Poland, Brazil and South Africa. www.fscoax.org

The business case for such schemes can bevery strong. Some cost is involved but thiscan be seen as investment which improvesaccess to developed markets, includingsometimes a price premium. Companiesalso find that these schemes help improvemanagement control, resulting in costsavings and improved productivity.

There are potential drawbacks, however:

— Some codes or certification schemes do not relate adequately to emerging market conditions.

— It may be difficult for emerging market businesses to justify the initial investment, especially if multinational buyers do not provide technical or financial assistance.

— Verification of compliance can be technically difficult, costly and in some cases superficial. Certification also may not translate sufficiently to improved performance.

14


There are many opportunities to increasesales by improving the environmental impact of production processes and by taking action which helps local economies.

Successful approaches have been to innovateand develop new products, and to view‘wastes’ as potentially saleable by-products.Improved processes can also make existingproducts more attractive to concernedcustomers. Recognition as a responsibleproducer — informally or through formalcertification — can also open the door tosome markets in developed countries.

Action which helps develop local economies,such as local recruitment, using localsuppliers and providing finance andtelecommunication facilities, can boost sales and may also have important publicrelations benefits for companies that areseen to be integrating into the community.Local small and medium sized enterprisesthemselves are involving their communitiesand finding innovative ways to grow sales,both locally and abroad, e.g. through eco-tourism and organic farming.

Together, these actions provide opportunities to:

— develop new products;— sell more of existing products because:

— they are more attractive to customers — local supplies have increased— greater local prosperity means

more spending power;— earn a premium selling price for

products with positive environmental or social attributes;

— find markets for by-products or waste;— gain or improve access to markets

because of sustainability credentials.

We have identified such benefits for mosttypes of companies across all regions. Local investment is particularly relevant inSouth Asia and Sub-Saharan Africa.


Meeting environmental or social standards is increasingly recognized by formalcertification schemes e.g. ISO 14001 forenvironmental management systems or theFSC certification for sustainable forestry. Such independent recognition can helpcompanies gain access to markets or achievepremium prices. For example Aserradero San Martin, a Bolivian logging and woodproducts company which sells predominantlyto North America, reports that FSCcertification helped it to earn a premium of 10-15% over normal prices.

This can apply in many industries. In 1994 a German customer of Bombay-basedCentury Textiles and Industries required the company to comply with the Eco-Texsustainability standard (developed by aEuropean consortium, covering chemical use and other environmental issues). This involved changing dyestuffs, whichresulted in a marginal cost increase. But Century, which is one of India’s largestmanufacturers and exporters of cotton andother materials, capitalized on meeting theEco-Tex standard — the first company inIndia to do so. Compliance and associatedquality improvements allowed the firm toincrease prices by 8-10%. Sales volumes alsoincreased — by at least 10% in the first year— as Century attracted new buyers from theUS and the UK.

But certification is not essential to makemoney from environmental improvements.Perion is a medium sized company based inBudapest, Hungary, which makes batteries. It has created a new business linereprocessing car batteries, based on its ownpatented technology which has significantenvironmental benefits compared with thetraditional process. This market opportunitydeveloped from the company’s efforts toimprove its health, safety and environmentalperformance and avoid heavy fines forhazardous discharges and waste. Perion thensaw the opportunity to collect used batteriesthrough its store network. The business issufficiently profitable to pay $1 for eachused battery. It brings in an extra 30 millionforints per annum ($110,000) for thecompany.

The development and implementation of an environmental management system byTecon Salvador, which owns and operates acontainer and cargo terminal in NortheastBrazil, allowed it to secure a major contractwith a newly established plant. The contractwhich is equal to 10% of the terminal’s totalvolume helped the company achieve anincreased market share of 75%.


2.2 Increase revenues by improving theenvironment andbenefiting the localeconomy

‘Trade is better than aid. We will only be able to reduce social exclusion if we are granted access to markets.’ Luiz Furlan, chairman Sadia, BrazilFinancial Times / IFC conferenceMay 2002



Environmental focus






Localeconomicgrowth







Access tocapital


Human capital


Highlighting revenue growth & marketaccess resulting from environmentalprocess improvement and local economicgrowth. Full matrix is on page 31.

15

Local economic growth

Building linkages with local businesses andemploying local residents is key to localeconomic development and can also increaserevenue for the companies involved. A clearlink has also been established betweenpoverty reduction and business growth. 22

Hindustan Lever is the Indian subsidiary ofthe Unilever Group. In the early 1970s itsdairy factory in the Etah district wasoperating at only 50% capacity and incurringsignificant losses because of inadequate milksupplies. In 1976 Hindustan Lever establishedan Integrated Rural Development Program.The program set out to help farmers increasemilk production, by addressing a range offarming practices that could be improved.The company sponsored education andtraining in animal husbandry, thedevelopment of basic infrastructure and theestablishment of village developmentcommittees. Beginning in six villages, theproject area expanded to more than 400.Milk supplies to the factory increasedsignificantly to meet its capacity and thedairy is now one of the company’s mostprofitable units.

Providing tools for economic growth, such as microfinance and telecommunicationfacilities, can be a viable business.

Local SMEs themselves are involving theircommunities and finding innovative ways togrow sales. For example, Kuapa Kokoo inGhana is a cooperative set up in 1993 by thefarmers to buy their own cocoa and sell it on.In 1998 they partnered with Twin Trading,Christian Aid and others to start the DayChocolate Company to launch their ownchocolate brands — Divine and Double —internationally, through fair trade whichallows them to charge a 10-20% premium.Approximately 1,000 tons of cocoa is sold to the European fair trade market. When itstarted, Kuapa Kokoo had 22 societies. In 1998 this figure rose to 160 and in the1999–2000 season, Kuapa had 460 villagesociety members and 35,000 farmermembers while being operational in fivecocoa growing regions.


Sustainability factor 2Local economic growth

This factor is about how companies canshare the benefits from their investmentactivity with local businesses or providetools for economic growth to localcommunities. Companies can transfer skills and technology to local residents andbusinesses, use and pay fair prices to localsuppliers, help develop and support localSME suppliers and service providers, andprovide microfinance and tele-communications facilities to localcommunities. The factor is also about howlocal businesses themselves can developand grow through community involvementand innovative business approaches.

Why it mattersEconomic development is a key objectivefor emerging markets and localcommunities are the foundation for suchdevelopment. Shrinking public sectorbudgets have greatly increased theimportance of the private sector in the developing world, and the sharing of benefits has become a majordevelopment issue.

Changed circumstances have requiredowners and managers to reassess theirresponsibilities to all stakeholders, whilestill keeping the profit motive in mind. This process has led to the recognition that, beyond taxes paid to government,some project revenues must be retainedwithin local communities.

Investment to support local economicgrowth ultimately leads to a better poolfrom which to staff the business, cheaperand more reliable supplies, improvedreputation and a more affluent localconsumer base. Failure to aid localdevelopment can result in resentment and hostility — negatively impacting on a company’s license to operate.

Future trajectoryConcerns about the impact of businesses onlocal communities have been growing andwill continue to do so as the globalizationdebate focuses attention on the wayswealth is generated and shared. Action by leadership companies will increaseexpectations and put pressure on others tofollow. Equally, NGOs are working to ensurethat businesses in emerging markets sharethe benefits of investment with localcommunities.

Box 6Alternative business models

Traditional business models arepreoccupied with delivering conventionalproducts or services to other businesses or to relatively affluent consumers. Newmodels break out of this straitjacket todeliver new kinds of products or services, inunconventional ways, to new markets, orwith unconventional business structures.

There are three broad categories ofalternative business models:

— Multinationals or other conventional businesses developing products or services specifically for the poor, e.g. Deutsche Bank introducing microcredit. 23

— Smaller producers finding ways to access the global market, often with premium products which bypass conventional distribution systems including organic and ‘fair trade’ products, eco-tourism and certified forest products.

— Social enterprises, not-for-profit organizations, cooperatives or other institutions developing innovative solutions that provide a social, environmental or economic benefit to the community. Examples include ‘digital dividend’ projects which bring telecommunications and internet access to poor communities and solar power projects which bring electricity and other services to off-grid communities.

These are financially viable solutions whichoften particularly benefit vulnerable groupswho may otherwise be excluded fromeconomic activity. Business benefits includefinding market niches and being able tocharge a premium for the products.

While many of these developments haveemerged without official stimuli, supportivegovernment policies will help to expand the opportunities, for example efforts byKenyan farmers to sell organic producehave been hampered by a lack ofgovernment assistance in obtainingcertification. Attempts by emerging marketproducers to enter new markets also needappropriate trading relationships and rules.

16 Developing ValueChapter 2.3


Businesses can reduce financial, reputationaland political risks by engaging withstakeholders. Understanding the concernsand interests of employees, customers, NGOs, politicians and business partners helps a company to manage environmentaland social expectations better, resulting in reduced risk of civil action or brandassassination, improved access to capital and insurance, cost savings and reducedvulnerability to regulatory changes.

Risk is intrinsic to business and cannot be eliminated. But companies can improvetheir risk profiles for environmental andsocial performance by understanding theexpectations of a broad spectrum ofstakeholders. Engagement helps companiesunderstand stakeholders’ changingexpectations and needs. It allows companiesto keep a finger on the pulse of the generalsocial and political environment and helps to identify issues which could become crises or simply lead to changes in the way a business operates.

Social and environmental problems can have serious impacts on financialperformance and therefore on borrowers’ability to maintain interest payments andrepay capital. They can also extend to the lenders’ reputations, as institutionsinvolved in controversial dam projects havediscovered, or can generate specific financialliabilities if a borrower causes environmentaldamage and cannot meet its liabilities.

The evidence for risk reduction throughengagement and transparency is strongestfor larger companies because regulators,international stakeholders and localcommunities expect more of them, but also because of the sensitive sectors in which many of these companies operate (e.g. mineral extraction).

Stakeholder engagement

Stakeholder engagement is essential to increasing community understanding of business operations. Communityunderstanding of private sector activity,sometimes called a ‘local license to operate’,can sometimes be a major factor in a firm’soperations. Such acceptance can help withreputation and brand value, and failure tohave such acceptance can raise operationaland production risks, at times with verysignificant costs to the companies involved.As examples below indicate, this local license to operate — obtained throughconsultation and good relations withaffected communities — is sometimes thelicense with the greatest impact on acompany.

The global climate is such that companiesare seen as obstructionist when it comes to matters of environmental impacts andsocial development. To combat the climate of suspicion and mistrust companies mustengage with stakeholders to learn theirconcerns and expectations.

According to Saroj Datta, executive director, Jet Airways, ‘India has become an extraordinarily suspicious society, which can only be corrected through greatertransparency, and the acceptance andpractice of corporate citizenship and socialresponsibility by all companies.’ 24

Electropaz, a private Bolivian electricitydistribution company serving the cities of La Paz and El Alto, decided to improve itsdistribution system. There was oppositionfrom the community of El Alto to an existinghigh-tension tower whose conductors wererunning over their houses. Electropaz heldseveral public meetings with the communityand the municipal government and reachedan agreement to re-route the transmissionlines as well as to relocate the tower.Responding to community concerns byrelocating project assets helped it buildcommunity acceptance and reduce the risksof future grievances.

2.3Reduce risk throughengagement withstakeholders



Environmental focus






Localeconomicgrowth







Access tocapital


Human capital


‘ India has become an extraordinarily suspicious society, which can only becorrected through greater transparency, and the acceptance and practice ofcorporate citizenship and social responsibility by all companies.’Saroj Datta, executive directorJet Airways, India

Highlighting risk management & license to operate resulting from stakeholderengagement. Full matrix is on page 31.

17Developing ValueChapter 2.3

The Inka Terra tourism company in Peru,which operates two small hotels near Machu Picchu and the Madre de Dios forestin Amazonia, engages with the localcommunity, government, NGOs, academicsand other stakeholders. It employs locals and works with scientists to preserve theextensive biodiversity of the surroundings,which include the world’s greatest diversityof ant species in a single location and thelargest known collection of native orchidspecies. With funding from the GlobalEnvironment Facility, the company isdeveloping plans for working with localcommunities to generate alternativelivelihoods to mining and logging. This hasenabled the company to get longer landleases and licenses to expand. It alsomaintains the support of the localcommunity.

The Sarshatali coal mining project in India’s West Bengal region worked with local NGOs, community institutions and the district authorities to reverse rising levels of dissatisfaction with the project.Relationships with the eight communities in the area had suffered because of loss ofincome to the population following landacquisition by the mine owners, and thesituation was made worse by delays insecuring finance, which stalled the minedevelopment. Working with the NGOs,government and community partners, andindependent facilitators, the project rebuilttrust and negotiated a Memorandum ofUnderstanding. Pilot projects worked onrestoring income for those most affected by lost land, and longer-term developmentprojects were also identified. Improvedrelations gave the company the confidenceto proceed with design and earlyconstruction work, based on evidence thatthe risk of social tensions had been reduced.

Sustainability factor 3 Stakeholder engagement

Stakeholder engagement is aboutconsulting with business and non-businessstakeholders on key sustainability issuesfacing the company. Such engagement can take place in many ways, includingopen dialogue and consultation onenvironmental and social impacts, publicreporting, and ultimately through theinclusion of business and social partners in business decision-making processes.Engagement is more than communication.It is a two-way process leading to sharedlearning between a company and itsstakeholders.

Why it mattersFor private sector development to be mutually advantageous to bothshareholders and other stakeholders,transparent and frank consultation withaffected groups is essential. Shareholdersare informed through annual reports and can voice their opinions through their votes or by divesting their shares.

Other affected groups, for the most part, have no formal lever to changecompany actions or policies — although, as evidenced throughout this report, they can and do make their voices heard.Transparent and thorough engagementwith stakeholders is a necessity forsustainable, win-win developmentoutcomes for business and society.

Future trajectoryAn increased level of transparency and honesty provided by companies is a key feature of stronger relationships.Expectations of increased businesstransparency have grown continuously in recent years, and the trajectory appears to be rising.

NGOs are becoming increasingly vociferous and other groups such aslenders and investors are also introducingrisk management systems that includedisclosure of environmental and socialimpacts and performance as key features. The importance of reporting on sustainability efforts is emphasized by many organizations such as the Global Reporting Initiative.www.globalreporting.org

Copper miners, Zambia



Brand value & reputation can be significantly enhanced by action whichimproves a company’s environmental and social performance.

A company’s reputation is intangible but it helps to build sales, attract capital andbusiness partners, and recruit and retainworkers. It can be separate from, but relatedto, brand image. And in emerging markets,where brands tend to be fairly weak, thebrand owner’s reputation can be a significantcompetitive factor. There are manycomponents of reputation but sustainabilityis an increasingly significant factor forgovernments, NGOs, customers and investors.

Measurement of reputation is not as preciseas for many components of business success,but it can be assessed through customersatisfaction surveys, public opinion polls and rankings in lists such as ‘most admiredcompanies’. Brand valuation methodologiesare also becoming increasingly sophisticatedand include tracking of a company’s overallreputation. Another rough but easy proxy for brand value for quoted companies is thedifference between the company’s bookvalue and its worth on the stock market.

Reputation is not an end in itself. It mattersbecause it enhances the ability to attractcapital — both human and financial — to mitigate risk and to build a company’slicense to operate. A good reputation alsoprovides companies with what might becalled a buffer zone — space to makemistakes without being attacked, as mighthappen if the company did not have the trust of stakeholders. This is important at atime when companies are still coming togrips with the sustainability agenda andwhen even leadership companies are farfrom perfect.


We have found that reputation can benefitfrom improving environmental processesmore than from other dimensions ofsustainability. In fact a worldwide survey 25

found that environmental responsibility was the third most important expectation of companies, after provision of jobs andquality products.

Most of the evidence we found of improvedreputation is in the form of companiesreceiving recognition and awards fromorganizations, governments, rating agenciesor public surveys. While awards are notnecessarily the best benchmarks forreputation and brand value, they are areasonable proxy indicator. Nationalcompanies saw the greatest reputationalgain, and it held across most regions.

Jolyka Bolivia is the first South Americanproducer of laminate and other tropicalhardwood flooring products to be certified by FSC. 26 It sells to the US and Europe, where consumers are increasingly concernedabout the sustainability of tropical wood. In 2000, Jolyka was one of the winners ofthe business plan competition for promisingenterprises that incorporate social andenvironmental benefits held by NewVentures, a World Resources Instituteprogram. This brought direct reputationalbenefits, including coverage in the media as a viable, dependable and ‘green’ company.It also helped to raise new capital as in the following six months Jolyka was visitedby four investors and has renegotiated $2 million in long-term debt finance.

Girsa, a Mexican chemical company, has invested more than $20 million inenvironmental efficiency improvements,including the capture and use of energygenerated in the carbon black process, which yielded $30 million in savings and has substantially reduced emissions andwaste. From 1991 to 1998, carbon dioxideemissions and wastewater per ton ofproduction were cut by more than 80%, and solid waste per ton of productionreduced by more than 90%. The net incomeas a percentage of sales was improveddrastically. The plant has gone from being a major source of controversy in thecommunity to a model corporate citizen that locals are proud of. It has wonnumerous accolades for its performance atnational and international levels, includingthe Mexican Environment Ministry’s NationalQuality Award in 1997 and the NationalAward for Ecological Merit in 1999.

2.4Build reputation by increasingenvironmentalefficiency



Environmental focus






Localeconomicgrowth







Access tocapital


Human capital


Textile printing, Bangladesh

Highlighting brand value & reputationresulting from environmental processimprovement. Full matrix is on page 31.


Buried Treasure found that in developedcountries brand value & reputation had thestrongest link to a company’s sustainabilityefforts — even more than cost savings andrevenue growth. This suggests differences in perception between developed anddeveloping countries. It could be explainedby some companies in emerging markets still concentrating on basic business survival, rather than being concerned about reputation or brand value. Or it couldstem from the fact that brands are moreestablished in developed countries andreceive greater management and investment.Either way, it suggests that as emergingmarkets develop, companies are likely to see an upsurge of interest in brands andshould even now be building this into theirstrategies.

Nevertheless, in emerging markets acompany’s brand may be tied into theowner’s reputation, and may sometimesbecome synonymous with its sustainabilitydeeds. In India, the name Tata is associatedwith a professionally run, respected company that has cared for its employeesand neighboring communities while makingexcellent products. 27 The company investedin its employees and community and itsreputation as a social and ethical companyspread through word of mouth. In fact, theTata Iron and Steel Company (TISCO)had gained enough recognition for its social deeds that it could run a televisionadvertisement showing investment in socialproject like schools and sports, with thecatchline, ‘We also make steel.’

Recyclable adobe bricks, Cuzco, Peru

20 Developing ValueCase Study 2

Anglo American is a SouthAfrica-based global miningand natural resourcescompany, with operations and developments in Africa,

Europe, the Americas and Australia. It has a long record of support for disadvantagedblack communities in South Africa. One aspect of this is now known as Zimele, a Zulu/Xhosa word which meansindependence, in the sense of standing on your own two feet and making your own way in the world.

