Sustainability:
Costly Inconvenience or New
Business Paradigm?
Baruch College
April 2, 2008
Daniel Mahler, Partner
New York Office
The challenge: billions of people globally aspire the
western standard of living but resources are limited
Today
7 bn.
Future, 20xx
100 (indexed)
20%
80%
80%
20%
# People
Resources
One planet
7 bn. +x
• Resource prices
indicate that demand
already exceeds supply
• Regardless of
environmental impact
developing countries
strive to increase
standard of living
500
10%
98%
90%
# People
Resources
Five planets
2
The Sustainability Challenge is re-shaping the
environment for doing business
Key drivers of the sustainability challenge
Environmental & social
problems
Scarcity
of natural
resources
• Global warming
• Environmental
degradation
• Child labor; poor
social standards
• Increasing demand
for oil & gas
• Scarcity of water
Business threats…
• Increasing resource prices: from 20$ to
100$ per barrel oil in 5 years
• Global Warming premium: pricing in of CO2
cost in energy prices
• Vulnerable supply chains: 70% of iron ore in
the hands of three global players
• Increased policy risk:
- Australia bans incandescent light bulbs
- San Francisco bans plastic bags
• …
… and opportunities
Emerging participation
of developing countries
• Increasing material aspirations
• Competition for resources
• Migration
• New markets: 50% of Global GDP growth will
come from developing markets
• Growth opportunity:
- UK demand for Fair Trade products growing
over 40%/year
- US demand for organic products up 20+% for
past 10 years
- strong growth of final demand from
developing countries
• Differentiation opportunity: superior access to
capital and talent for sustainability leaders
• …
3
In recent times, major companies have engaged in
a flurry of activities around “Sustainability”
Examples
Tesco invests $990MM
to reduce carbon
footprint
Michael Dell announces he
will enable customers to
plant a tree for every Dell PC
sold
2007
Wendy’s stops using transfats in fries and fried chicken
Leading
companies form
U.S. Climate
Action
Partnership
CVS offers walk-in clinics
that provide low-cost
basic healthcare
G.E. will invest $1.5
billion in
environmental
technologies by 2010
Goldman Sachs
commits to investing
$1 billion in clean
energy technologies
2006
Wal-Mart commits to
being more
environmentally
conscious
McDonald’s introduces
healthier menu items
2005
UPS truck fleet has 1500
alternative fuel vehicles
4
Sustainability is about creating competitive advantage
from aligning financial, social and environmental goals
A.T. Kearney’s Sustainability Framework
Definition of Sustainable
Development
Economic
Development
Financial Performance
"For the business enterprise,
Growth vs.
Efficiency vs.
Environment
Social
Maximum
Benefit
Focus Area
Environmental
Protection
Environmental
Impact of
Business
Activities
Environment
& Welfare
Social
Wellbeing
Enterprise Impact
on Society
sustainable development means
adopting business strategies and
activities that meet the needs of the
enterprise and its stakeholders today
while protecting, sustaining and
enhancing the human and natural
resources that will be needed in the
future."1)
Creating a Competitive Advantage and a
sustainable shareholder return
1) Book: Business Strategies for Sustainable Development: Leadership and Accountability
5
CEOs and the Boardrooms are beginning to discover
sustainability as a “top line” opportunity
Does Your Company Have a Corporate
Sustainability Strategy?
Prominently Expressed Objectives for
Corporate Sustainability Strategy (1)
Total = 100%
54%
Improve brand
Differentiate products
50%
xx%
46%
Compliance
No
42%
Risk Mgmt..
Yes
58%
Efficiency
Retention
Cost
Source:
Notes:
A.T. Kearney and Institute for Supply Management
(1) Multiple responses allowed
TM
33%
21%
21%
17%
(ISM) Sustainability Management Survey, January 2007
6
But: sustainability is a challenge representing
opportunities and risks
Sustainability can be a …
"Revenue Threat"
Revenue
• Declining relevance of current
product portfolio (e.g., SUV)
• Boycott (e.g., Nike)
• Safety Disaster (e.g., Schering)
"Cost Peril"
Costs
•
•
•
•
Carbon Tax
Exploding Commodity Costs
Sustainability Administration
Localization of Supply Chains
Risk
"Growth Platform"
• New Products (e.g., Hybrid, Solar,
Organic)
• New Markets (e.g., Micro-Business
model)
• Price Premium (e.g., „green features“)
Amplifier
Reputation
"Efficiency Booster"
• Energy Efficiency (e.g., WalMart)
• Product Specification Optimization
(e.g., Packaging design, material
usage)
• Value Chain Optimization (e.g.,
manufacturing/network design, service
levels)
Opportunity
7
Latest research indicates that companies excelling in
all three dimensions command an evaluation premium
Companies good in all three dimensions…
….command a premium
Shareholder Value Development
(2003-2007)
….and outperform their peers more often
Shareholder Increase
GS Sustain vs. Industry Peers
(2003-2007)
+25%
MSCI Index
72%
GS Sustain
Companies
higher
28%
Industry
Peers higher
GS Sustain
Companies
Source: Goldman Sachs, GS Sustain, May 2007, includes 120 companies from Energy, Mining, Food & Beverage, Pharmaceutical Industry
8
Understanding the longer term value challenge is
pivotal in developing a sustainability strategy
Company Sustainability Value Challenge
Illustrative
“Sustainability
Champion Path”
Creation
“Cost
Threat”
SVC
Sustainability
Value Challenge
+
“Efficiency 2020
Booster”
Protect
2015
Win
“Growth
Platform”
2010
Destruction
Shareholder/
Company Value
“Evaluation Premium”*
Sustainability
Strategy
“Revenue
Threat”
“Do-Nothing Path”:
Maxium Value
Destruction Scenario
Source: Goldman Sachs
9
Conclusion –
“Going Green”….
 … should be more than a PR effort repackaging existing efforts
 … is more than fighting “global warming” -- the underlying issues are larger
 …, if done correctly, is not “another initiative”
 …. but the long term survival, health and fitness program of a company
10