Business & Sustainability
Rachelle Sampson
RH Smith School of Business
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Firms must be part of the solution
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Thinking about sustainability in markets:
1. What does sustainability mean for firms?
2. The bad news:
Pressures against greater ‘sustainability’
efforts by firms – why don’t firms always act
sustainably?
3. The good news:
Where are the opportunities? How can firms
do well by doing good?
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What does it mean for a firm to act ‘sustainably’?
•Ensuring the firm’s continued operation?
•Preserving intergenerational equity?
• What does this mean? How much resource use now versus in
future?
•Becoming ‘carbon neutral’ and/or minimizing energy usage?
•Reducing pollution?
•Managing the life cycle of products and not just the
production? Using recycled inputs?
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The bad news: Why don’t firms act sustainably?
The market rules:
 Focus on earnings targets, a function of production costs
 Future discounted heavily
 investments with uncertain, long term paybacks discouraged
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Pacific Lumber
Long held family firm:
Sustainable logging practices
 Selective cutting
– only up to 70% of mature trees
 Leave most vigorous young trees standing to reseed
and prevent erosion
 Never cut more than forest could replace in 1 year
Held no debt in 1980
Had 100 year plan for sustainable cutting
 Led to deliberately lower profits
What are the implications of this strategy?
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What happened to Pac Lumber?
Hostile takeover in 1985:
CEO replaced
Commenced clear cutting of redwood forests to
realize value of asset (logging rights to land)
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The bad news: Why don’t firms act sustainably?
The market rules:
 Focus on earnings targets, a function of production costs
 Future discounted heavily
 investments with uncertain, long term paybacks discouraged
Competitive implications:
 Improving social & environmental outcomes may increase costs
 Compete with firms with lower cost structures
 Will the consumer discriminate?
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•Product line development: 1.5 years (versus ¾ year for competitors)
•Sustainable fabrics:
 20-30% higher cost than competitors
 Organic cotton: 50-100% higher than conventional & supply chain didn’t exist
•Pricing: 15-20% higher than other specialty makers
•Is this a strategy for all firms?
 “Our growth is small, which is fine because we don’t have the same
shareholder expectations that a publicly traded company would have.”
Patagonia
CFO, Martha Groszewski
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Cyber Monday Ad
• Ad boosted sales
• Argues that stole
existing customers
from competitors
Why don’t firms act sustainably?
The market rules:
 Focus on earnings targets, a function of production costs
 Future discounted heavily
 investments with uncertain, long term paybacks discouraged
Competitive implications:
 Improving social & environmental outcomes may increase costs
 Compete with firms with lower cost structures
 Will the consumer discriminate?
What is sustainability for traditional energy firms? (e.g., BP)
 Voluntarily abandon fossil fuel assets?
Regulatory uncertainty:
 What will be regulated? Energy efficiency? CO2?
Not clear what actions are helpful:

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What is sustainable banking? Carbon offsets?
Some actions make no difference
Uncertainty over what is necessary to make a difference
Measurement of benefits challenging – only manage what can measure!
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Landfill flare in Florida – credits sold on CCX
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What actions will be necessary?
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How to measure firm sustainability efforts?
Environmental
Social
‘Triple Bottom Line’
Economic
Source: John Elkington, SustainAbility, Inc.
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The good news: Where are the opportunities?
Political change
 EPA implementing new program to regulate carbon emissions: rules to be
issued this summer for power plants
 Investment will follow
Demand conditions changing
 Activist groups successful in targeting visible brands
 Better information on products, allowing consumers to discriminate
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Greenpeace efforts against McDonald’s use of
chicken fed with Brazilian soybean
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More transparent labeling…
Imagine every product with a label ranking
each of the categories on the left…
3 phases:
1. Supplier questionnaire
2. Lifecycle analysis database
3. Labeling tool for customers
Small steps now, potential for enormous
change…. will allow consumers to
discriminate & push change up
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The good news: Where are the opportunities?