The name is appropriate because the unitexists to invest in SMEs. It has emerged froma concern with unemployment, and nowoperates as a self-sustaining venture capitalunit within the Anglo group.

Economic initiatives

The unit exists specifically to build localeconomies, especially black communities, by helping to expand the small businesssector. As well as being open to approachesfrom any entrepreneur looking for backing,each Anglo division has a Zimele businessdevelopment manager who looks foropportunities to invest in new businesseswhich can supply products or services thedivision may want to outsource.

Dr Lia Vangelatos, Zimele’s senior businessdevelopment manager, says the aim is tocreate sustainable businesses, not to handout charity: ‘The businesses we back have to be viable. The entrepreneurs may not have the skills or sophistication but theyhave to be passionate about their projectsand committed to making money.’

Ventures have ranged from catering tolighting, and even include a banana farmingbusiness. Examples include Envirolight, which manufactures energy-efficient lightingunits for both the mining and housingsectors, and Surmap Services, created toproduce high quality maps using the latestphotogrammetric technology.

Zimele takes a minority equity stake and may make loans to the businesses it backs.Crucially it also takes a seat on the boardand continues to support the newentrepreneurs. It can also call on the skills of Anglo’s managers — from informationtechnology to mining expertise — and makessure these new businesses adopt the highstandards of health and safety which Anglosubscribes to.

‘It is a hand-holding approach. We are notthere to run their business but we are closebehind, and that makes a difference,’ Dr Vangelatos said. She distinguishes thisfrom what she calls ‘balance sheet support’— providing finance without the necessarymanagement support, and without giving therecipients an equity stake in the business.

Originally support was aimed at micro-enterprises but now the targets are bigger,which led to the formalization of Zimele as a self-sufficient business unit in 2000,with 15 million rand ($1.5 million) to invest. It is not a profit center, but is expected tocover costs, and did so in 2001 — the firstyear after being established formally as aseparate operation. ‘The message is invest it but don’t lose it,’ Dr Vangelatos said.

This is an intensive support operation, so there are only six to eight deals a year, but they can now be companies aiming forinitial revenues of as much as 40 millionrand ($4 million).

Early in 2002 the operation had investmentsin 22 companies which together providedwork for 1,300 people and had revenues of145 million rand ($15 million).

Benefits and challenges

Apart from the general benefits from helpingto build — and being seen to build — a morevibrant economy, the Zimele operation alsomeshes with Anglo’s policy of outsourcingmany non-core operations. It means thereare reliable, viable, local businesses whichcan become suppliers to the group with more fruitful and trusting relationships thanwould be the case with outsourcing basedsolely on price.

Zimele has some important advice for othercompanies wanting to follow this communityinvestment path. It believes entrepreneursshould put in some capital themselves sothey will have a serious stake in the business.But Dr Vangelatos also cautioned that this is not a get-rich-quick option, either for the entrepreneurs or for their backers. ‘There are no shortcuts. You have to build the networks, roll up your sleeves and getinvolved,’ she said.

Stimela Rail, railway maintenance company supported by Zimele

Zimele, Anglo American South Africa

Addressing environmentaland social issues early on can often boost both theprofitability and theenvironmental and social

benefits of private sector investments.Cembrit, whose modernization program IFC helped finance through a $5 million loanin 1995, is a producer of building materialsin the Czech Republic. The experience of this company illustrates the practicality of a sustainable approach. Cembrit is arelatively small company, employing fewerthan 400 people in two factories. But withthe aid of external finance and expertisefrom IFC and its new owner it has penetratednew markets in Europe, as well as helped toclean up the local neighborhoods.

In the early 1990s the Czech governmentannounced it would prohibit the use ofasbestos materials in line with the trendthroughout the European Union (EU). Such legislation would have shut down the formerly state-owned plant. But Cembrit began to address the regulatoryrequirements — including those of the EU.

The focus of the $15 million project wasswitching from a hazardous, asbestos-based production process for making roofingmaterials to an environmentally soundcellulose-based process. The project alsofacilitated an extensive environmental clean-up, including the safe and properdecommissioning of the asbestos cementoperations.

Cembrit was then able to expand itsoperations through exporting to the EU and other markets which had previously not been accessible. Although the originalbusiness plan projected that only 20% ofproduction would be exported, today exports exceed 50%.

Mr Bubla, managing director, comments, ‘The biggest benefit of our proactiveapproach was a new opportunity to startselling goods to attractive Western Europeanmarkets. The asbestos ban had taken placethere, and the new technology was the onlypossibility of exploiting these markets. Sales in 2000 were $17 million, a 22%increase over the previous year and morethan double what they were in 1996. Exports now account for more than half totalsales, whereas previously it was impossible to export to Western Europe because ofenvironmental regulations. We would not be in business today without these changes,so the benefits were tremendous.’

Following the success of the initial program,Cembrit has made further environmental andsocial investments as part of a long-termsustainability strategy. In 2002, Cembritbecame ISO 14001 certified. This is in linewith its commitment to continuousenvironmental improvements.

Business benefitsIf asbestos had not been eliminated thecompany would have shut down. But byproactively addressing future regulatoryrequirements it has built competitiveadvantage, which has resulted in expansion,despite intense competition.

‘The whole purpose of the exercise was to get ahead of competition and conquernew markets,’ Mr Bubla confirmed. Access to markets has been the key element, but this opportunity would not have beengrasped effectively without adequatefinance, motivated and well-trained staff,and that has been another benefit from the sustainability approach.

The managing director is convinced:‘The investment allowed us access to bothfinancial and human capital. Our employeesbecame more motivated working in ahealthier environment. Productivity has more than doubled since 1996 with the same number of employees. The companyhas a very low staff turnaround in an areawhere unemployment is under 5%.’

Social and environmental benefits

In addition, the modernization resulted in many benefits to human health andenvironmental quality. The immediate benefithas been the removal of hazardous asbestos,which has enhanced life expectancy andreduced negative health impacts on workersand the local population. By converting from coal to gas-oil fuel, the plant reducedair emissions almost 100% and made acleaner source of energy available to localneighborhoods. By constructing a pre-treatment facility and connecting to themunicipal sewage system, the projectstopped the discharge of untreated liquideffluent into the Berounka River.

The prosperity of Cembrit has also helped the local economy, indirectly as well asdirectly through wages of the employees. A third of the company’s suppliers are localand they have benefited from Cembrit’sgrowth through winning more orders. Local businesses such as suppliers ofpigments and spare parts have seen $3 million in incremental sales per year.


CembritCzech Republic

Cembrit factory


Human capital means the knowledge, skills,motivation, health and empowerment ofworkers. A quality workforce is critical forkey aspects of competitiveness such asproductivity, product quality and innovation.This applies in emerging markets eventhough in many cases there may be a largepool of available workers. The key is findingthe right people and motivating them, andthere are often shortages of the right peoplefor the job — from contract labor tomanagers. Mistakes cost money to rectify,while committed workers can be invaluablein achieving required quality levels andboosting innovation.

Health issues in the developing world,particularly HIV/AIDS and other infectiousdiseases, are pressing areas of concern forhuman capital. An unhealthy workforce can lead to increased absenteeism, loss of trained employees and high costs forreplacement and training.

Better human resource management

Effective human resource management can improve the quality of the workforce by setting the right policies and practices.Aspects include good working conditions,paying what are seen as fair wages andappropriate benefits, training anddevelopment, and ensuring equalopportunities regardless of gender, race,religious persuasion or other factors. We found all types of company benefitingfrom this opportunity, especially in LatinAmerica and Sub-Saharan Africa.

A recent study in India 28 covering 52,000employees in more than 200 companiesacross 15 industries found a correlationbetween employment practices and financialreturns. The best employers showed growthin return on capital employed despite mostsectors recording negative returns in theperiod. According to the study, ‘Indian CEOsare more than aware that they now handle a global talent pool. While the labor cost-advantage has eroded gradually, the biggestchallenge for CEOs is to retain people andmanage career aspirations, whether throughmotivation or training.’

The same organization also did a survey ofthe Best Employers in Asia,29 in which theCEOs of the top 20 companies stressed theimportance of people as key to their success.The CEOs also described acquiring andtraining talent as one of the main issuesfacing their business. They believe thatemployees are attracted to and stay withtheir companies because of learning anddevelopment opportunities, company imageand culture, and the workplace itself.

Fernando Capellán, founder and president ofthe Dominican Republic company Grupo M,says, ‘We have proven that you don’t have to run a factory like a sweatshop in order tobe profitable and to grow. We believe thatwe have been able to innovate, to expand,and to do what we have done because of the way that we treat our people. Everythingthat we give to our workers gets returned to us in terms of efficiency, quality, loyalty,and innovation. It’s just smart business.’ 30

The company operates 26 textile factories in the country and has become the country’slargest private employer with 13,000workers. It started providing better workingconditions due to the requirement of itsbuyer, Levi-Strauss, but then progressed evenfurther. The company provides subsidizedtransport, day care centers, medical anddental services for employees and theirfamilies, training at various levels, and payswages of roughly 1,000 pesos a week — well above the country’s minimum wage of 555 pesos a week. While apparel makersin countries like Honduras and China havelower labor costs, Grupo M can competebecause its workers produce more goods of higher quality.

Opportunities exist for smaller companies as well as multinationals or large nationalbusinesses. LMC Enterprises, an auto partsdealership in India, found benefits included a high retention rate and productivity fromproviding perks like paid holidays andmedical help to its employees. According to the owner-manager, Ashish Jain, ‘Peopledrive a business and a focus on humanrelations is key.’


2.5Develop humancapital throughbetter humanresourcemanagement



Environmental focus






Localeconomicgrowth







Access tocapital


Human capital


‘Everything that we give to ourworkers gets returned to us in terms of efficiency, quality, loyalty, andinnovation. It’s just smart business.’Fernando Capellan, founder & presidentGrupo M, Dominican Republic

Highlighting human capital resulting from human resource management. Full matrix is on page 31.

Alexandria Carbon Black (ACB) is Egypt’s only carbon black producer and with 400 employees also a major employer.Mr K N Agarwal, the managing director, saysACB’s phenomenal growth is linked to staffenthusiasm and his company’s excellentreputation in the community. ‘We are thefastest growing carbon black company in theworld. You cannot increase production thisrapidly unless your workforce is behind youand you have trust from the community youare operating in and the partners you areworking with. If you work in an emergingmarket context you have to think verydifferently. To attract the best talentavailable in the country, you have to create a clean, green and healthy environment andan atmosphere where the people would liketo work and grow, which is extremelyimportant for improving the bottom line of the company. Then, through commitmentto training and empowerment of local staff,you have to improve morale to improveproductivity and increase efficiency. Then, you can develop and grow.’


Sustainability factor 4Human resource management

Human resource management is concernedwith the conditions under which employeeswork, the benefits afforded by theiremployment and their opportunities fordevelopment. Indicators of the degree to which a company considers humanresource management a priority include the safety and cleanliness of the workplace,the provision of health care for employeesand their families, the existence of policiesto address issues such as freedom ofassociation, forced/child labor anddiscrimination, and the availability oftraining and development opportunities for employees.

Why it matters Companies’ most basic and fundamentalimpact is through employment.Employment opportunities offering a safe,high-quality work environment, technicaltraining, education or medical care makeimportant contributions to reducingpoverty and improving the quality ofpeoples’ lives.

Future trajectoryLabor conditions have been rising up theinternational agenda for several years, andwill continue to do so. The InternationalLabour Organization has sought to raisethe profile of what it terms the ’core laborstandards’. These include prohibitionsagainst forced labor, the worst forms ofchild labor and discrimination and the right to freedom of association and tobargain collectively.

NGOs and trade unions, internationally and locally, are also seeking to ensureminimum conditions are adhered to,through standards such as SA8000 (see Box 5, page 13). Consumers aroundthe world are also sometimes boycottingcompany products that are believed to be produced using forced labor or in‘sweatshops’.

Clothing factory, India



Demonstrating that governance structuresand management systems are designed to encourage attention to sustainabilityissues can help companies raise capital atattractive rates. Access to capital is criticalfor any company wanting to invest and grow, but it can be a serious constraint inemerging markets where equity is typically in short supply, and debt can be expensiveand difficult to obtain except on a short-term basis.

Restricted access to capital is an even moreimportant constraint in the present businessenvironment in developing countries, with an economic slowdown, sharp decline inlong-term fixed investment, low long-termdebt flows and the retreat of many strategicinvestors. Sustainability action providesseveral opportunities to unlock capital:

— High standards of corporate governance reassure lenders and investors that the board is properly constituted, that shareholder and stakeholder rights are respected and that the highest standards of transparency and disclosure are maintained.

— Financial institutions are increasingly likely to require evidence of sound management of environmental and social issues as a condition of any deal.

— Since the cost of capital is driven by perceived risk, companies which can demonstrate good relations with stakeholders will reassure investors about potential volatility and should benefit through lower rates.

— Some specialist funds are available specifically for products or projects which will enhance sustainable development (see Box 11, page 49).

— Ultimately sustainability action is likely to enhance shareholder value for all the reasons covered in this report, which naturally improves a company’s ability to raise all forms of capital.

Governance & management

We found evidence of opportunities toimprove access to capital linked to all seven sustainability factors, although no one factor stood out as having a particularlystrong link. 31 The strongest evidence isconnected to governance & management.

On the other hand, poor governance and alack of transparency (implicated in the Asianfinancial crisis which hit many businesses in the region) is still a cause for concern. One prominent investor survey by McKinseyhas demonstrated that internationalinvestors have been unhappy about the slow progress of corporate governancereform in emerging markets. 32

We found that enhanced access to capitalthrough sustainability activities wasparticularly relevant for the larger nationaland multinational companies.

The Bank of Shanghai in China hasattracted international investment afterbringing its management and corporategovernance up to international standards for commercial banks. In December 2001,HSBC signed an agreement to acquire an 8% equity stake in the Bank of Shanghai for approximately $63 million (see page 9).

In El Salvador, Banco Cuscatlan obtained a credit line from IFC for on-lending to SMEs. It subsequently moved beyond IFC’sminimum requirements for the specific creditline and started expanding environmentalreviews to its entire portfolio and to all new commercial projects, enhancing itsreputation as an environmental pioneer in that country. As a result, Cuscatlan hasimproved its ability to access long-termfunding from multilateral and bilateralorganizations. The fact that Cuscatlan has an environmental management system has helped to secure a credit line fromNetherlands Development Finance Company (FMO).

There is also evidence of the negative impact of inadequate governance. Samsung,the South Korean electronics company, has battled to convince investors that itscorporate governance is sound. Yet onefinancial analyst has estimated that poorgovernance represents a price drag of asmuch as 50% on Samsung stock. HasungJang, a shareholder rights activist andeconomist at Seoul’s Korea University, hascommented, ‘Investors question [Samsung’s]corporate governance. That’s why its sharesare so seriously devalued, compared to its US and even Taiwanese competitors.’ 33

2.6Improve access tocapital throughbetter governance

‘We believe we can gain a competitive advantage by going beyond generally accepted corporate governance standards.’ Zarir Cama, chief executiveHSBC, India Centre for Social Markets conferenceDecember 2001



Environmental focus






Localeconomicgrowth







Access tocapital


Human capital


Highlighting access to capital resultingfrom governance & management. Full matrix is on page 31


The Itaú Bank in Brazil has recentlyupgraded its corporate governance practicesby extending ‘tag-along rights’ to its non-voting shareholders. This rare move in Brazil means that in the case of a sale of the company, the minority shareholders with non-voting shares would receive thesame price as the controlling shareholder. The company’s share price rose nearly 7% in the two days following the decision. The Itaú Bank is also among the firstcompanies in Brazil adhering to the ‘SpecialCorporate Governance Level 1’ of BOVESPA,the São Paulo Stock Exchange. Its shareshave been promoted to the most highlyvalued stock in the banking sector. The ItaúBank also has the highest corporate marketvalue in Latin America, close to $20 billion. 34

Even for smaller companies starting alongthe sustainability path, specific investors areemerging. A2R in Brazil provides investmentfunds for financing environmental projects.Its Terra Capital private equity environmentalfund can finance environmental projectswith biodiversity benefits in areas includingorganic agriculture, non-timber forestproducts, fish farming and eco-tourism. Terra Capital was launched with an initiatinginvestment from IFC and complimentarygrant funding from the Global EnvironmentFacility and includes additional capitalmobilized from the Inter-AmericanDevelopment Bank, the Swiss governmentand private investors.

E+Co was established in 1994 with fundingfrom the Rockefeller Foundation as anindependent not-for-profit company focusedon, ‘Bringing together technology, people and funding to create viable local enterprisesthat deliver affordable and clean energy to those in need’. It has provided $9.3 millionin seed capital to 77 local clean energyenterprises in 34 countries in Africa, Asia andLatin America, e.g. 12 Rural Energy ServiceCompanies (RESCOs) that serve more than31,000 previously unelectrified households in Bangladesh, Brazil, Costa Rica, DominicanRepublic, El Salvador, Gambia, Honduras,India, Lesotho, Morocco, Nepal, South Africaand Vietnam.

Sustainability factor 5 Governance & management

This factor focuses on the managementsystems which underpin a company’ssustainability performance, as well as itsgovernance structures.

It is about setting in place systems andprocesses that make a company moreaccountable to shareholders and otherstakeholders. It covers the inclusion of sustainability concerns in missionstatements, business principles, values and ethics, codes of conduct includingpolicies on bribery and corruption andhuman rights, financial and sustainabilitytransparency, reporting and audit. It is important that the managementsystems incorporate structures andresponsibilities for sustainability issues at the highest levels within the companyand align incentives and pay systems with this commitment. It also ensuresalignment between a company’sgovernment-related activities and itssustainability principles.

Why does it matter?A company’s management systems andprocesses are the first steps to improvedfinancial, social and environmentalperformance. They allow companies toplan, monitor and manage key issues withbetter control. Environmental and socialmanagement certification schemes such as ISO 14001 and SA8000 are often usedby investors, as well as customers and civil society, as a proxy for the company’scommitment to good environmentalprocesses or good labor force management.

Future trajectory Pressure on companies to improvegovernance & management, as well as the benefits to companies in terms ofaccess to capital is increasing. This isreflected in initiatives from organizationslike the World Bank and OECD to foster the development of appropriate nationalcorporate governance frameworks.35

With the increased scrutiny, the number of companies gaining certification of theirenvironmental and social management is also increasing (see Box 5, page 13). This trend is likely to continue ascompanies begin to compete for markets and access to capital.

Box 7Corporate governance: building stakeholder trust

Corporate governance is the ‘system by which companies are directed andcontrolled’.36 It is about improving thegovernance structures and processes ofcompanies to improve their performanceand make them more accountable toshareholders and other stakeholders. It covers issues such as the structure and operation of the board of directors,financial reporting, transparency and audit, separation of powers and minorityshareholders’ rights.

In emerging markets, where family firmsundertake much of the business activity,the main divergence of interests is mostoften between the family shareholders and the external minority shareholders. In emerging markets the quality ofcorporate governance has become widelyrecognized as crucial. Weak corporategovernance leads to what can be described as a general ‘corporategovernance discount’ 37 which reducesforeign investment and capital flows to developing economies.