Political change
 Carbon will be priced…EPA ‘stick’
 Investment will follow
Demand conditions changing
 Activist groups successful in targeting visible brands
 Better information on products, allowing consumers to discriminate
Better design & managerial standards emerging
 LEED – energy efficiency & renewable resource standards
 Cradle to Cradle – closed loop product life cycles & manufacturing
trends
 ISO 14001 – standards for environmental management
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Typical manufacturing ‘cycle’ vs. closing the loop
Waste
Waste
Extraction
Energy
Manufacturing
Energy
Packaging
& shipping
Energy
Waste
Use
Disposal /
landfill
Energy
Packaging &
Extraction
Renewable
Energy
Manufacturing
Renewable
Energy
shipping
Use
Renewable
Energy
Recycled
&/or
renewable
materials
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Adoption of C2C Design at Herman Miller
Eco-effectiveness vs. ecoefficiency
 “Waste equals food” vs.
conservation
Impact on Design
 Ease of disassembly
 parts can be composted or
recycled
 Recyclability and recycled
content
 Materials classification
 Requires systems thinking
The Mirra Chair
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Interface Flor (carpet)
Design changes:
 Recycled inputs (Nylon 6,6)
 Fully re-usable, no loss of value
 Separable carpet backing
 Re-usable
 No monstrous hybrids
Business model changes:
 Option to buy function instead of product
 Can rent carpet
 Tiles replaced as worn, rather than replace old carpet
 All carpet returnable to Interface at end of life for complete
recycling
Results: elimination of waste alone represented 28% of
operating income in 2004
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Subaru: Zero landfill facility in Indiana
Focus on eliminating waste,
not clean up
 Dumpster diving
 5 year plan took 2 years
Impact on Manufacturing
 Change welding practices to
reduce copper slag
 Switch to waterborne paint
 Replaced old spray guns with
more precise paint
applicators
(Big) Side benefit:
…engaged employees
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The good news: Where are the opportunities?
Political change
 Carbon will be priced…EPA ‘stick’
 Investment will follow
Demand conditions changing
 Activist groups successful in targeting visible brands
 Better information on products, allowing consumers to discriminate
New design & managerial standards emerging
 LEED – energy efficiency & renewable resource standards
 Cradle to Cradle – closed loop product life cycles & manufacturing
trends
 ISO 14001 – standards for environmental management
Better measurement of benefits from sustainable actions:
 Tangible benefits: increased rents, market value
 Less tangible benefits: BIDS system at Carnegie Mellon
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What do we know about green building value?
Rent premium on green building (ENERGY STAR or
LEED):
 Premium in effective rent ~7%
 Premium on sale ~16%
 Premium has more value in smaller markets and peripheral parts of
large metro areas, where location rents are smaller.
These effects are above the effects of reduced energy
costs.
 Energy benefits: 10% decrease in energy consumption
increases building value by 1% over and above rent
premium
Source:
Eichholtz, Kok & Quigley (2010) “Doing well by doing good? Green office buildings.”
American Economic Review
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Casa Feliz: San Jose, CA
‘Affordable green housing’ ($300-$600/month)
Energy efficiency puts $$ back into pockets:
•
Average low income household spends 17% total
income on energy
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Castle Gardens: Harlem, NY
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•
Put hot water boilers on the roof
Use trickle vents to encourage
airflow
Money saved put towards energy
saving features – 30% more efficient
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Dollars per employee
Productivity benefits vs. saved energy
Source: Loftness et al (2007) “Building Investment Decision Support (BIDS)”
http://www.nwcouncil.org/energy/rtf/meetings/2007/08/BIDS_study.pdf
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Productivity increases: breakdown
Source: Loftness et al (2007) “Building Investment Decision Support (BIDS)”
http://www.nwcouncil.org/energy/rtf/meetings/2007/08/BIDS_study.pdf
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The good news: Where are the opportunities?
Political change
 Carbon will be priced…EPA ‘stick’
 Investment will follow
Demand conditions changing
 Activist groups successful in targeting visible brands
 Better information on products, allowing consumers to discriminate
New design & managerial standards emerging
 LEED – energy efficiency & renewable resource standards
 Cradle to Cradle – closed loop product life cycles & manufacturing trends
 ISO 14001 – standards for environmental management
Better measurement of benefits from sustainable actions:
 Tangible benefits: increased rents, market value
 Less tangible benefits: BIDS system at Carnegie Mellon
Better understanding of how people make decisions:
 Using behavioral biases to encourage pro-social/environmental behavior
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Follow social norms, good or bad
2 Signs:
1. “Many past visitors have removed
petrified wood from the
Park, changing the natural state of
the Petrified Forest. Please don’t.”