An increased international awareness isreflected in a growing number of initiativesfrom organizations like the World Bank and OECD to foster the development ofappropriate national corporate governanceframeworks.38

The work of the King Committee in SouthAfrica is groundbreaking and has led to a significant improvement of localcorporate governance practices amonglisted companies. The committee suggeststhat corporate boards in South Africashould actively solicit and take intoconsideration feedback received fromstakeholder groups other thanshareholders.39

In Brazil the initiative has been taken byBOVESPA (the São Paulo Stock Exchange).BOVESPA created the ‘Novo Mercado’ (NewMarket) in 2000, a voluntary approach toimproving corporate governance standards.Companies that choose to list on the NovoMercado commit themselves to following astricter set of rules, including equal rightsfor all shareholders, higher standards ofdisclosure with annual reports, andimproved procedures for election of theboard of directors.


The previous sections have highlighted thebusiness opportunities for which we havefound the strongest evidence. But otheropportunities exist to bring value to bothbusiness and society, although the evidenceis weaker. In this section we examine two of these areas — community developmentand environmental products & services.

Community development activity has astrong tradition based on philanthropy 40

and has often been the starting point for business sustainability in emergingmarkets. At the other end of the spectrum,environmental products & services are often part of a new business model, with the entire strategy based on environmentalsuperiority going beyond just technology and encompassing the whole life cycle of theproduct — from raw material to disposal.

Community development

Companies have for some time recognizedthe need to ensure surrounding communitiesdevelop as a result of setting up a company’soperation, for example by the building ofschools, hospitals, roads or water facilities.What began as philanthropic gestures made to aid pet causes have since evolvedinto targeted interventions to addressfundamental community needs and assistbusiness objectives. This is not to say thatcompany owners and executives do not still fund their special interests or makephilanthropic contributions — only to pointout that many businesses have recognizedthe strategic importance of communitydevelopment and have exploited theopportunities that exist to improve theiroverall performance. Brand value &reputation benefits most from communitydevelopment, but we found benefits in all the business success factors, especiallyrevenue generation.

The creation of special community develop-ment departments and/or foundations bymany companies, particularly those in theextractive industries, has permitted thescaling up of strategic actions designed tooptimize positive returns for both thecommunity and the business.

There is also evidence of communitydevelopment helping to reduce costs as wellas risk. For example, where there are largemining or exploration projects that maydisplace people and adversely affect theirlivelihoods, companies that work to affectlocal social and economic developmentpositively may find it easier to win a locallicense to operate and to reduced delays and contain the costs of the project.

In Mozambique the $1 billion aluminumsmelter, Mozal, helped the government to manage the resettlement of peopleoccupying the area specified by thegovernment for the Beluluane Industrial Park, on which Mozal would be the anchortenant. Mozal used its own and third partyresources to help provide housing andreplacement farmland in order to complywith IFC and World Bank standards regardingresettlement. It also supported the relocatedpeople with agricultural know-how, seed andfertilizers, while its fully funded CommunityDevelopment Trust provided further supportincluding marketing support for agriculturalcommodities. This helped raise local incomelevels and provided support to the widercommunity in the form of projects coveringinfrastructure, education, sport, culture,health and small business development. IFC is working with Mozal to develop andimplement social responses to AIDS-relatedissues and malaria. This has helped Mozalmaintain its local license to operate as wellas build good community relations.

Environmental products & services

There is a growing market for products andservices that provide environmental benefits.It includes niche markets for environmentalinfrastructure and pollution abatementtechnologies, such as water supply, wastemanagement, soil remediation, air and waterpollution control, and other establishedenvironmental technologies. A distinct nichefocuses on the growing demand for eco-efficiency, including industrial products andknow-how which reduce the use of energy,water and other resources in productionprocesses. There are also green niches of established industries that providealternative ways of meeting market needs,such as renewable energy, sustainableagriculture, forestry and fisheries, and eco-tourism.

2.7Other opportunitiesfrom communitydevelopment andenvironmentalproducts

Teapickers, Sri Lanka



Environmental focus






Localeconomicgrowth







Access tocapital


Human capital


Highlighting opportunities fromenvironmental products & servicesand community development. Full matrix is on page 31.


Products and services based on environ-mental considerations — from the rawmaterial extraction to disposal — potentiallycommand a price premium while alsocatering to the needs of specific targetmarkets.

Creating an environmental product or service needs to be based on a coherentstrategy which will embrace a company’sentire operations and possibly businesspartners. In some cases such a strategy hasbeen adopted by small enterprises following new business models that explore newopportunities and needs of customers around the world (see Box 6, page 13).

Emerging markets have specific advantagesover developed countries in buildingalternative product and service markets. For example, countries can leapfrog stages of technology — in power, moving straight to off-grid renewable energy without ever having polluting power generationplants. Vast forests and concentrations ofbiodiversity represent natural capital notavailable in most developed countries, which may become valuable as carbon sinks, watershed protectors or the researchlaboratory for bioprospectors that developingcountries are beginning to generate.

Eco-tourism opportunities in developingcountries clearly offer an experience that issimply not available in the developed world. Eco-tourism — responsible travel to naturalareas that conserves the environment andsustains the well-being of local people — is growing at almost 30% a year, comparedwith the 4% growth of general tourism. Eco-tourists are also found to be willing to pay more than the standard traveler. 41

The Conservation Corporation Africaoperates 27 lodges and camps in safarilocations spanning six countries — includingSouth Africa, Zimbabwe, Kenya and Tanzania. It is Africa’s largest eco-tourism group,employing approximately 3,000 people. Since the early 1980s, the company hassuccessfully raised equity from overseasinvestors by stressing the social responsibilityof its operations. Much of this foreign-generated capital has gone into theconstruction of four lodges at the 30,000hectare Phinda Game Reserve, in thesouthern part of Maputaland in KwaZulu-Natal, one of the most biologically diverseareas of the country.

Box 8The business case — private provision of public goods

The private provision of public goods, such as infrastructure and health care, is unique in making the business case forsustainability. Not only do they enhancethe providers’ bottom line, but the spill-over effects of the public good can besubstantial. IFC’s experience in thesesectors demonstrates how businessefficiency promotes sustainability. While economic and financial objectivesare usually the prime motivation fortransferring public services such asrailways, ports or water supply to theprivate sector, there can also be significantenvironmental and social spin-offs.

The provision of public goods by privateproviders in emerging markets can deliverimproved efficiency as a result of fewerresources being used to deliver the sameservice or the service being expandedwithout extra resources. Further, thebenefits of the expanded service orproduction can spread well beyond theproject, leading to greater opportunities for employment as well as communitydevelopment.

New jobs may be created in the expanded service, or often in the new small businesses set up to support thecommunity. For example, the investmentplan of a water concession in Latin America has created jobs for 15,000 smallcontractors. Throughout Latin America,affordable basic water services have been extended to all population groups.Access to clean water and power has also made it possible for schools, healthclinics and small businesses to be set up in poorer neighborhoods. The installation of sewage networks in some poorercommunities is an example of howcompanies have demonstrated their high level of community interaction.

Private investment in clean water andwastewater treatment can also haveimportant social spin-offs. Firstly, improvedsewage collection and treatment reversesthe trend of environmental degradation ofsurface water and public health problemscaused by lack of sanitation. Secondly,actions taken to reduce water losses fromthe system help to conserve undergroundwater resources. Finally, easy access toclean water can mean that girls can go to school rather than standing in line tocollect water.

Sustainability factor 6Community development

Companies can go beyond economicgrowth in a community and support itthrough provision of health, education,water and sanitation, helping fightcorruption and upholding indigenous andhuman rights. Support can be in the formof financial contributions or staff time andexpertise. Companies may also seek tomitigate their potential negative impacts,including the siting of operations, securityarrangements and relations with localgovernment.

Why it matters In many emerging markets the services,structures and human capital necessary for healthy communities may be absent to some extent. Local and nationalgovernments may not always be able toprovide basic services such as clean waterand power. Access to medical care andeducation may also be limited. Localpopulations may not have the skills andexperience necessary to establish and run civil society organizations.

Without such important elements ofinfrastructure and human capital,communities will be unable to provide the environment necessary for people toachieve their potential. Helping to ensureamenities are available to the communitycreates opportunities for social andeconomic development.

This kind of business support will help to build positive relationships, enhancecompanies’ reputations and provide asuitable environment for business success.In many settings such support has come to be expected of companies and in manycases the companies themselves do notconsider community development anoption but rather a necessity for doingbusiness.

Future trajectory As long as governments continue to lack resources or capacity to supplyinfrastructure and services for communitydevelopment, the expectations regardingthe role of business in this area will remainhigh. Companies which have embracedcommunity development have found it to be a highly effective means of improvingbusiness prospects. 42


The organic food market demonstrates the potential of environmental products. In Austria and Switzerland, organic productsrepresent as much as 10% of the foodmarket, while the US, France, Japan andSingapore are experiencing growth rates that exceed 20% annually. This is a majoropportunity, and emerging market supplierscan command premiums as high as 20% in these markets.

Café Mesa de los Santos is among thelargest producers and exporters of organiccoffee in Colombia. Its target market is North America, where the demand fororganic coffee is increasing 15% annually. In 1999, the company produced more than2% of all specialty coffee consumed in NorthAmerica, and there are plans to expand toJapan and Europe. Its coffee is sold at thehighest price paid in the marketplace.

Similarly, the São Francisco mill in Brazilproduces an organic sugar called Native,which commands a premium of 60% overcommon sugar. Sold in 24 countries, withannual revenues of $5 million, Native is oneof the largest producers of organic sugar in the world. As well as earning a pricepremium, the sugar costs less to producethan the common product because of costsavings from productivity improvements andsavings from the non-use of chemicals.

Vilniaus Bankas (VB), established in 1990, is the largest and most profitable privatebank in Lithuania and second largest bank in the Baltics. VB is the dominant player inforeign trade financing, corporate,investment and e-banking. It has adopted a proactive strategy on environmental issues by building up a small portfolio ofenvironmental investment loans as well as integrating environmental risks into itscredit appraisal systems. Several of thebank’s corporate and SME borrowers facesignificant environmental challenges,particularly as Lithuania has adopted EU environmental standards. VB identifiesand tracks these issues and has providedproject finance for the necessary capitalexpenditure programs, often as a co-financier with the State Environmental Fund.These pilot environmental investment loansare adapted to the Lithuanian economy,dominated by small processing plants andtrade, and the products have been in demandmostly for upgrades of heating systems, ISO 14001, and dairy farming. VB expects the demand to increase with EU integration.

Wind farm, India

Sustainability factor 7Environmental products & services

Analyzing environmental impactsthroughout the life of products andservices — from raw material extractionthrough to disposal — is recognized asincreasingly important. Though much focusis placed on production processes, impactsthat take place during the ‘use’ and‘disposal’ phase can be very significant (for example in the case of cars theenvironmental impacts of their use faroutweigh those associated with theirproduction). Product stewardship, orembedding environmental principles in its products and/or services, can helpreduce the overall impact of a product.

Why it mattersAs pollution from ‘point’ sources such as factories is addressed, a growingcomponent of the overall load on naturalresources comes from ‘diffuse’ sources,associated mainly with the use or disposalof products.

Companies that think proactively aboutthese issues and ensure that products and services are designed with the entirelife-cycle in mind are likely to avoid the negative impacts and potential costs of remediation or compensation, as well as reputational damage. Such productsmay also be able to attract a premium bylegitimately claiming to be environmentallyfriendly.

Future trajectoryThe focus of sustainability has shiftedslowly from process improvements toproducts and services and this is likely to sharpen further as international effortsintensify to combat climate change andimprove the impact of business on society.The development of environmentalproducts and services by new businesseswill present competition to existingsuppliers which will also intensify activityin this area. Emerging markets are likely to continue to play an important role in the development of these markets.


Natura, formed in 1969, sells cosmetics, personalhygiene products, perfumesand nutritional supplementsthroughout Latin America.

Sales in 2001 were 1.66 billion reais ($630 million), an increase of 14% over the previous year. At the beginning of 2002Natura employed 3,100 people directly, andhad 286,000 sales consultants in Brazil.

Natura believes that investing in the qualityof all its relationships is fundamental tocreating a united enterprise, attracting andmaintaining professional talent, establishingconstructive dialog with communities andachieving consistent economic results.

In 2000 it became a signatory to the UNGlobal Compact and also began to producean annual ‘balanço social’ (corporate socialresponsibility report) in accordance with the Global Reporting Initiative guidelines.Natura works hard on sustainability with its own workforce and in its supply chain.

There is an initial induction process for eachemployee in which the beliefs, values andobjectives of the company are explained. Suppliers are visited at least six times peryear by quality assurance staff. They monitoreconomic performance, compliance withlabor laws, health and safety, and workingconditions.

Environmental initiatives

The Natura Ekos line of hygiene and beauty products was launched in 2000,based on natural Brazilian flora extracted in a sustainable manner by local people. In partnership with Imaflora, an NGO whichoperates on FSC principles, Natura has alsocertified floral assets to guarantee that theyare extracted in a sustainable manner.

Other environmental initiatives includesupporting environmental restorationprojects in the 650 hectare Fazenda Bulcãoand of the Pomar project which promotesrestoration of polluted areas on the banks of the Pinheiros River. Natura also partnerswith TV Culture, the public broadcastingstation of São Paulo, on the BiodiversityBrazil project which includes production of documentaries and other programs about biodiversity in Brazil.

Social initiativesNatura’s Social Action Managementidentifies and develops social projects. For example, since 2000 product labels are printed at Laramara, an institution which cares for visually impaired people.

The company has also developed a programwith the Abrinq Foundation, an NGO thatpromotes the rights of the child, called‘Seeing is Believing’. The proceeds from a lineof special products support the developmentof educational projects involving 3,600schools and 768,000 children in Brazil. A total of 9 million reais ($3.4 million) hasbeen invested since the beginning of theprogram in 1995.

An amount equal to 10% of shareholder’sdividends is invested in social programs each year.

Business benefits

Natura believes it has benefited from:

— increased skills and motivation (human capital);

— improved ability to attract and keep employees;

— increased brand value & reputation, demonstrated by a high ranking in assessments by Ethos and the Good Citizenship Guide, prepared by Exame and Carta Capital magazines;

— consumer loyalty and willingness to pay a price premium — an annual study of Natura consumers has found that the company’s social responsibility is regarded as its most important attribute;

— better evaluation from financial institutions.

Challenges

It is necessary to embed sustainabilitythroughout the business, influencing thewhole production chain, engaging peopleand integrating sustainability intomanagement systems.

This can cause short-term disruption. For example, in 2000 Natura learned of an illegal supply of bark from the ‘candeia’ tree which provides an important extract.The company decided to suspend thepurchase of this item until the suppliersproved the product was totally legal.

The challenges also reach beyond thecompany’s own operations to increasing fair trade practices in the supply chain.

Natura laboratory

NaturaBrazil


This chapter has highlighted the keyopportunities and benefits identified by somecompanies from action on sustainability. The substantial body of real-life cases behindthis analysis demonstrates clearly thatsustainability action can deliver against the‘triple bottom line’ which considers social,environmental and economic benefits. Many more examples are on the website atwww.sustainability.com/developing-value.

As explained at the start of this chapter, thelinks between the six elements of businesssuccess and the seven sustainability factorscreate the business case matrix. The matrixshows the strength 43 of the evidence wehave found for each pair of business /sustainability factors (rather than thestrength of the impact, which we have notattempted to measure). The matrix belowsummarizes the linkages. It answers thequestion: How much evidence is there for a business benefit from a specificsustainability action?

The dark orange cells identify the strongestevidence. Companies are clearly realizing the business benefit described down the leftside of the matrix by taking the sustainabilityaction identified across the top. For example,a company making improvements in workingconditions is very likely to achieve greaterlabor productivity. These seven dark orangecells are the connections featured in theearlier part of this chapter.

The light orange cells, which fill the bulk of the matrix, represent links where there is evidence of business benefits, but theevidence is not as strong as the previousseven clear winners. For example, we foundevidence of improved access to capital fromall sustainability factors but there was nosingle factor with overwhelmingly strongevidence. Meanwhile, although we have not discussed the light orange cells in detailin this report, these are the areas where the business case may have the greatestpotential to strengthen in the future.Examples of companies already experiencingbenefits in these areas can be found in the database on the website. Six cells areuncolored. In these areas, such as costsavings from environmental products, we did not find any evidence of businessbenefits, although in all cases there are other benefits from the sustainability factor.

The lack of evidence does not necessarilymean that companies cannot achieve thesebenefits. It may be that the benefits are more difficult to measure or have not beenmeasured. On the other hand, if thesesustainability actions do not yield businessbenefits, then these might represent areas for governments and other players (see Chapter 5) to assess and redesignframework conditions and incentives tostrengthen the business case.

The business case matrix illustrates ouroverall conclusions, although there aresignificant variations. Some benefits weremore marked in some regions than others.The results also varied depending on the type and size of company, and the industrysector it operates in. These differencessuggest that companies need to considertheir own circumstances when decidingwhich sustainability opportunities to explore. These contrasts are explored further in Chapter 3.

It is also important to note that the businesscase is not static. As expectations anddemands from stakeholders grow, along withenvironmental and social needs, the businesscase will evolve. A few years ago theenvironmental and social agenda was widelythought to be a fringe movement. But todaycompanies are taking these concerns onboard as their customers, investors andemployees are examining their sustainabilityperformance along the whole value chain.The future will see this agenda becomemainstream and provide competitiveadvantage to companies which incorporatesustainability into their business strategies.

Limitations

The matrix shows where businesses can helpto achieve their objectives by taking actionwhich also furthers sustainable development.The grading of the cells in the matrix,illustrated by the color codes, indicates how confident we can be of the connectionbetween the two dimensions. It does not give any indication of how significant thebusiness benefit is likely to be, nor have we attempted to judge the scale of thesustainability benefit, because it depends on the case. It also does not show whichconnections will be stronger in future, butrather is based on the present experiences of companies. Future trends are discussed,however, throughout Chapter 2 and inChapter 5. We hope that others will beinspired to use the data we have gathered to investigate the links in greater depth, and that businesses will explore how theconnections fit their respective cases.

2.8The bestopportunitiesin summary

Pharmaceutical factory, India


Sustainability factors


Environmental focus


Governance & manage-ment


Environmen-tal processimprovement


Localeconomicgrowth





Figure 3 The business case matrix

Some evidence of a business case

No evidence of a business case

Strong evidence of a business case

Revenuegrowth &market access


Access tocapital


Human capital



The nature of this research also means thatwe have not gathered negative evidence. In other words, there may be cases wherecompanies have made environmental processimprovements, for example, which haveresulted in cost increases. It could also mean that an activity had no immediate (or short-term) tangible benefit, or thatnobody thought of observing the link torevenues, for example.

There can be no guarantees that a companywill achieve a business benefit even bytaking action which has produced thehighest scores in the matrix. The evidenceshows only that these opportunities exist. It is up to each company to find its own wayof capitalizing on the opportunities whichare relevant to its particular circumstances,as external conditions are important.Businesses must also see how certainactivities are linked in their own companye.g. transparency, communications,partnership with suppliers. In Chapter 4 we provide some tools for companies tobegin developing their own business case.

In context

It is important to put sustainability-focusedmanagement in context. It does not offer a magic recipe for success. It can contributeand add to success, but will not offset poorbusiness practices or compensate for baddecisions in conventional aspects ofmarketing, production or financial control. Nor should business activity be seen as the solution to a country’s sustainabledevelopment dilemmas. Business cancontribute to sustainable development — and benefit in return — but governments and other actors are key, as we highlight in Chapter 5.

Our research has been concerned withexamples of ordinary companies doingbusiness in a more or less ordinary way.These companies are not paragons of virtueand the fact that we have identified somesustainability benefits does not mean theyare doing everything right. In most casesthey have not followed what might be called a ‘sustainability strategy’ but haveacted in a piecemeal fashion.

It is likely, however, that the long-termbenefits of strategic actions will outweighthe short-term benefits from tactical fixes. As Eve Anneke, executive director ofSpier Holdings in South Africa observed, 44

‘A sustainable approach asks people to think differently and make a fundamentalleap in perspective. We find that whenpeople are able to see the difference, theirperspective changes.’

Answering the skeptics

We have found comprehensive evidence of the potential opportunities for businessbenefits from sustainability actions. Critics, however, raise several objections to corporate sustainability. We address them here:

Sustainability is a trade barrier designedto make it more difficult for emergingcountries to compete internationally.’

Corporate sustainability is primarily astrategic response to a changing externalenvironment. It is underlying shifts in publicopinion on the importance of environmental,social and governance issues which drivenew opportunities and risks. In some cases, public opinion leads to changes ingovernment regulations and policies, whichmay have the effect of raising standards andchanging the criteria for trading partners.This may in some cases be a sustainability-related risk for developing country exporters.But the risk to these exporters does not lie in companies’ focus on sustainability; insteadit is a focus on sustainability which is oftenthe best way for firms to mitigate that risk. The risks and opportunities targeted by most corporate sustainability strategies and programs are real — and require activemanagement. Success brings improvedaccess to markets and finance, helping build supply chain partnerships.

Sustainability will add unnecessary costs which many companies simplycannot afford.’

It is a matter of investment, not cost. Like any investment, companies must findthe resources and assess the paybacks. But this research has uncovered many caseswhere the paybacks have been swift andsubstantial, and it has shown that addressingthese issues is more likely to help companiesidentify cost reductions than add to their costs.

Sustainability interferes with the proper working of markets and distracts companies from their primaryresponsibility, which is to provide goodsand services profitably.’

Sustainability is a response to evolvingmarket pressures. Industrial and retailcustomers want to know that the goods they buy have been produced responsibly,with minimum environmental impact andoptimum gains to the communities affected.Sustainability is a new way of thinking about business. It will become a basiccharacteristic of many goods and services,just as price and quality are.

Sustainability is nothing more thanphilanthropy.’

The hundreds of examples on our websitewww.sustainability.com/developing-valuedemonstrate that sustainability is concernedwith the core of a company’s operations —the way workers are recruited and treated,dealings with suppliers and customers, and the impact of the products in use. These are central business issues. Philan-thropy can be a part of sustainability, but it is not a central part.

Companies are being asked to follow an agenda set by over-powerful NGOs.’

Sustainability is not about bowing to NGO demands. But NGOs represent manyimportant stakeholders and it is critical tounderstand their interests and concerns.Many companies have found benefit fromactively partnering with them. Businesspolicies remain the prerogative of ownersand managers but there needs to be adialogue so that all parties understand thethinking and constraints of the others.

For all these reasons, and the evidence fromover 240 cases, we believe sustainabilityoffers a positive agenda for businesses inemerging markets all over the world.

‘

‘

‘

‘

‘


Box 9‘The right thing to do’?

Some people feel sustainability action is a fundamental responsibility and thereshould be no need for a business case. This is reflected in business people sayingthey took initiatives simply because it was ’the right thing to do’. Looking for thebusiness benefit as a justification cantherefore be regarded as amoral. It impliesthat unethical behavior is acceptable if itpays, and that doing right is inappropriateif it damages profits. It is the kind ofposition which led the business world tooppose the abolition of slavery and theintroduction of decent working conditionsduring the industrial revolution in thedeveloped world.

The moral case argues that principle mustprecede profit, even if the two are notopposed. Profit is a necessary outcome, but the purpose needs to be rooted insomething more substantial, such as thesatisfaction of a societal need.

The reason why companies do notdeliberately kill or poison people is notbecause it is bad for business, but simplybecause it is bad. Bribery, lying andpolluting are not acceptable, regardless ofwhether they will be detected and there-fore result in financial damage. The resultis that companies must do right because itis right, not because it pays. Principle, notprofit, should be the point of departure.

We do not dispute the assertions made by proponents of the moral argument. Our response is that it applies tofundamental principles, but there are many areas of corporate activity that arenot matters of morality. The basic principlesare usually enshrined in law — andcertainly in United Nations declarations.But sustainability goes beyond legalminimums. Issues such as training andchildcare, environmental innovation orresponding to community concerns are not solely matters of morality. But they areareas where investment can help businesssuccess — and aid sustainability.

This box draws on the views of Sir Geoffrey Chandler, founder-chair of the Amnesty UK Business Group andformer senior executive with Shell. 45

Bamboo transportation, Indonesia

34 Developing Value

The concept of sustainability or corporatesocial responsibility emerged as a significantforce in Brazil during the 1990s. But theseeds were planted already during the 1980sin a sequence of social and political eventswhich definitively changed the attitude ofcitizens, including business community.

During the 1980s the country went througha process of re-establishing democracy. This was marked by vast participation of thepeople, culminating in a new constitutionand direct elections for president in 1989.

The impeachment of the president, only twoyears after his election, was imposed by anational commitment against corruption. Citizen participation and civil societyorganizations continued to grow during the1990s, fuelled by the Rio Summit whichpropelled environmental issues to the top of the world agenda, but also the campaignagainst hunger. This was led by Betinho (an intellectual and social leader responsiblefor many initiatives against poverty andhunger, ethics in politics and HIV patients’rights) and supported by an enormous groupof organizations of all kinds, includingbusiness leaders, from all over the country.

This tide of concern for environmental andsocial issues began a fundamental change in attitudes in the Brazilian business world.The social movements brought together free trade unions, political parties,environmental organizations, ethical bodies and associations promoting the rights of consumers, women and children.

The series of changes in the business worldhave developed and become more prominentover the last ten years. Many businessinstitutions were created to deal withthemes such as economic and environmentalsustainability, community and societaldevelopment, and corporate responsibility(such as the Ethos Institute — Business andSocial Responsibility). These organizationsare led by business men and women whoactively take part in different socialmovements.

Spending on social projects has also grownsubstantially. The Institute for AppliedEconomic Research (IPEA) reported that inthe last few years companies spent nearly$4.5 billion reais ($1.7 billion) per year insocial investment, beyond spending requiredby law. This figure is comparable with thefederal government’s spending on socialservices and assistance.

The IPEA found that two-thirds of thecompanies in the Southeast of Brazil (the most industrialized region in thecountry) have community projects. Half of these businesses are small companies.

The growth of interest in sustainability in Brazil can also demonstrated by thegrowth of the Ethos Institute. It began in1998 with 11 associate companies, and bythe beginning of 2002 nearly 600 companiesare associated with Ethos. Their turnoveramounts to more than a quarter of thecountry’s GNP. These companies want tosupport the movement and get informationabout ethics, transparency, employmentconditions, consumer relations, supplierinvolvement, community activity, theenvironment and government/societyrelations.

There are three main motivations forcorporate sustainability:

— The need to adapt to the international market — the Brazilian business community is marked by a large number of branches of multinational and export companies which are aiming at developed markets.

— The desire to bring about swift and significant improvements in poverty and the country’s extreme social differences.

— Concern to maintain natural and human resources for future generations.

The main challenge faced by companies is to develop a balanced style of managementthat maintains a focus on cost control, high standards of quality and other aspectsof competitiveness, but also aims forsustainable growth in accordance with the demands of civil society. Many Brazilian companies are getting involved in sustainable aspects but are still centered on the issues of cost and quality.

A second challenge is training managers and professionals who will work in thesecompanies in the new sustainability scenario.That is also a challenge for the teachers andtrainers of the professionals of the future.

We can identify already increasing company interest in reporting on social andenvironmental activities — a few companiesalready report following the Global ReportingInitiative or similar guidelines — and agreater engagement with projects aroundpublic issues and social development.

A view of the development of corporatesustainability in one country, contributed by Ethos Institute, Brazil. www.ethos.org.br

Car factory worker, Brazil

Sustainability inBrazil


The cases we have gathered demonstrate the many and varied opportunities forbusinesses to achieve their objectives while undertaking activities which furthersustainable development. The evidence set out in Chapter 2 confirms the businesscase for sustainability action, with somecommon threads running throughout. The strongest trend is that companies of alltypes in all regions can experience efficiencygains from investing in people and makingenvironmental process improvements.

In addition to some common trends, theexamples also show that the details of howthe business case plays out in each specificcompany differs. There is a multitude ofbusiness cases, with some interestingcontrasts between regions, sectors and types of company. The following analysis,based on the case studies gathered for this report, outlines some of the strongestdifferences by region and type of company,which are driven by the relevant context and business approaches.

Several of our case studies also suggest theimportance of sectoral variation. However,while we touch very briefly on sectoral issuesin the discussion of market focus, we do notattempt a comprehensive analysis, as therewere not enough examples in each sector.

Different types of company

We have divided the companies into the three broad categories indicated in Figure 4.‘National and multinational (MNC)’ refers to large companies based in the emergingmarkets, although they may have operationsand customers anywhere in the world. ‘Small and medium sized enterprises (SMEs)’are also based in the emerging markets, but are distinguished by their size. ‘Foreignmultinational (MNC)’ refers to companiesoperating in emerging markets but with their ownership based elsewhere — i.e. in oneof the developed markets.

Figure 4 Percentage of cases by company type

Others includes cooperatives and non-profit organizations, as well as studieswhich cut across types of companies.

Chapter 3The diversity of thebusiness case

Smallholder, Hungary

Others 10%

Foreign MNCs 20%

SMEs 10%

National and MNCs 60%


Small and medium sized enterprises(SMEs)

Key trends— Cost savings and revenue growth

demostrate the strongest benefits.— No examples of enhanced access to

capital or risk management.— Environmental products more

important than for other categories.

For SMEs, many of which operate in survivalmode, even small changes in revenues andcosts are critical, time horizons are short,and access to capital is problematic. The external sustainability drivers tend to be weaker, as these companies are likely tobe under less public pressure than largerbusinesses to demonstrate high social andenvironmental standards.

Nevertheless, the examples in this studyshow that a business case does exist forSMEs. It focuses overwhelmingly on costsavings (accounting for nearly half of theSME cases, most based on environmentalprocess improvements), as well as revenuegrowth & market access (over 40%).Governance & management also contributedto both cost saving and revenue growth.

None of the SMEs in this study benefiteddirectly from greater access to capitalbecause of sustainability activities. Indirectly, the increase in revenues andreduction in costs increased profitability,thereby improving credit worthiness.Enhancing SME access to capital is one area the World Bank Group has highlightedas a priority within the SME LinkageProgram. Among other objectives, theprogram seeks to develop viable localfinancial intermediaries to support SMEs.

Some SMEs are leading the way ininnovation, employing ‘alternative businessmodels’ (see Box 6, page 16) to achievebusiness objectives by generating both social and economic development or creating environmental products. Examplesinclude eco-tourism, microfinance, organicagriculture and ‘digital dividend’ projects. For example, the Campements Villageoisin Senegal are successful eco-tourismdevelopments. Local people plan, build,operate and manage the ‘campements’, with major decisions open to the wholevillage. Since 1974, 400 bed spaces havebeen created in 19 Campements Villageois,for a cost of around $140,000. Theyrepresent 10% of the alternative tourismsector in Senegal, with annual receipts from tourists totaling around $138,000.

National companies and MNCs based inemerging markets

Key trends— Cost savings strong, but focus on

revenue growth weaker than for SMEs.— Greater focus on risk management

and brand value & reputation.— Governance and socio-economic

growth were stronger factors than for other categories of companies.

As for SMEs, over half the examples ofnational companies and MNCs enjoyed the greatest benefits in the form of costsavings (60%). However, unlike the SMEs we analyzed, for which savings derivedmostly from environmental process andgovernance & management, the benefitshere came from almost all the sustainability factors.

Several national companies and MNCs alsobenefited from sustainability in two wayswhich SMEs did not — through improved risk management and access to capital. One-fifth of the companies in this categoryalso enjoyed improved reputation, whichresulted from a wider variety of sustain-ability factors than for SMEs, in particularhuman resource management andenvironmental process.

One example of reputational benefits is theHaiha-Kotobuki joint venture in Vietnam.Working with a number of local partners, the company helped develop programs forthe prevention and control of HIV/AIDS. The company’s deputy director has identifiedcorporate reputation as one major benefitfrom the partnership. ‘Instilling public trustin a company’s quality products and theprocedures involved in providing the productto the public is vital to our success.’ 46

Foreign MNCs

Key trends— Stronger focus on intangibles than for

national companies.— Governance and environment are less

important as sustainability factors than for other categories of company.

We found examples of foreign MNCs which experienced financial benefits from improved sustainability in all areas. But compared with companies based inemerging markets, cost saving was a lessimportant benefit (29%). Risk reduction(24%) and human capital (11%) weresomewhat more important.

Interestingly, environmental processimprovements and governance &management show up less as sustainabilitydrivers of financial performance for foreignMNCs than for companies based in emergingmarkets. This may be a result of companiesbased in developed markets differentiatingthemselves less through these factors. These companies are more likely to focus ondeveloping their own global standards thanusing certification schemes, for example.

As with national companies, riskmanagement was an important aspect of sustainability contributing to businesssuccess for foreign MNCs. Driven by a widevariety of stakeholder pressures both in theirhome country and their country of operation,MNCs based in the developed markets morefrequently derive benefits from engagementand social development activities as a meansof managing risk and maintaining their locallicense to operate.

MNCs analyzed in our study alsodemonstrated a willingness to move beyondtraditional concepts of social developmentsuch as community development. Some have chosen to analyze the social impacts of their products and processes and takensteps to mitigate those that are adverse. One such example comes from Henkel Chile,a producer of adhesives and other householdproducts. As part of its production ofadhesives, the company used toluene, an organic solvent also frequently used as an inhalant by children from poor andmarginalized social groups. In large orfrequent dosages, toluene has been shown to have irreversible negative impacts on the central nervous system even leading to death in extreme cases.

To limit availability of the substance in thecommunity, in 1995 Henkel Chile developednon-intoxicating substitutes for toluenesolvents. Despite expected start-up costsassociated with such a change in product,the company has increased its market shareand enjoyed excellent public relations as aresult of its decision. Finally, Henkel Chilewas well ahead of its competitors whenChilean law was changed three years later to ban the use of toluene solvents inadhesives.

37Developing ValueDeveloping ValueChapter 3

Business success factors Revenuegrowth &market access


Access tocapital


Human capital


Governance & managementStakeholder engagementEnvironmental process improvementEnvironmental products & servicesLocal economic growthCommunity developmentHuman resource management


Figure 5 Percentage of SMEs showing specific business cases

60%

50%

40%

30%

20%

10%

60%

50%

40%

30%

20%

10%

60%

50%

40%

30%

20%

10%

Figure 7 Percentage of foreign MNCs showing specific business cases

Figure 6 Percentage of national companies and MNCs showing specific business cases


Differences by market focus

In addition to the type and size of company, we found that market focus —whether the company trades domestically or internationally — had a significantinfluence over how often firms gained from sustainability. This difference is also in part a reflection of sectoral differences,with resource-based sectors and agricultureand textiles more heavily represented among export-focused companies, andservice industries more typical ofdomestically-focused companies.

Export-oriented companies are more likely to concentrate on meeting internationalenvironmental and labor standards, and on adherence to recognized managementsystems. In some cases, companies becamemore competitive internationally, gaininggreater access to international markets andcustomers, and sometimes price premiums.This is especially true for those companiesreceiving recognized certification (see Box 5,page 13).

SMEs are also taking advantage of theseopportunities — combining them with thedevelopment of environmentally and sociallybeneficial products, such as organic and fair trade agricultural goods.

Companies focused on the domestic market,on the other hand, respond to a wider rangeof local societal pressures, but also reapmore diverse rewards. They are more likely to gain from local economic and communitydevelopment, focusing on their license tooperate, which helps them further their ownrevenue growth. Stakeholder engagement is another way companies producing fordomestic consumption lower risks and cost.Domestically-oriented financial servicesfirms have been particularly successful atgaining improved access to capital throughgovernance improvements.

The following chart illustrates the differentimpacts on these dimensions.

Figure 8 Impacts and opportunities

International

Local

International

Local — Environmental process

— Human resource management

— Management systems, including certification

— Cost savings — Market access

To improve competitiveness and innovate

— Environmental process

— Engagement

— Cost savings — Risk management

To develop business models to source and supply goods in ways that meetsociety’s needs and expectations:— through local SMEs and

supply networks

— Environmental product

— Local economic growth

— Revenue growth— Market access

To develop niche, premium markets:— organic— certified forest products— eco-tourism— fair trade

— Local economic growth

— Revenue growth — Market access

To provide basic and sustainable services:— connectivity

(digital dividend)— power

(solar, off-grid)

Large companies

SMEs and localentrepreneurs


Market Impacts Opportunities

Zen car production, India

39Developing Value

History

Business efforts towards sustainability in the Philippines date back to before the 1970s, and began in the form ofphilanthropy. Wealthy families belonging to the ‘illustrado’ class and individualinternational businesses led the trend ofmaking donations to support communities. In 1970, the business sector came togetherin response to the turbulent situation in the country with 50 of the country’s topcorporations pooling resources to formPhilippine Business for Social Progress(PBSP), with an initial focus on povertyalleviation and building social capital.

In the 1980s businesses began to realizethere was a business case for communityinvolvement, as it helped to improverelationships which might otherwise beconfrontational. This trend has continued,with companies understanding the need to build reputation as a route to competitiveadvantage. The emergence of thinkingaround sustainable development broadenedcompanies’ understanding of corporateresponsibility. This has led to the notion of stakeholders being critical to businesssuccess rather than merely participants in transactions.

Sustainability now

Concerns about the impact of globalizationand the development of internationalstandards, especially for labor conditions,have helped drive business to look into their internal and external practices. Thegovernment has also provided an impetuswith legislation such as the IndigenousPeoples Rights Act (IPRA), the Mining Actand the Fisheries Code which highlights theneed for stakeholder engagement.

The NGO sector is a very powerful driver and traditionally the business sector hasbeen wary of dealing with it. The feeling hasbeen mutual — some NGOs have mistrustedbusiness deeply, especially during the Marcosregime. But over the past few years, thebusiness community and civil society havestarted to work together and identify areasof collaboration.

Consumers, on the other hand, do not have the purchasing power to pressure the business sector. With about 30% of the population below the poverty threshold,what matters is the price of the commodityand not how the product was made. The government has recently made goodgovernance one of the key pillars of itsadministration, and is the first country toadopt the Asia-Pacific Economic Cooperationframework of corporate governance reform.

The social, economic and political context of a given country plays a very importantpart in the whole business sustainability anddevelopment discourse. In the Philippines,factors such as the conflict in Mindanao,labor disputes, corruption and lack of basicinfrastructure facilities are ongoing problemsthat affect business.

Priorities

PBSP recognizes and encourages members to work on four areas:

— Social investment with potential benefits from a higher quality workforce, improved reputation and returns from investments in social enterprises.

— Corporate-community partnership to empower communities, ensure respect for social and cultural values and validate companies’ license to operate.

— Environmental stewardship to mitigate adverse impacts of operations on the environment.

— Managing workplace concerns to provide an enabling working environment, including good health and safety conditions and the provision of appropriate benefits, protect human rights and promote the spirit of volunteering.

PBSP’s CSR Impact Report finds that thestrongest positive impacts companiesexperience are improved human andintellectual capital, stakeholder acceptanceespecially from local communities,operational efficiency especially fromresource efficient technology, reputation and managing risk of negative publicity. On the other hand, the evidence of eco-efficient practices improving their financialperformance is weaker. Companies also findweak evidence that CSR practices reducetheir security costs or vulnerability to bribery.

The future

Most companies need to work oncommunicating sustainability policies andprograms to stakeholders and on measuringimpacts. Businesses face the challenges ofdwindling resources, increasing stakeholderdemands and corruption in the political,social and judicial systems. Costs are abarrier to business pursuing sustainability.More documentation and sharing of goodpractice, and better evidence of the businesscase from empirical studies, would helppeople to break out of this old paradigm.

A view of the development of corporatesustainability in one country, contributed bythe Philippine Business for Social Progress —Center for Corporate Citizenship .www.pbsp.org.ph

Intercropping, Philippines

Sustainability in the Philippines


Sub-Saharan Africa17%

East Asia & the Pacific13%

South Asia12%

Central & Eastern Europe12%

Middle East &North Africa 3%

Various3%

Latin America & the Caribbean38%

Figure 9 Percentage of cases by world region

Regional differences

Attitudes to sustainable development varywidely from region to region, and evenwithin regions. While broad generalizationscan be dangerous, the case studies weanalyzed showed some regional differencesin the opportunities being grasped bycompanies.

This does not necessarily mean thatopportunities are not available to somecompanies, just that local priorities andpressures play an important role in theparticular benefits being experienced inthose regions. It also suggests that there is potential for cross-regional learning, both for the corporate sector and for otherstakeholders that wish to help companiesimprove their sustainability activities(discussed in Chapter 5).

The discussion below considers five regions —East Asia & the Pacific (countries east ofBangladesh and south of Russia); South Asia(Bangladesh, India, Nepal, Pakistan and Sri Lanka); Sub-Saharan Africa; Central &Eastern Europe and Latin America & the Caribbean.47 In all regions except SouthAsia, the strongest evidence of a businesscase was for eco-efficiency — a fifth of all cases in the study. To focus on thedifferences, the ‘key link’ indicated on themap on page 41 thus refers to the strongestlink apart from eco-efficiency.

East Asia & the Pacific

Companies in the region experienced strongbenefits from environmental and socialmanagement systems, particularly thosewhich are internationally recognized, such as ISO 14001 and SA8000. Production for the global market is important for many East Asian and Pacific companies, andcertification systems can help them wininternational customers. The Hua HuiIndustrial Company in China, for example,which makes toys and dolls, found thatSA8000 certification helped it to acquirenew customers and access new markets,with orders up by 30%.

Interestingly, however, cost savings were the main benefit from implementation of these management systems, even in cases where they were developed to meetcustomer demands. In a survey in Thailand,48

for example, 76% of the respondents said they achieved cost savings from ISO 14001.More than two-thirds said they also achieved greater efficiency.

The 1997 Asian crisis has been influential inspawning calls for greater transparency andbetter corporate governance in the region.There are some examples of companiesstarting to benefit from improved corporategovernance, such as the Bank of Shanghai(see page 9).

It is notable that East Asian companies didnot show significant benefits from bettercommunity relations. This may reflect a lackin some parts of the region of strong NGOs,trade unions and consumer groups, whichcan be important in raising issues andstimulating corporate responses. A globalstudy by Environics International 49 foundthat only 8% of citizens in Asia had punishedcompanies for being socially irresponsible,compared with 23% in Latin America and42% in North America.

South Europe & Central Asia2%


South Asia

Social issues such as harmful child labor, fair labor practices and community welfareare more prominent than environmentalconcerns in South Asia, the only region for which eco-efficiency benefits were not common. In some countries, such asIndia, large companies commonly providecomprehensive welfare benefits foremployees — well beyond what would beexpected in developed countries, such assubsidized housing, children’s education and development resources for neighboringcommunities.

But that is not to say that the environment is not important. A survey in India found that the general public perceives the primaryrole of companies to be providing qualityproducts at cheap prices, but then expectsthem to ensure that operations areenvironmentally friendly and that employeesare treated fairly in accordance with globalstandards. 50

Himal Power made the first direct foreigninvestment in Nepal’s hydropower sector. It built a separate small power plant for thesurrounding rural community, which is notconnected to the grid. In addition, it providesboth human resources and infrastructuretowards the improvement of social servicesaround its facility and supports local serviceproviders. Its community outreach programcontributes to good community and localgovernment relations. As a result, it hasremained largely unaffected by the civilconflict that has threatened developmentefforts throughout much of the country.

Companies in South Asia also experienceimportant reputation benefits from socialinvestments. For example, the extensivesocial development program of Tata Ironand Steel in India promotes positiveindustrial relations, as well as generatingcommunity rapport and good relations with local government.

In contrast to East Asia, we did not find any evidence that corporate governance hasbeen a major factor in South Asia.

Sub-Saharan Africa

Despite significant commercial pressures in Africa, there was substantial evidence of a business case in the social areas, as well as a stronger focus on humanresource management than for South Asia.Companies in Africa with a proactiveapproach to managing the labor force areexperiencing increased productivity andmotivation, and lower staff turnover.

Some of the community focus may derivefrom governments’ unwillingness or inabilityto provide services. Ayo Ajayi, managingdirector and CEO of the UAC in Nigeria, says,‘In developed countries, governments provideeducation, health, law and order. In Africa,these are areas where companies are likely to use up their CSR budget. Good leadershipis lacking in Africa.’ 51

Health is an important issue, with companyactivities ranging from focusing on safeworking conditions to HIV/AIDS initiatives.These issues are clearly urgent, and can place demands on companies to develop andimplement prevention and care strategies.

Figure 10 Strongest business case link by region (apart from eco-efficiency)

Central & Eastern Europe Environmental processimprovement = Revenue growth &

market access

Latin America & the CaribbeanHuman resource management = Cost savings &

productivity

Sub-Saharan Africa Human resourcesmanagement = Cost savings &

productivity

South Asia Local economicgrowth = Revenue growth &

market accessCommunitydevelopment = Brand value &

reputation

East Asia & the Pacific Governance &management = Cost savings &

productivity


While it is difficult to quantify costs andbenefits of HIV schemes accurately, onestudy found that the total cost per new HIV infection (due to sick leave, productivity loss, recruitment, training, etc.) is likely to be greater than the cost of treatment andcare to keep employees in the workforce. 52

Companies in Africa have also benefited from revenue gains through the developmentof environmental products & services,including organic agriculture and eco-tourism. For example, the EPOPA program in Uganda was set up to develop organiccotton for export, thereby enabling producersto benefit from access to new internationalmarkets and a price premium in some casesof 50% over non-organic cotton. In addition,prices for organic cotton tend to be far morestable than prices for non-organic, adding a degree of certainty to the productionprocess for these farmers.

Central & Eastern Europe

Opportunities to benefit from environmentalprocess improvements are especiallyprevalent in Central & Eastern Europe, where the strongest business case evidenceis for revenue growth and cost savings.Companies pursuing these improvements can also help address the legacy ofcommunist era pollution and preparethemselves for possible future EU accession.

At the Estonian textile company Krenholm,investment in acquisition of moderntechnologies is addressing reduction in water use and energy efficiency — includingmore efficient lighting and installation of a new gas fired boiler. Reduced resourceconsumption has led to reduced costs.

The companies of the region have also saved costs with the assistance of cleaner-production programs such as those of theWorld Environment Center and participationin the EU’s Phare program, as well as frommanagement systems.

Latin America & the Caribbean

The most important link in Latin America(after eco-efficiency) was for cost savingsand higher productivity from good humanresource management. This emphasis onlabor force issues may also derive from the strong trade union tradition in manycountries, although the role of trade unions has generally weakened in the last few decades.

Good human resource management can alsobring benefits when it encourages greaterworker loyalty. In one survey in Peru, 92% ofexecutives and 94% of workers interviewedindicated that increased employee loyaltywas a benefit of corporate sustainabilityaction. Community development activitieshave also been important in Latin America,helping companies to build trust andlinkages with local communities.

License to operate is a particularly importantconcept in some regions of Latin America,where the legitimacy of official institutionsis often weak and communities may not, inany case, accept an official permit grantedby the government.

The evidence shows that Latin Americancompanies have improved their access tocapital through actions in all sevensustainability factors — a fact that did nothold true in any other region. Governance & management systems and environmentalprocess improvements demonstrate thestrongest link to access to capital for thesefirms. Sadia, a poultry and pork processor in Brazil, has extensively upgraded its healthand safety policies, making the companymore attractive to international investorsand helping its recent listing on the NewYork Stock Exchange.

Finally, in the cases we gathered, LatinAmerica is the only region apart from Africawith examples of companies benefiting fromenvironmental products & services (althoughother research 53 has found evidence thatAsia and Central & Eastern Europe areachieving strong growth in environmentalproducts). Companies have increasedrevenues and accessed new export marketsthrough organic products such as coffee inColombia and Venezuela, and sugar andheart of palm in Brazil.

Box 10Business case in developed anddeveloping markets

In 2001 SustainAbility published a report,Buried Treasure: Uncovering the BusinessCase for Corporate Sustainability, whichfocused on developed markets. These are the key similarities and differencesbetween the findings of the two studies.

Similarities— Environmental process improvement

is by far the strongest factor in both studies, with evidence of strong cost savings.

— Human resource management is a strong category in both studies, with a strong link between workplace conditions, training and increased productivity.

Differences— There was stronger evidence for revenue

growth, access to markets and cost savings in emerging markets.

— Brand value & reputation are more important and more strongly correlated to sustainability in developed countries.

— Human capital was more important in developed countries.

— Community development is seen primarily as an overhead in developed countries. In emerging markets it is important in retaining the license to operate and reducing risk.

The key difference is that emerging marketcompanies are more concerned with short-term cost savings and revenue gains, whilebrand value and reputational issues aremore significant in developed countries.This could suggest that, as companies gainbusiness stability and operate in anincreasingly global world market, intangibleassets like brand value, reputation andhuman capital will become more importantbusiness drivers for emerging marketcompanies than cost savings and revenuegrowth.

43Developing Value

The emphasis of sustainability in SouthAfrica has been on the social rather than environmental aspects. This can beattributed to the country’s isolation duringthe apartheid years, and the poverty andsocial problems in black communities that the country is now seeking to address. ‘Corporate Social Responsibility orInvestment’ (CSR/CSI) is thus the preferredterm to describe business commitment to sustainability.

Some companies have a history of highlyinnovative, cutting edge work that wascarried out almost clandestinely to deal with some of the problems of apartheid. On the other hand, some companies havetraditionally not been as involved and have recently come to the realization thatthey need to make a contribution.

CSR is in the process of maturing from beingmainly a philanthropic add-on to becomingpart of business strategy, at the heart of thebusiness, and with a potential benefit for the bottom line. So far, few companies haveprogressed very far in this direction, however.Many are struggling to understand what to do and how to ensure the best impact.Some overseas firms are coming to termswith the significant role and contributionexpected of business in South Africa.

Large companies are involved directly (albeit informally) through the President’sBig Business Working Group, which hasagreed a framework for the encouragementof fixed investment and has held high-leveldiscussions on issues such as Zimbabwe,black economic empowerment, the budget,obstacles to investment and land reform.

The key drivers have been the need for socialstability, better education and economicgrowth. The King Reports deal with the need for companies to demonstrate strongcorporate governance, especially King II.

Health has risen up the agenda in the lastfew years, especially driven by HIV/AIDS and employees pressing for improved health provision. Investors have also begunto be concerned about companies’ socialperformance.

The role of key players

Government has helped by clearlyarticulating socio-economic priorities. Business organizations such as the NationalBusiness Initiative (NBI) have helped tosensitize business to social responsibilitiesand to implement CSR in line with thegovernment’s priorities.

There is also a growing acceptance of thebenefits of working in partnership, even insome cases with competitors, in support of the bigger picture.

The NGO sector played a large role indeveloping and implementing CSR prior tothe democratic government, but has sincebeen hampered by funds being divertedthrough the government. NGOs are changingto maintain support, becoming moreaccountable, relevant and business-like.

Trajectory

There is a growing understanding of the key role business has to play in developingthe South African society and economy. This trajectory could be given an addedimpetus by four factors:

— A large number of new businesses will mature and make their contribution, particularly information technology companies and black businesses.

— Consumers could become stronger in pushing for CSR in the companies they buy from. This needs to develop as a force in South Africa.

— Social pressure on companies has not been as significant as in some countries. Civil society is developing, as has been demonstrated recently in campaigns over the provision of anti-retroviral drugs in the fight against HIV/AIDS.

— Environmental issues are a very new concept for this country. Those issues that affect our children, our health, shelter and food will become more of a rallying point for lobbying.

The NBI believes that business mustcontribute to building a stable democracy in which a market economy functions to the benefit of all. Business has a duty andopportunity to contribute to public policy,social development and economic growth.

Business collective action needs to focus on aspects where public and businessinterests intersect. South Africa will succeedonly through the empowerment of all people through basic education and skillsdevelopment to support economic growthand job creation. Thus the NBI believes thepriorities of CSI in the country are skillsdevelopment and job creation.

A view of the development of corporatesustainability in one country, contributed bythe National Business Initiativewww.nbi.org.za

Tourists, South Africa

Sustainability inSouth Africa

Businesses may be aware of the potentialopportunities in sustainability action, butmay be reluctant to move forward becausethe subject seems to be beyond theirexperience and expertise. In fact, theevidence reported in the previous chaptersdemonstrates that companies can seizecertain opportunities without necessarilybeing or ever becoming ‘sustainabilityexperts’. This chapter outlines how ownersand managers can identify their own specificopportunities, possibilities and priorities.

This is a generic approach rather than auniversal prescription which can simply beimplemented by any business. As we haveshown in previous chapters, there is no single business case for sustainability action.There are many business cases, but eachcompany has to develop its own rationale,and the case will change over time.

Business sustainability must be rooted inpracticality and flexibility in the same way all other aspects of management are.The business case is as dynamic as thebusiness world. So sustainability plans haveto be flexible, fitting in with the changingneeds of the business as well as thechanging expectations and needs of society.

It is not necessary to develop a full-blownsustainability strategy before taking action.Many businesses find that small, discreteactions can yield benefits. But ultimatelyintegrating sustainability in core businessstrategies will provide longer-term benefits,maximizing the alignment of business, social and environmental objectives. Again,this is consistent with other aspects ofmanagement.

In the words of María Emilia Correa, vice-president for social and environmentalresponsibility at Nueva Group in Costa Rica,the fundamental business case question ishow can sustainability help the company winmarket share? ‘Saving money is an engineer’smentality — get your head out of it and thinklike a CEO. Environmental management islike any other line of business. Be strategic!’


Step 1Analyze your business

— Key businessdrivers

— Opportunities andthreats

— Strengths andweaknesses

Step 2Develop strategy

— Operational versusstrategic

— Compliance versusbeyond compliance

— Risks versusopportunities

Step 4Monitor and reviewprogress

— Monitor— Communicate— Learn

Step 3Plan and implementstrategy

— Roadmap— Clear objectives— ‘Low-hanging fruit’— Training— Linkages

Figure 11 Four steps to monitor and review progress

Chapter 4Getting started onsustainability

Construction site, Thailand

‘Saving money is an engineer’s mentality — get your head out of it and think like a CEO. Environmental management is like any other line of business. Be strategic!’María Emilia Correa, vice-president forsocial and environmental responsibility Nueva Group, Costa Rica

Four steps to add value to your business

This report has helped to uncover areas of business potential in sustainabledevelopment. The challenge for managers is to apply these findings to improveunderstanding of the links betweensustainability performance and businesssuccess in their own organizations. Below, we offer a basic four-step approachto help companies begin that process.

Step 1Analyze your business

The first step — as for any other businessprocess — is to analyze the business situationand priorities. Our business case matrix inChapter 2 might provide a useful referencepoint to identify and prioritize sustainabilityissues relevant to your business, and theirlinks to business performance. Considerationof the company’s strengths and weaknesses,opportunities and threats — a SWOT analysis— will help create a better understanding ofhow business success is affected bysustainability.

— Key business drivers What are the key business drivers? For example, is a good reputation withcustomers paramount? Would improvingproductivity, for example through reduceddowntime and absenteeism, give you areal competitive edge? Would reducinginsurance premiums by reducing risk be aserious cost-saver?

— Opportunities Are there untapped opportunities foraction on environmental, social and/orgovernance issues? As we demonstratedin Chapter 2, these could includeincreased productivity and reduced staffturnover from better human resourcemanagement, reduced costs fromenvironmental process improvements,access to new markets or premiumproduct pricing, or a lower cost of capital.

— Threats What are the threats to the business from the emerging sustainability agenda?These could be coming from issues suchas conditions in the supply chain, lowworker productivity, reputational risks toyou or your customers, or increasinginformal barriers to trade (e.g. productstandards imposed from elsewhere).

— Strengths and weaknesses What are the business strengths andweaknesses which will determine yourability to respond to sustainabilitychallenges, opportunities and threats? Do you have the skills and expertise tomanage this emerging set of issues, orunderstand how to gain this expertise?

This is just sound business planning appliedto sustainability. The process needs toconsider short, medium and long-termperspectives and to draw on the insights and experience of many people from withinand outside the company. Good internalcommunications are important. They help to gain clarity on a company’s strengths and weaknesses as well as to provide a goodopportunity to learn from earlier successesand failures. An inclusive process also helpspeople to become confident about theircapacity to undertake specific actions, aswell as to build commitment and motivation.

Early engagement with external stakeholderswill add important insights into theirconcerns and priorities, which will help inunderstanding the trajectory and relevanceof sustainability issues. Engagement withstakeholders such as the government, localcommunities and NGOs helps managersunderstand their expectations and concernsaround the company and to make an earlyassessment of opportunities and threats. Such engagement could be in the form ofsmall informal conversations or more formalstructures like facilitated dialogues. It couldaddress short-term, specific issues or helpwith the development of a long-term vision.

While there are many advantages ofengagement the risks should not beunderestimated. External dialogue brings a company into the public eye. This greaterscrutiny will make it critical that thecompany ensures stakeholder expectationsdo not exceed its ability to deliver.


Figure 12 What stakeholders might expect companies to provide

NGOs

Naturalenvironment

Localcommunity

Employees

Government

Qualityproducts

Reduced risk

Transparency

Cleanerprocesses andproducts

Better workingconditions,developmentopportunities

Compliance

Company

Help withsocio-economicdevelopment

Consumers Investors

Clearguidelinesand bestpractice

Businesspartners


Step 2Develop strategy

The analysis in Step 1 should produce abetter understanding of the sustainabilityissues facing the business as well as thecompany’s ability to deal with them. The response to these issues needs to beright for your business — the business casefor sustainability is not a one-size-fits-allproposition. The strategy needs to build onthe issues identified in Step 1 and reflect the following key considerations:

Distinguish operational from strategic actions The action taken could be at a basicoperational level, e.g. changing theproduction system to reduce theenvironmental emissions from a plant, or at the strategic level, putting in placeoverall governance and managementsystems. For instance, Bank of Shanghaiin China put in place better governancestructures that had an impact throughoutthe company (see page 9).

Distinguish compliance measures from projects which go beyond complianceThe strategy could be merely to ensure that the company is in compliance withregulatory requirements. Or sustainabilityfactors could be used as one of the marketdifferentiating factors to gain competitiveadvantage and leadership in the field. For instance, Natura in Brazil has based its entire strategy on the provision ofproducts that are environmentally andsocially superior (see page 29).

Distinguish between risk and opportunities The issues identified in Step 1 may representrisks or opportunities, or both. For example:

— Risk of future regulation could triggeradvanced environmental requirements in one of your key markets. The potentialopportunity could be access to a widermarket and first mover advantage amonglocal competitors through investment in higher standards. A good example isCembrit in the Czech Republic whichremoved asbestos prior to regulation andcould expand its market into WesternEurope as a result (see page 21).

— Risk of a major customer adopting newenvironmental or social standards in theirsupply chain could require substantialinvestment. It could also bring anopportunity for greater technical andcapacity-building support from thecustomer and possibly guaranteedcontracts.

That could open up access to newcustomers that require similar standardsand the opportunity to improve overallmanagement systems. For instance,Century Textiles, India, was able to gain new customers once it was awardedthe Eco-Tex certification which wasrequired by its German customer.

— Risk of political unrest near a key production facility due to ethnic tensioncould cause workforce problems andreduced productivity. The potentialopportunity would be to engage openlywith the community, provide support to marginalized groups and give equalopportunities for employment. This would strengthen the company’s licenseto operate while also improving retentionand motivation among employees. For instance, Anglo American’s Zimeleproject helps develop the communitythrough financing and developing small business. This helps in blackempowerment in South Africa, builds local economies as well as helps AngloAmerican gain in employee motivation,reputation and local license to operate(see page 20).

Step 3Plan and implement strategy

Planning and implementing sustainabilitystrategies requires the same disciplines as any business process:

RoadmapPrepare a roadmap which clarifies the keystages, success factors and indicators.

Clear objectives Set clear objectives for each stage, and the desirable outcomes.

‘Low-hanging fruit’ Start with the easy successes which buildconfidence and enthusiasm among theworkforce, and yield the simplest financialpaybacks.

Training If necessary, provide training and develop internal incentives for delivery, as with any organizational or business change.

LinkagesIn implementation, consider linking up withothers. Connectivity is an important aspectof sustainability. Stand-alone action isalways possible and can yield dividends, but linkages inside and outside the businesscan have a multiplier effect.

Links can be made to:

— Other company plans and goalsSustainability plans should match business priorities and available resources and mesh with the company’s overall approach to risk management.

— NGOsThey possess enormous expertise which can often be tapped to help understand issues, identify solutions, plan and implement appropriate action.

— Business/industry sector associationsThere can be synergies from working together on common issues across a sector or value chain, especially where solutions require cross-sectoral support and individual companies can have only a limited impact.

— Other initiativesGovernment departments or organizations such as the World Business Council for Sustainable Development (WBCSD)54 or the United Nations Global Compact,55 might be looking at similar issues. Joining such initiatives can save time, energy and possibly money.

Step 4Monitor and review progress

This is a rapidly changing and evolvingagenda so it is important to review thestrategy periodically as well as to checkprogress against the targets which have been established. This will allow the strategy to evolve in line with business needs and keep key personnel focused:

MonitorMonitor performance and measure progress to keep on track.

CommunicateBe transparent and communicateperformance against targets, internally and externally wherever possible.

Learn Learn from successes and failures, as well as changes in the business and sustainability environment, and feed the learning back into the process so that plans can be adapted.


Sustainability is a journey — keep going

The trajectory of sustainable developmentbecame steeper throughout the 1990s andshows every sign of continuing in the samevein. This means that the pressures oncompanies are likely to continue growing,increasing both risks and opportunities.Doing nothing, or taking very limited action, is in itself risky. Companies are likely to find that risks can be minimized and opportunities maximized by seeingsustainability as a journey, with each stepbuilding on the previous ones.

This fits with the management philosophy of continuous improvement, in whichcompanies constantly seek to achieve higher standards in all areas of the business.As we have mentioned, small sustainabilitysteps are valuable and bring benefits. But if these are built into a long-term vision or strategy, they have the potential tocreate longer-term competitive advantage.

Like every aspect of the businessenvironment, but perhaps more volatile than most, the sustainability agenda isdynamic and evolving. New issues willemerge, presenting new opportunities and risks. Assuming the upward trajectory of sustainability continues, demands oncompanies will increase. But this should be seen as an opportunity: well-managedcompanies which are aware and cananticipate the direction and nature ofchanges can capitalize on them. Withappropriate systems and processes in place, companies can be well placed toaddress the sustainability challenge and use the opportunities it presents to their advantage.

Further help

Some specific tools that can be used for the process steps outlined in this chapter are available on the report website atwww.sustainability.com/developing-valueand also at www.ifc.org/sustainability.These include environmental and socialindicators, stakeholder engagementprocesses, best practice codes for corporategovernance, as well as references to othersources of information. The site also offerscorporate case studies from around theworld in a searchable database.

The three sponsors of this report — IFC, SustainAbility and Ethos — can eachprovide assistance based on their ownspecific expertise (see back cover) while keysources of further information and advice are listed in the Centers of Excellence onpages 54–55.

Drying sarees, India


This report has outlined many ways thatbusinesses can improve their impact onsociety, while also benefiting themselves. The business case matrix summarizing thoserelationships, however, shows that there are several areas where the business casecan be further strengthened.

Undoubtedly some business benefits existwhich are simply not being attributed orreported, which helps to explain ‘holes’ in the matrix. But the role of other players — governments, investors and other stakeholders — also has an importantimpact on the business case. These playersare tending to demand greater action fromcompanies on sustainability, but there mayalso be actions they could take to strengthenthe business case.

This chapter examines what key players can do and are doing based on the cases westudied, as well as interviews with expertsfrom companies, business associations, NGOs and academia. The main trends aresummarized in the table on page 50. Our aimis to sketch out some of the important issuesand key players which we feel are relevant tothe business case in many emerging markets.We acknowledge, however, that there is notenough space here for an exhaustivediscussion.

Emerging market governments

Many of those we spoke to highlightedgovernment as one player that generallycould do much more to strengthen thebusiness case. Weak governance is a majorproblem for emerging market businesses,with issues such as unsuitable economicpolicies, corruption, general policy instabilityand inconsistent regulations topping the listof grievances. Environmental laws are oftendescribed as being too rigorous — to thepoint of being impossible to comply with. Yet enforcement is generally weak, with the result that there is often insufficientincentive for companies to attempt tocomply with regulations.

A recent study showed that, on average,neither pollution nor the number ofaccidental poisoning cases fell as the number of regulations imposed bygovernments across the world increased. 56

Some government policies actually create incentives that weaken the business case, such as subsidies encouraging environmentally damagingactivities. Estimates of these ‘perversesubsidies’ range from $500 billion to $1.5 trillion a year worldwide. 57

Few emerging market governments are using alternative policies such asenvironmental charges, taxes and othereconomic instruments 58 to support thebusiness case for good social andenvironmental performance — due in part toa lack of capacity to develop and implementsuch policies within the state institutions ofmost emerging market governments.

Overall, good governance, regulatorycertainty and an appropriate mix of policytools — including clear and enforceableregulatory standards, economic instrumentsand voluntary initiatives — each have a keyrole to play in promoting the business casefor sustainability. While there is someevidence of emerging market governmentsimplementing innovative policies despiteinstitutional capacity constraints, there isnevertheless significant potential forgovernment to have a greater impact.

Investors and lenders

Investors are a very broad and diverse group — as well as being very influential.They range from the local financialcommunity in emerging markets tointernational private investors and financialinstitutions. As the evidence grows for thelink between a company’s sustainabilityactivities and financial performance, thiscommunity will be increasingly likely to favor more sustainable companies in theirinvestment decisions — further strengtheningthe business case.

However in this research, access to capitalwas the only business benefit which did nothave a strong link to any of the sustainabilityfactors. While there are undoubtedly moreexamples of this benefit which we have notuncovered, this also suggests that providersof capital are failing to reward good socialand environmental performance in emergingmarkets, despite the fact that they have beenrewarding them in developed markets.

The nature of the local financialcommunity varies significantly betweencountries, but bank loans remain thedominant form of capital, and one whichrarely rewards sustainability activities assuch. As local banks become more cognizantof asset and reputational risks, as well assustainability risks and opportunities, theycan be expected to use lending policies tomove companies towards more sustainablebehavior.

Chapter 5Roles for otherplayers

Monetary exchange, Russia


For companies listed on a stock exchange,the incentives from the financial communityto undertake sustainability activities arealready greater and definitely increasing. For example, the ‘Novo Mercado’ is a newlisting segment of the São Paulo StockExchange. 59 Companies listed on the NovoMercado commit themselves to the higheststandards of corporate governance, therebyseeking to reduce the general ‘corporategovernance discount’ applied to Brazilianfirms. BNDES, the Brazilian nationaldevelopment bank, offers these companiesspecial lower interest rates, while thepension fund regulator allows pension fundsto invest a larger proportion of their assets in companies listed on Novo Mercado.

The efforts of international financialinstitutions (IFIs) to disseminate goodpractice in sustainability suggest that theycan also be increasingly important. Forexample, the IFC has developed leading-edge expertise in social and environmentalissues in emerging markets, which is used tohelp companies, other lenders andgovernments negotiate difficult issues suchas the impact of projects on natural habitatsand indigenous peoples. The role of IFIs is two-fold: first, to ensure adherence tostrong ‘do no harm’ environmental and socialstandards; and second, to disseminate bestpractice and understanding of evolving risksand opportunities related to sustainability. In emerging markets, especially during thisperiod in which private capital flows havereceded, IFIs have wide influence on whatfirms do. Many of these institutions could do more to strengthen their role in boththese areas, and encourage the convergenceof economic development and sustainabilityobjectives.

Private investors, entrepreneurs andventure capitalists are also playing a role, by investing in sustainable enterprisesthroughout the emerging markets. But in general investors could do much more to strengthen the business case — forexample by becoming more sophisticated in assessing and selectively rewardingcompanies’ sustainability performance. There is a tendency for internationalinvestors to make blanket decisionsregarding an entire country or region,without considering the merits of individual companies.

For Lawrence Pratt of the Institute of Business Administration of CentralAmerica (INCAE), a key question is how to demonstrate sustainability performanceand value to the company without excessivedocumentation which does not matchrealities on the ground. ‘Europeans areobsessed with certification anddocumentation,’ he notes.

‘The activities that Latin American companiesare doing do not show up because it’s just a normal part of doing business. Companiesdown here do way more for the communitybut they get no credit for it from Europeanand American analysts.’

Business customers

Through their supply chain, businesscustomers have been an important influence in motivating emerging marketcompanies to improve labor standards and environmental performance. Many companies, particularly in developedeconomies, are under considerable pressure from NGOs and consumers over their sustainability performance. These companies in turn place demands ontheir suppliers — many of which are based in emerging markets. Nike is a primeexample. Responding to pressure fromdeveloping country NGOs, Nike has begunstrengthening relationships with their keysuppliers, creating ‘strategic partnerships’where there is exchange of expertise toimprove conditions in many sub-contractedfactories.

Concern has been raised, however, thatemerging market suppliers are left to bear a disproportionate amount of the costs inmeeting international standards. Greatercollaboration along an entire supply chain to help emerging market suppliers overcomecapital and capacity constraints is one waythat companies in developed markets canenhance and protect their own reputations,while maintaining their supplier relation-ships. Nike’s policy is to negotiate bothimprovements and the costs with their‘strategic partners’, while guaranteeingorders for a certain length of time. This reinforces the long-term intentions of both parties plus ensures tangibleimprovement all round.

Consumers

Although the impact of consumer activism in developed economies has sometimes been considerable, consumers in emergingmarkets have so far played a relatively smallrole in driving sustainability. That helps toexplain the weak business case we found for companies to focus on developingenvironmental products and services for local markets.

Box 11Socially responsible investing

Socially responsible investment (SRI) aimsto encourage sustainability by investing in special portfolios of the most sustainablecompanies (‘screening’) and/or by puttingpressure on companies to improve theirsustainability performance (‘engagement’).

It has developed rapidly in North Americaand the UK since the mid-1990s and isbeginning to spread to emerging markets.The value of screened funds in the US wasput at $2 trillion in 2001,60 while the figurefor the UK was £4 billion ($6 billion).61

The Dow Jones Sustainability Indexes and FTSE4Good from the UK now providemainstream indices focusing on sustainablecompanies.

While this provides opportunities — andrisks — for companies seeking internationalequity capital, local funds are alsospringing up. For example the Associationfor Sustainable and Responsible Investmentin Asia (ASrIA) was launched in 2001.

In Brazil, Banco Real launched the ABN AMRO Ethical FIA, a mutual fund forcompanies with good social, environmentaland corporate governance practice.Unibanco, Brazil’s fourth largest privatesector bank, also began to carry out SRIresearch in January 2001 (the first in anyemerging market). In South Africa, FraterAsset Management specializes in SRI andhas launched a unit trust focusing on goodcorporate citizenship.

Evidence suggests these opportunities will continue expanding. Media coverage of SRI in Latin America and Asia has grownexponentially over the past five years,although the frequency of mentions is stillsmall compared with Europe or the US.62

And local Business Councils for SustainableDevelopment in South Africa and Argentinaare aiming to develop a sustainability indexfor their local markets.

However, the decision by CalPERS, theCalifornia Public Employees’ RetirementSystem, to stop investing in Asian emergingeconomies, partly on the ground of socialconcerns, also suggests that sociallyconscious investors, like mainstreaminvestors, consider at least some emergingeconomies too risky at the moment.


Even in affluent countries, most consumersput price and quality before otherconsiderations. Price is even more significantin regions where poverty levels are high.Consumers often do not have the luxury of putting pressure on companies throughtheir purchasing — and goods are oftenbought through the informal sector.

However, some recent surveys 63 have shownthat there is a genuine concern amongconsumers in emerging markets about thesustainability performance of companies, and these consumers are set to be anincreasingly strong driver for the businesscase as economies develop. These consumerscan enhance the business case by acting on their values — questioning companiesabout their sustainability commitments and performance, and following throughwith their purchasing decisions.

As discussed, consumers in developedmarkets can also affect the business case in emerging markets through their pressureson corporate supply chains.

Non-governmental organizations (NGOs)

Local NGOs and community groupsstrengthen the business case by grantingresponsible companies the local license tooperate, while exposing those companieswith poor performance — although theirinfluence is much greater in some countriesthan others. NGOs can also exert influenceby lobbying governments for more effectiveregulation or the elimination of perversesubsidies.

NGOs have also begun to realize thatcollaboration with responsible companiescan be effective in enhancing their mutualsustainability objectives — especially in relation to community development. In the Philippines, for example, mistrustbetween NGOs and business has historicallybeen high — based on NGOs’ view ofbusiness as having been tied to thepatronage of the Marcos regime. But at a recent tri-sector conference both NGO and business organizations vowed to try harder to move beyond their comfortzones and identify areas of collaboration.

International collaboration and newgovernance forms involving NGOs, business,governments and other players is emergingas a promising area in disseminatingknowledge, sharing good practice andbuilding new coalitions. One major initiativehas been Business Partners for Development,which has highlighted strategic examples of tri-sector partnerships between NGOs,government and business. 64

Current impact ofinfluence

Trend of futureinfluence

Means of strengtheningimpact on business case

Emergingmarketgovernments

Investors

Internationalbusinesscustomers

Emergingmarketconsumers

Emergingmarket NGOs

Providing a clear and stable framework of demanding targets and enforceableminimum standards.

Creating an enabling environment for theadoption of stakeholder partnerships andvoluntary initiatives where appropriate.

Promoting the internalization of costs by using economic instruments and by eliminating economic disincentives.

Participating in the development ofinternational codes of conduct and/ordeveloping local ones.

Providing information to help overcome market failures.

Understanding the business case forsustainability and how it impacts the quality of investments.

Developing tools to incorporate sustain-ability-related considerations in lendingcriteria, taking into account local context.

Implementing appropriate SRI screening funds.

Encouraging the adoption of sustainabilitypractices in the supply chain, sensitive to regional differences and constraints.

Assisting suppliers with resources andtechnology — allowing adequate time for improvements.

Questioning companies about theirsustainability performance.

Making purchasing decisions that reflectpersonal values.

Partnering and engaging with companies.

Exposing companies with poorperformance, but also rewarding thosemaking sustainability efforts.

Some negativesome positive

None / notdiscernible

Weak positive

Strong positive

Increasing Negative

Figure 13 Influence of stakeholders on business case


NGOs can also weaken the business case by targeting companies which are starting to make efforts towards sustainability, ratherthan the real laggards. Failing to recognizehonest efforts, even if the companiesconcerned still have a long way to go,discourages companies from being moretransparent and from making efforts towards sustainability.

Others

There are several other groups which havenot been considered here in detail, but whichnevertheless have an important influenceover companies, and have the potential tostrengthen the business case in future.

Employees are a key group. Individually, they can enhance sustainability at thecompany they work for by bringing theirpersonal convictions and experiences to bear,and contributing to change and innovation.They strengthen the business case when they choose to work for companies with a strong sustainability reputation. Throughtrade unions, workers can also apply pressureon companies, especially in relation to labor standards — although unions do notalways have the necessary legal frameworkto support action, and they are often lesssupportive of environmental objectives.

Local business associations can help their members reach the standards that will give them a competitive edge, byproviding expertise or helping businessesachieve economies of scale in purchasingenvironmental technologies, for example.

The media could be another significantplayer in driving the business case forward,by providing information on sustainability,and highlighting the good — and bad — that companies are doing. Nevertheless, with some notable exceptions, the media is falling well short of its potential role.

Finally, international agencies can play a catalytic role in stimulating awareness of opportunities. For example, the UnitedNations Environment Programme (UNEP)organized the Financial Institutions Initiative, which promotes the integration of environmental considerations by financialinstitutions into all aspects of theiroperations. As of May 2002, the initiativehad 195 signatories, over a quarter of which are banks from emerging markets. 65

Another example is the Round Table onCorporate Social Responsibility — a jointinitiative by the UK’s Department forInternational Development (DFID) and the Canadian International DevelopmentAgency (CIDA) to help disseminateinformation on the links between business and poverty alleviation.

Conclusion

New coalitions and new forms of governancewill be important in achieving societal goals,while the actions of the ‘other players’described above will drive the evolution ofthe business case. Over time we expect tosee our business case matrix change — andstrengthen — reflecting more and morecompanies that successfully build andmeasure sustainability and the benefits they gain from it. 66

We have shown in this chapter thatimportant trends in this direction can be seen in the financial community and civil society. More action is needed fromgovernments, which have the responsibilityto create and maintain framework conditionsfor business that offer maximum stabilityand create the right incentives. However,capacity limitations will be an ongoingconstraint, while the social, economic andpolitical context in a given country will alsocontinue to influence the business case.

International organizations

Localcommunity

Employees

NGOs Government

Standards andbest practice

Demand forproducts /services

Capital

Best practice License tooperate

Productivity

Reputation Regulatoryframework

Industry Consumers Investors

Company

Figure 14 Stakeholder impact on the business case

‘ Inclusive globalization must be built on the great enabling force of the market, but market forces alone will not achieve it. It requires a broader effort to create a shared future based upon our common humanity in all its diversity.‘ Kofi Annan, secretary general United NationsReport to the Millennium Assembly, 2000 67


We started this project with an open mind —we were not certain that we would findsufficient evidence of a convincing businesscase for sustainability in emerging markets.We had heard often enough that businessesin these markets were focused on businessgains to the exclusion of other consider-ations. And that if we did find anything itwould be around philanthropy, or would be primarily related to companies whichexport to the developed world, wheresustainability demands were higher.

We were therefore pleased to find such a large number of examples in emergingmarkets of corporate sustainability acrossthe governance, environmental and socialdimensions, and to find that these wereindeed linked to business benefits forcompanies focused on both domestic and export markets.

Through these case studies, as well asdiscussions with businesses and stakeholdersin emerging markets, six main themes arosetime and again. This chapter presents our six key conclusions, as well as some ideasabout what they mean at a practical level.

This report aims to encourage companieswhich have not previously recognized thelinks to find business value even as theyparticipate in social and environmentaldevelopment. It also helps identify new areas of focus for companies which mayalready be addressing sustainability, andprovides ideas for new business models thatput environmental and social concerns at the core of the business. These themes will help in all those areas.

Theme 1 New data and evidence

This report presents an important newanalysis based on the experience ofcompanies operating in emerging markets.While the cases do not necessarily representmodel companies, the activities theyundertook do reflect business benefits from specific sustainability efforts. We havecombined this evidence with existing studiesto develop a picture of the business case for sustainability for companies operating in emerging markets.

However more work is required to betterunderstand the value gained by companies.This report has focused on the areas in whichthe greatest business case evidence exists.Yet for many areas the evidence was stillweak — and in a few cases we were unableto find any link between particular aspects of sustainability and financial performance.

Some of these linkages may not exist — at least in present circumstances. But inmany cases the linkages may not have been adequately recognized quantitativelyeven though a lot of qualitative, anecdotalevidence may exist. And undoubtedly thereare many business case examples that have not come to our attention.

Creating the right methods to evaluatefinancial returns from sustainability factorswill be important to understanding thebusiness case better. It will also becomeimportant to identify key performanceindicators against which performance will be measured.

ActionCompanies should strive to understand andmeasure sustainability performance better, as well as the impact it has on their business.They need to ask themselves the rightquestions and create and use the toolsnecessary to evaluate results.

Theme 2There is a business case in emerging markets

Our findings refute the argument that the business case holds only in developedmarkets. A comparison with the businesscase in developed markets shows thatopportunities and priorities differ, butbenefits apply in both markets. The strongestbusiness case in developed markets camefrom reputational gains and brand value,whereas in the emerging markets themajority of the evidence focuses more on cost reduction and higher sales.

There are also risks. As with any businessinitiative, too much money can be spent, too little benefit gained. Companies mustassess risks, and analyze the costs andbenefits of sustainability action as theywould for other company activities.

Also, as sustainability implies some form of interaction with stakeholders, it can raise the company profile above the rest of the competition. A higher profile canresult in enhanced reputation, but alsogreater scrutiny and potentially criticism. The more that sustainability is developed and integrated into core businessmanagement and processes, risks andopportunities will be better understood and better managed.

Chapter 6Six themes

Textile factory, Indonesia


ActionEmerging market companies can learn from the experiences of those in developedmarkets, but the opportunities and risksexperienced by similar companies in theirown region can suggest action appropriateto their particular circumstances. Equally,companies based in developed markets can learn from emerging markets. This isespecially true of foreign multinationals with global operations. These MNCs need to beware of imposing their own valuesystems, instead of adapting in a locallymeaningful way.

Theme 3The greatest evidence of benefits were of cost savings & productivity andrevenue growth & market access

This report has identified the areas of thebusiness case which were supported by the strongest evidence. We found that inemerging markets cost saving, productivityimprovement, revenue growth and access to markets were the most important business benefits of sustainability activities.Environmental process improvements andhuman resource management were the mostsignificant areas of sustainability action.

The importance of good human resourcemanagement may be largely intuitive formany managers — reflected in the highnumber of companies focusing on this factor. But the strong evidence we found of the business case for human resourcemanagement provides a factual basis to back up those instincts, and to persuadeothers who have not taken it seriously.

While the cost savings from good environ-mental management may also have beenexpected, the strength of the evidence andthe number of companies engaged in theseprocess improvements was a surprise.

ActionThe strength of these key links can help toconvince skeptics of the business benefitsavailable, and may suggest new ways toenhance business performance.

Theme 4Every company can find benefits butspecific business cases vary

Every kind of company can find benefits but the best opportunities will depend on the particular drivers, circumstances andpriorities of a business. Although we foundthat certain gains were consistent acrosssectors, regions and types of companies, thebusiness case plays out in ways which arecompany-specific. The information we havegathered in this report cannot provide ablueprint for how to implement sustainabilityin a financially beneficial way. But it doesdemonstrate the many potential aspects of the business case.

ActionCompanies can use the practical examples,the business case matrix, the online databasewww.sustainability.com/developing-valueas well as the suggestions in Chapter 4 toanalyze their risks and opportunities anddevelop their own individual business case.Others may also be able to use these tools to analyze the business case in emergingmarkets further, including developing specificbusiness cases for different local contexts or for individual sectors.

Theme 5 The business case is dynamic

The business case is constantly evolving,reflecting changing expectations andrelevance, just as with other businessparameters. As stakeholder communitiesdevelop and access to information increases,expectations will rise. They will requiregreater accountability and transparency and will increasingly expect businesses tocontribute towards sustainable development.It is likely that the more intangible businessfactors, such as brand value & reputation,will gain greater importance in emergingmarkets as they have in developed countries.

For many companies, meeting minimalrequirements may be all that is possible in the short term. But the most successfulcompanies will anticipate these growingexpectations and derive value from them.Developing proactive sustainability strategiesand being ahead of societal demands canbring greater opportunities — although these are accompanied by new risks.

ActionCompanies will need to be flexible in theirapproach to sustainability, monitoringchanges, understanding new demands andchanging values. As societal expectationsdevelop and competitive pressures increase,the links summarized in the business casematrix may change. The cases and matrix atwww.sustainability.com/developing-value will be updated as new information becomesavailable.

Theme 6Other players are key

Government, NGOs, business customers and other players often have their ownsustainability objectives. By putting pressureon companies with poor performance, as well as rewarding those which makeimprovements in their sustainabilityactivities, these players can strengthen the business case while moving their ownagendas forward. But if their expectationsrequire changes beyond what is practical for companies to achieve in the expectedtime frame, they can also act as roadblocksto sustainability.

ActionSustainable development is a long-term goal which cannot be achieved without the involvement of all sections of society.Non-business players need to adoptpartnership approaches which can help all the parties involved better realize theirindividual short-term objectives, whilefurthering the aims of sustainabledevelopment — at the local, national and global levels.

‘Ten years ago [the drive for sustainability] would have been too early because we didn’t have a real economy. Ten years from now it would be too late because we would have done too many of the wrong things. Right now is exactly the moment for these ideas to take root and transform Brazil’s development path.’ José Luiz Alquéres, former chairman Electrobras, Brazil 68

International

International Business Leaders Forumwww.iblf.org

International Finance Corporationwww.ifc.org/sustainability

International Institute for Sustainable Developmentwww.iisd.org/business

SustainAbilitywww.sustainability.com

United Nations Environment Programme— Department of Technology, Industry and Economicswww.uneptie.org

World Business Council for SustainableDevelopmentwww.wbcsd.ch

World Resources Institutewww.wri.org

Africa

African Institute for Corporate Citizenship 137 Daisy Street, SandtonPO Box 37357 Birnam Park 2015 South AfricaT +27 11 432 5364F +27 11 432 1530www.corporatecitizenship-africa.com

Common Ground ConsultingPO Box 1828Cape Town 8000South AfricaT +27 21 424 5052F +27 21 424 2495www.commonground.co.za

Ethics Institute of South Africa1209 Schoeman Street, Sanlam GablesHatfield, Pretoria 0083South AfricaT +27 12 342 2799F +27 12 342 2790www.ethicsa.org

National Business Initiative PO Box 294Auckland Park 2006JohannesburgSouth AfricaT +27 11 482 5100F +27 11 482 5507www.nbi.org.za

Private Sector Corporate Governance TrustKenyawww.corporategovernance.co.ke

Asia

All-China Federation of Industry and Commerce 93 Beiheyan StreetBeijingChinaT +86 10 6513 6677F +86 10 6513 1769www.acfic.org.cn

Asian Institute for Corporate GovernanceBusiness School Korea UniversityKorea T +82 2 3290 1657 F +82 2 3290 2552www.aicg.org

Association for Sustainable & Responsible Investment in AsiaHoseinee House/Rm 60169 Wyndham StreetHong Kong, ChinaT +852 3105 3701F +852 3105 9707www.asria.org

Bangladesh Centre for Advanced StudiesHouse 23, Road 10A, Dhanmondi R/ADhaka 1209BangladeshT +880 2 811 3977F +880 2 811 1344www.bcas.net

Business Group for Thai Society10 Soonthornkosa RoadKlongtoey, Bangkok 10110ThailandT +66 2 262 6606F +66 2 249 3700

Centre for Science and Environment41 Tuglakabad Institutional AreaNew Delhi 110062IndiaT +91 11 698 1110F +91 11 698 5879www.cseindia.org

Centre for Social Markets15 Stephen Court18A Park StreetCalcutta 71India T +91 33 229 4537F +91 33 229 0647www.csmworld.org

54 Developing ValueDeveloping ValueCenters of excellence


China Enterprise Confederation17 Zizhuyuan NanluBeijing 100044ChinaT +86 10 6872 5437F +86 10 6841 4280www.cec-ceda.org.cn

Confederation of Indian IndustryIndia Habitat Centre4th Floor, Zone IV, Lodhi RoadNew Delhi 110003, India T +91 11 464 5228F +91 11 460 2524www.ciionline.org

Development AlternativesB-32, Tara CrescentQutab Institutional AreaNew Delhi 110016IndiaT +91 11 685 1158F +91 11 686 6031www.devalt.org

Federation of Thai IndustriesQueen Sirkit National Convention CentreZone C / 4th Floor 60 New Rachadapisek RoadKlongtoey, Bangkok 10110ThailandT +66 2 229 4255F +66 2 229 4941/2www.fti.or.th

Institute of Environment andDevelopment34 Fu-wai-da-jie StreetCai-yin Building / Rm 441Beijing 100832ChinaT +86 10 6857 7249F +86 10 6851 9950www.lead.org.cn

Partners in Change S 385 Greater Kailash IINew Delhi 110048IndiaT +91 11 641 8885F +91 11 623 3525www.caringcompanies.org

Philippine Business for Social Progress3rd Floor Lower LevelDAP BuildingSan Miguel Avenue, PasigManila 1601PhilippinesT +63 2 635 3670F +63 2 631 5714www.pbsp.org.ph

Responsible Business Initiative52-B New Muslim TownLahore 54612PakistanT +92 42 586 6398F +92 42 586 7341www.rbi.org.pk

Tata Energy Research Institute 2002 Darbari Seth BlockHabitat Place, Lodhi RoadNew Delhi 110003 India T +91 11 468 2100 F +91 11 468 2144 www.teriin.org

Europe

Department of Environmental Sciences & PolicyCentral European UniversityNador u. 9, H-1051Budapest, HungaryT +36 1 327 3021F +36 1 327 3031www.ceu.hu/envsci

Ecoline PO Box 7, G-47, 125047MoscowRussiaT +7 095 978 90 61F +7 095 978 90 61http://cci.glasnet.ru

EcoPravo-KharkivPO Box 10479Kharkiv 61002UkraineT +380 572 19 10 21F +380 572 19 10 21www.ecopravo.kharkov.ua

Institute of Corporate Law and Corporate Governance5, Building 2 Zvonarsky PereulokMoscow 103031RussiaT +7 095 258 3569F +7 095 258 3568 www.iclg.ru

Slovak Cleaner Production CentrePionierska 1583102 BratislavaSlovak RepublicT +421 2 4445 4328F +421 2 4425 9015www.fns.uniba.sk/zp/sccp

Latin America

Acción EmpresarialEncomenderos 231/of. 601SantiagoChileT +56 2 234 5141F +56 2 234 5088www.accionempresarial.cl

Earth CouncilApartado 2323-1002San JoséCosta RicaT +506 256 1611F +506 255 2197www.ecouncil.ac.cr

Ethos Institute — Business and Social ResponsibilityRua Francisco Leitao, 469Conj. 1407—CEP São Paulo, SP 05414-020BrazilT +55 11 3068 8539F +55 11 3068 8539www.ethos.org.br

FundamasEdificio FUSADES, Blvd Sta. ElenaUrb. Santa Elena, San SalvadorEl SalvadorT +503 244 0538F +503 244 0539

Fundeswww.fundes.orgwww.mypyme.comthroughout Latin America

Institute for the Development of Social InvestmentRua São Tomé, 119Conj. 42—Vila FunchalSão Paulo, SP 04551-080BrazilT +55 11 3044 4686 F +55 11 3044 4685www.idis.org.br

Instituto Brasileiro de Governanca CorporativaWorld Trade Center, Av. das Nações Unidas, 12551Conj. 25º andar—Sala 2508São Paulo, SP 04578-903Brazil T +55 11 3043 7008 F +55 11 3043 7005 www.ibgc.org.br

Peru 2021Lord Nelson N 218Miraflores, Lima 18PeruT +51 1 421 3795F +51 1 440 2151www.peru2021.org

55Developing ValueDeveloping ValueCenters of excellence

56 Developing Value

Brand value & reputationPublic perception of a company, its products and brands. This would include the reputation of the company, the personalreputation of the company manager/ownerand the brand value of the company.

Business caseThe extent to which sustainability improvesbusiness value, as conventionally defined.

Civil societyThe set of institutions, organizations andbehavior situated between the state, thebusiness world and the family. Specifically,this includes voluntary and non-profitorganizations of many different kinds,philanthropic institutions, social and political movements, other forms of socialparticipation and engagement, and thevalues and cultural patterns associated with them. 69

Corporate governanceImproving board structures and proceduresto make a company more accountable to shareholders, covering issues such asfinancial reporting, transparency and audit,remuneration of directors, separation ofpowers and minority shareholder rights. At its broadest it is the full set ofrelationships between a company’smanagement, its board and stakeholders.

Digital divideRefers to the growing exclusion from social and economic opportunities of people without access to the internet and communication technologies. 70

Digital dividendProjects that bridge the digital dividethrough business solutions that bringconnectivity and digital services to un-served populations in developing regions.

Eco-efficiencyInvolves the delivery of competitively pricedgoods and services that satisfy human needsand bring quality of life, while progressivelyreducing ecological impacts and resourceintensity throughout the life cycle.

Eco-tourismResponsible travel to natural areas thatconserves the environment and sustains the well-being of local people. 71

Emerging marketsDeveloping countries recognized as havingaccess to international capital markets,thereby creating opportunities for attractingprivate capital flows.

EngagementThe process of seeking stakeholder views on their expectations of an organization, in a way that may realistically be expected to elicit those views. 72

Human capitalThe accumulated knowledge and skill set of a company’s employees, which affects itsability to learn, innovate and compete.

License to operateTraditionally refers to compliance with local,national and international legislation andregulation. Increasingly, however, retainingor enhancing license to operate refers toearning the trust and respect of diversegroups of stakeholders. To be commerciallyviable over the long term, a company mustretain its license to operate withstakeholders.

Multinational corporation(MNC)A company that has production operations in more than one country.

Product stewardshipProduct stewardship is a product-centeredapproach to environmental protection. It involves reducing the environmentalimpacts of products throughout their lifecycle, from the raw materials throughmanufacturing, use and disposal.

Small and medium sized enterprise(SME) An independent small business managed byits owner or part-owner. 73 SMEs are usuallyclassified by numbers of employees, totalsales and assets. IFC classifies an SME ashaving up to 300 employees, total assets of up to $15 million, and total annual salesof up to $15 million. This classification isbroadly consistent with those used by mostother international financial institutions.

Socially responsible investment(SRI)Investment decisions that incorporateenvironmental and social criteria as well as traditional financial considerations in measuring a company's performance or its attractiveness as an investment. Also known as ethical investment.

Developing ValueGlossary

Glossary

57Developing Value

StakeholderAny individual or group which can affect or is affected by an organization’s activities.‘Stakeholders’ are increasingly self-legitimizing — in other words, those whojudge themselves to have an interest in an organization’s operations, value andperformance are de facto ‘stakeholders’.

SustainabilityThere are over 100 definitions ofsustainability and sustainable development,but the best known is that of the World Commission on Environment and Development. This suggests thatdevelopment is sustainable where ‘it meets the needs of the present withoutcompromising the ability of futuregenerations to meet their own needs’.

TransparencyAn organization’s openness and honesty with its stakeholders about its activities.

Triple bottom lineThe basis of integrated measurement andmanagement systems focusing on economic,social and environmental value added — or destroyed.

Developing ValueGlossary

Eucalyptus plantation, Kenya

58 Developing ValueEndnotes

The sources for all case studies which appearin this report can be found on the websitewww.sustainability.com/developing-value

1 International Finance Corporation, IFC – The Partner of Choice, Washington, 2002, page 5.

2 SustainAbility/UNEP, Buried Treasure: Uncovering the business case for corporate sustainability, London, 2001.

3 The cases are recorded in our online database, which can be accessed at www.sustainability.com/developing-value The numbers of cases and companies are different because several companies produced more than one example, resulting in a total of 247 cases.

4 World Resources Institute/UNEP/WBCSD, Tomorrow’s Markets: Global Trends and Their Implications for Business, 2002 www.wri.org/business/tomorrows_markets.html

5 SustainAbility/Ketchum/UNEP, Good News & Bad: The Media, Corporate Social Responsibility and Sustainable Development, London, 2002.


7 Throughout this report we use the $ sign to refer to US dollars.

8 Institute of International Finance press release, Net Private Capital Flows to Emerging Markets Fall $54 billion in 2001 to $115 billion, New York and Washington, 30 January 2002.

9 World Bank, Global Economic Prospects and the Developing Countries: Making Trade Workfor the World’s Poor 2002, Washington, page 2.

10 In terms of Purchasing Power Parity – World Bank, Global Economic Prospects and the Developing Countries: Making Trade Work for the World’s Poor 2002, Washington, page 30.

11 World Resources Institute/UNEP/WBCSD, Tomorrow’s Markets: Global Trends and Their Implications for Business, 2002 www.wri.org/business/tomorrows_markets.html

12 ‘Once-communist world marches to its own rhythm’, Financial Times Survey – Investing in Central and Eastern Europe, 17 May 2002.

13 Institute of International Finance press release, Moderate Recovery Seen in Private Capital Flows to Emerging Markets, New York and Washington, 22 April 2002.

14 www.developmentgoals.org/achieving_the_goals.htm

15 As defined by the Brundtland Commission.16 Refer to website for full list:

www.sustainability.com/developing-value

17 The World Bank classifies economies as low-income (GNI $755 or less), middle-income (GNI $756-9,265) and high-income (GNI $9,266 or more). Low-income and middle-income economies are sometimes referred to as developing countries. World Bank, Global Economic Prospects and the Developing Countries, Making Trade Work for the World’s Poor 2002, Washington.

18 SustainAbility/UNEP, Buried Treasure: Uncovering the business case for corporate sustainability, 2001.

19 Wayne Visser, ‘Greening the corporates: The transition, local business and sustainable development’, Development Update, Special Edition: Election 1999: Where have we come from? A balance sheet of the political transition, Volume 3, Issue 1. Wayne Visser and Clem Sunter, Beyond Reasonable Greed: Why Companies Need to Shapeshift, Human & Rousseau Tafelberg, Cape Town, 2002.

20 International Network for Environmental Management, The ISO 14001 Speedometer, January 2001 www.inem.org/htdocs/iso/speedometer/speedo-4_01.html 14 February 2002.

21 As of May 2002. Social Accountability International, SA8000 Certified Facilities, www.cepaa.org/certification.htm (29 May 2002).

22 International Finance Corporation, Paths out of Poverty: The Role of Private Enterprise in Developing Countries, Washington DC, 2000.

23 C.K. Prahalad & Stuart Hart, ‘The Fortune at the Bottom of the Pyramid,’ Strategy + Business, 26.

24 From a speech at the Centre for Social Markets conference, December 2001

25 Roper Reports Worldwide, Cause Branding: Does Social Good = Market Share, Spring 2000.

26 New Ventures, Jolykawww.new-ventures.org/jolykanv.html 29 May 2002.

27 Ritu Kumar, David F. Murphy & Viraal Balsari, Altered Images: the 2001 state of corporate responsibility in India poll, Tata Energy Research Institute, New Delhi, 2001.

28 ‘Good Job Infy, Says Employer Poll’, The Times of India, 20 February 2002. www.bestemployersindia.com

Endnotes

59Developing ValueEndnotes

29 Hewitt Associates, The Best Employers in Asia, www.bestemployersasia.com11 December 2001.

30 Cheryl Dahle, ‘The New Fabric of Success’, Fast Company, Issue 35, June 2000.

31 We did not include the IFC-funded companies (a fifth of the total cases) under this heading, although they have to meet IFC requirements in relation to environment, social and governance performance, www.ifc.org/enviro

32 McKinsey, The McKinsey Emerging Market Investor Opinion Survey 2001, London, 2001.

33 ‘Samsung Turning Name into a Global Brand’, Taipei Times, 20 February 2002.

34 LCV News, March/April 2002, Year III - No. 21, page 2. Also see www.lcvco.com.br

35 Global Corporate Governance Forum www.gcgf.org

36 The Committee on the Financial Aspects of Corporate Governance, Report of the Committee (The Cadbury Report), The London Stock Exchange, December 1992.

37 Credit Lyonnais Securities Asia, Saints and Sinners: Who’s got religion?, April 2001.

38 Global Corporate Governance Forum www.gcgf.org

39 King Committee on Corporate Governance, King Report 2002, Institute of Directors, South Africa, 2002.

40 By ‘philanthropy’ we mean activity motivated solely by a desire to help, without any consideration of potential business benefits.

41 The International Ecotourism Society, The Ecotourism Fact Sheet, 2000 www.ecotourism.org/textfiles/statsfaq

42 International Finance Corporation, Community Development Resource Guide, Washington, 2000.

43 The strength of the evidence has been measured according to how confident we can be that there is a connection between the two factors. This is based on the volume of evidence relevant to x on box, and the nature of the evidence. We have scored quantitative data more highly than qualitative material, and given the lowest score to anecdotal evidence. The measure therefore combines volume and weight of evidence.


45 www.environmentfoundation.net/2001-geoffrey-chandler.htm

46 Paper presented at Business and AIDS Symposium, 5th International Congress on AIDS in Asia and the Pacific, 1999, quoted in Anthony Pramualratana & Bill Rau, HIV/AIDS Programs in Private Sector Businesses, Thailand Business Coalition on Aids, Bangkok.

47 The study also looked at Middle East & North Africa and South Europe & Central Asia, but there were insufficient cases in these regions to establish clear trends.

48 Thailand Environment Institute, How can it Benefit Business? A Survey of ISO 14001 Certified Companies in Thailand, Bangkok,1999.

49 Environics International Ltd, Corporate Social Responsibility Monitor, Toronto, June 2001.

50 Ritu Kumar, David F. Murphy & Viraal Balsari, Altered Images: the 2001 State of Corporate Responsibility in India Poll, Tata Energy Research Institute, New Delhi, 2001.

51 World Economic Forum / Environics International, The World Economic Forum Poll: Global Public Opinion on Globalization, February 2002.

52 Study by the Center for International Health at the Boston University School of Public Health on costing model that estimates the present value of new HIV infections in the formal business sector in Southern Africa.

53 Environment Business Journal, Vol. XII, Number 9-10.

54 WBCSD is a coalition of 150 international companies committed to sustainable development via economic growth, ecological balance and social progress. It also operates regional networks and partner organizations in many emerging markets. www.wbcsd.ch

55 www.unglobalcompact.org56 World Bank,

World Development Report 2002: Building Institutions for Markets, Oxford University Press, New York, 2001, p137.

57 UNEP/IISD, Environment and Trade: A Handbook, Canada, 2000 www.iisd.org/trade/handbook

58 Economic instruments are tools to create financial incentives for environmentally responsible behavior, while imposing costs for unsustainable behaviour, including taxes and other charges for resource use, new markets for trading resource usage rights and new property rights. A good list of examples from around the world of these and other innovative policy instruments can be found at www.iisd.org/susprod/compendium

59 In addition to the Novo Mercado, BOVESPA has two intermediate listing segments, the Special Corporate Governance Level 1 and Level 2, which also require higher standards of corporate governance, but are not as strict as the requirements of the full Novo Mercado. These different levels encourage voluntary adherence to appropriate standards. See www.novomercadobovespa.com.br/english/index

60 Social Investment Forum Industry Research Program, 2001 Report on Socially Responsible Investing Trends in the United States, Social Investment Forum, 28 November 2001.

61 Cliff Feigenbaum, ‘Socially Responsible Investing: Influencing the World by Investing with Your Values’, The Greenmoney Journal, February/March 2002.

62 SustainAbility/Ketchum/UNEP, Good News & Bad: The Media, Corporate Social Responsibility and Sustainable Development, London, 2002.

63 See for example Roper Reports Worldwide, Cause Branding: Does Social Good = Market Share, Spring 2000.

64 www.bpdweb.org65 http://unepfi.net/fii/signatories

_country.htm16 May 2002.

66 New cases will be added to the online database accompanying this report at www.sustainability.com/developing-value

67 Kofi Annan, ‘We the Peoples’: The Role of the United Nations in the 21st Century, United Nations www.un.org/millennium/sg/report/index.html22 May 2002.

68 David Sanders Payne, Capitalismo Natural, Rocky Mountain Institute www.rmi.org

69 Centre for Civil Society, London School of Economics.

70 Adapted from World Resources Institute’s Digital Dividend program www.digitaldividend.org

71 As defined by The International Ecotourism Societywww.ecotourism.org

72 Adapted from AA 1000.73 Ruth Hillary,

Small and Medium Sized Enterprises and the Environment, Greenleaf Publishing, Sheffield, 2000.

This report would not have been possiblewithout the contributions of manyindividuals, whom we gratefullyacknowledge for the time and energy they brought to this project.

We thank Ireland Aid for supporting thisproject financially.

We are indebted to our Advisory Panel, whichreviewed the methodology and report drafts,providing us with invaluable insights alongthe way:

— María Emilia Correa, Nueva Group, Costa Rica;

— Teoh Cheng Hai, Consultant, Total Quality & Environment Management, Malaysia;

— Alison Ramsden, South African Breweries, South Africa;

— Shankar Venkateshwaran, Partners in Change, India

The report has benefited tremendously fromthe contributions of Philippine Business for Social Progress (PBSP) and the NationalBusiness Initiative (NBI), South Africa. We would like to thank Elvie (Bing) Gancheroand Grace Mandac from PBSP and GillianHutchings from NBI.

A special acknowledgement goes to DanielBubla, managing director, and Ivan Budil,CFO, Cembrit; Rodolfo Guttilla and StefaniaValle from Natura Cosmetics; Lia Vangelatos,senior business development manager, AngloAmerican; and Funing Hou, vice president,Bank of Shanghai.

We would also like to express our gratitudeto the many experts from around the worldwhom we interviewed while researching thisreport, for helping to provide the backgroundand context for the research:

Luiz Alberto Aziz Checa, SAI; SebastiánBigorito, CEADS; Fran van Dijk; GeraldFryxell, Hong Kong Polytechnic University;Stuart Hart, University of North Carolina;James Johnson, University of North Carolina;Yann Kermode, UBS; Ashok Khosla,Development Alternatives; Patricia Londono,World Resources Institute; SantiagoMadriñán and Jaime Moncada, CECODES;Richard Ness, Newmont Nusa Tenggara;Javier Padilla, AISA; Lawrence Pratt, INCAE;Shan Shan Cheung, Center for EnvironmentalManagement, Education and Development;Michael Totten, Conservation International;Miguel Angel Valenzuela, Girsa; WayneVisser, KPMG South Africa; and Stanley Yung,Ashoka.

We would particularly like to acknowledgethe special inputs and support of Emilio Canoof Desarrollo Organizacional Sustentable and Jonathon Hanks of Common GroundConsulting.

From IFC, SustainAbility and Ethos, we would like to thank all our colleagues fortheir support and commitment.

Ethos Institute would like to thank AlejandraMeraz Velasco, Shannon Music and the teamof the Knowledge Management Area fortheir commitment.

From IFC we thank Karin Strydom, HarryPastuszek, Mark Eckstein, MargaretWachenfeld, Peter Taylor, Joseph O’Keefe and Gavin Murray for their invaluablecomments to improve the content of thereport; William Todd, Adam Struve, JunfengShi, Carmen Genovese, Stephen Bailey and Jenifer Wishart for their continuoussupport on the case studies; and AthenaAzarcon for her dedication and hard work on this project.

Thanks also to Seb Beloe, Oliver Dudok van Heel, John Elkington, Emily Foskett andNick Robinson from SustainAbility for theirhelp and guidance and to Jan Scherer fornaming the report.

We would also like to thank Still Pictures for the free use of their photographs.

Finally, we are profoundly grateful to ourresearcher Stephanie Faure, now with GlobalRisk Management Services, for her work onthe case studies, and our writer Roger Cowe,who put on paper the messages that were in our minds.

60 Developing ValueAcknowledgements

Acknowledgements

Photographers

Sorting cashews, MozambiqueRon Giling / Still PicturesStock exchange, BrazilJulio Etchart / Still PicturesKunda Nordic Cement before changesIFC Kunda Nordic Cement after changes IFCBoard meeting, Bank of ShanghaiBank of Shanghai Stockbroker, KenyaHartmut Schwarzbach / Still PicturesFruit market, Bolivia Ron Giling / Still PicturesFlower exporter, Kenya Richard LordCopper miners, Zambia Ron Giling / Still PicturesTextile printing, BangladeshNeil Copper / Panos PicturesRecyclable adobe bricks, Cuzco, PeruEdward Parker / Still PicturesStimela Rail, railway maintenance company supported by ZimeleAnglo AmericanCembrit factoryCembrit Clothing factory, IndiaRon Giling / Still PicturesTeapickers, Sri LankaSean Sprague / Panos PicturesWind farm, IndiaKirstine DamkjaerNatura laboratoryNatura Pharmaceutical factory, IndiaHartmut Schwarzbach / Still PicturesBamboo transportation, IndonesiaJen-Leo Dugast / Still PicturesCar factory worker, Brazil John Maier / Still PicturesSmallholder, HungaryPaul Harrison / Still PicturesZen car production, IndiaPaul Smith / Panos PicturesIntercropping, Philippines Ron Giling / Still PicturesTourists, South AfricaTom Walmsley / Still PicturesConstruction site, ThailandNic Dunlop / Panos Pictures Drying sarees, IndiaJeremy Horner / Panos PicturesMonetary exchange, Russia Mark FallanderTextile factory, IndonesiaMark Edwards / Still PicturesEucalyptus plantation, KenyaAdrian Arbib / Still Pictures

Writer

Roger CoweT +44 (0)20 8374 2145

Designer

Rupert BassettT +44 (0)7958 629 290

Paper

PaperbackT +44 (0)20 8980 2233Printed on 100gsm Revive Silk75% de-ink post-consumer waste and 25% mill broke.

Printer

The Beacon PressT +44 (0)1825 768611www.beaconpress.co.uk

The Beacon Press is registered under both the EMAS and ISO 14001 schemes.Recent progress highlights include thefollowing: vegetable-based inks are used;film and film processing chemicals havebeen eliminated; ‘green’ electricity issourced from Ecotricity; 95% of all presscleaning solvents are now recycled; andwaste recycling is now at 90%.

Publisher

SustainAbility Ltd11–13 KnightsbridgeLondon SW1X 7LYUnited KingdomT +44 (0)20 7245 1116F +44 (0)20 7245 1117www.sustainability.com

Developing ValueFirst Edition 2002ISBN 1-903168-05-8 / 0-8213-5181-82002 SustainAbility and International Finance Corporation (IFC)

All rights reserved. No part of thispublication may be reproduced, stored in aretrieval system or transmitted in any formor by any means: electronic, electrostatic,magnetic tape, photocopying, recording orotherwise, without permission of in writingfrom SustainAbility and IFC.

The findings, interpretations, andconclusions expressed in this work are entirely those of the authors andcontributors and should not be attributed in any manner to IFC, the World Bank Group, affiliated organizations, or members of its Board of Executive Directors or the countries they represent. IFC and SustainAbility do not guarantee the accuracy of the data included in thispublication and accept no responsibilitywhatsoever for any consequence of theiruse. The boundaries, colors, denominations,and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgement on the legal status of any territory or the endorsement or acceptance of suchboundaries.

The Developing Value report can be ordered direct from SustainAbility atwww.sustainability.com/storeor from World Bank publications atwww.worldbank.org/publications

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Developing ValuePublication details

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SustainAbility

Founded in 1987, SustainAbility is thelongest established international consultancyspecializing in business strategy andsustainable development — environmentalimprovement, social equity and economicdevelopment.

SustainAbility is a hybrid organization: part strategic management consultancy, part world-class think-tank and partenergetic public interest group. Our strengthis based on a thorough knowledge andunderstanding of current and emergingsustainability issues and of stakeholderperceptions — and on our ability to interpretand communicate these appropriately and effectively.

We work with businesses from a variety of industries and world regions, helping them understand and respond strategicallyto the evolving challenges of sustainabledevelopment.

In all our work we stress the need to createnot just shareholder value but also widereconomic, social and environmental value.

International Finance Corporation (IFC)

Since 1956, IFC has shown that goodinvestment returns are compatible with creating employment, a healthyenvironment, and an improved quality of life in developing countries. IFC hascommitted more than $31 billion of its own funds and has arranged $20 billion insyndications for more than 2,600 companiesin 140 developing countries.

Working with business partners and financial institutions, we invest insustainable private enterprises in regions and sectors underserved by investment from private sources. We set high standardsfor corporate governance and social andenvironmental performance, bringing ourexpertise to project transactions to help our partners achieve the best overallperformance. In addition to our primary role as a lender or direct investor, we useconcessional financing to develop innovativebusiness models and demonstration projectswith broader environmental and socialbenefits.

We find new ways to develop promisingopportunities in markets that commercialinvestors consider too risky or politicallyunstable to provide any measure of security,profitability or growth without IFC’sparticipation. In those environments we see — and encourage — opportunity andprofitability.

IFC is a member of the World Bank Group.

Ethos Institute — Business and Social Responsibility

The Ethos Institute of Business and SocialResponsibility is an association of small andlarge Brazilian companies from a range ofsectors that are keen on developing theiractivities in a socially responsible manner.This is achieved through a permanent process of evaluation and improvement.

Founded as a not-for-profit organization in1998 by a group of business leaders, Ethosstarted with 11 company members. Today the Institute has more than 600 companymembers, with joint revenues correspondingto approximately 28% of Brazil’s GrossDomestic Product (GDP).

The Institute also focuses on specific projects for the media and academiccommunities, and partners with manynational and international institutions.

Developing Value

SustainAbility11-13 KnightsbridgeLondon SW1X 7LYUKT +44 (0)20 7245 1116F +44 (0)20 7245 1117E [email protected] www.sustainability.com

International Finance CorporationCorporate Relations Unit2121 Pennsylvania Avenue NWWashington DC 20433USAT +1 202 473 2258 F +1 202 974 4384E [email protected] www.ifc.org/sustainability

Ethos Institute — Business and Social ResponsibilityRua Francisco Leitao, 469Conj. 1407-CEP São Paulo, SP 05414-020BrazilT +55 11 3068 8539F +55 11 3068 8539E [email protected] www.ethos.org.br

developing value the business case for sustainability in emerging

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