(Showed pictures of people stealing wood.)
2. “Please don’t remove the
petrified wood from the Park, in order
to preserve the natural state of
the Petrified Forest.”
(Showed picture of lone visitor stealing a piece of
wood, with a red circle-and-bar
symbol superimposed over his hand.)
Petrified national forest
Sign 1 led to 3x theft vs. sign 2
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Influencing Users: OPOWER
Conservation messages printed on door hangers and left on
homes
$$$
Environment
Citizenship
Neighbours
Turn off AC &
Turn on Fan
Turn off AC &
Turn on Fan
Turn off AC &
Turn on Fan
Turn off AC &
Turn on Fan
Zero Impact on Consumption
Schultz & Cialdini (OPOWER Scientists)
Hewlett Foundation San Marcos Study
6% Drop in
Consumption
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A new power bill….
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Bill detail
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Effectiveness of behavioral strategies
Conducted a study of 35,000 households:
•
Study of 35,000 households:
•
•
Program savings increased year over year
2.89% (year 2) vs. 2.37% (year 1)
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Consistent with NYU study of 600,000
households (2% reduction in consumption)
•
Consistent with Ayres study at Yale Law:
•
75,000 households
• Sustained energy usage decrease over year
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Facilitating behavior with technology
During setup
Keep user in control
Reinforce efficient behaviors
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Want more behavioral applications?
iNudgeyou.com
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The good news: Where are the opportunities?
Political change
 Carbon will be priced…EPA ‘stick’
 Investment will follow
Demand conditions changing
 Activist groups successful in targeting visible brands
 Better information on products, allowing consumers to discriminate
New design & managerial standards emerging
 LEED – energy efficiency & renewable resource standards
 Cradle to Cradle – closed loop product life cycles & manufacturing trends
 ISO 14001 – standards for environmental management
Better measurement of benefits from sustainable actions:
 Tangible benefits: increased rents, market value
 Less tangible benefits: BIDS system at Carnegie Mellon
Better understanding of how people make decisions:
 Using behavioral biases to encourage pro-social/environmental behavior
Emergence of important new ideas for markets:
 Rethinking mobility: Better Place
 Rethinking product life cycles & manufacturing: Flor carpeting
 Surmounting capital constraints: Solar power financing
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New market developments
Better Place = Electric
cars + battery swapping
stations + pay by the
kilometer
Flor Carpeting = Rent
commercial carpeting +
recycled materials +
‘closed loop’ lifecycle
Clean Power Finance
= solar panels without
capital + buy electricity
from finance firm at
reduced rate
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The good news: Where are the opportunities?
Political change
Demand conditions changing
 Activist groups successful in targeting visible brands
 Better information on products, allowing consumers to discriminate
New design & managerial standards emerging
 LEED – energy efficiency & renewable resource standards
 Cradle to Cradle – closed loop product life cycles & manufacturing trends
 ISO 14001 – standards for environmental management
Better measurement of benefits from sustainable actions:
 Tangible benefits: increased rents, market value
 Less tangible benefits: BIDS system at Carnegie Mellon
Better understanding of how people make decisions:
 Using behavioral biases to encourage pro-social/environmental behavior
Emergence of important new ideas for markets:
 Rethinking mobility: Better Place
 Rethinking product life cycles & manufacturing: Flor carpeting
 Surmounting capital constraints: Solar power financing
New models for business:
•
LC3s, B-corp, employee-owned cooperatives
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The traditional for-profit company
Owners
Incentive alignment
Company
(Manager)
Customers
Community
Employees
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Employee cooperative
Community
B Corp:
• can make social
mission central, over
profit maximization
LC3:
• Can take contributions
from non-profits for
social enterprise
Company
(Manager)
Customers
Employees
Owners
Incentive alignment
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How to get to a sustainable world?
No silver bullet….
Technology development, new markets, and
new policy must all be part of the solution.
Context determines relevant solutions.
More material?
• www.grist.org
• dotearth.blogs.nytimes.com
• Inhabitat.com
• treehugger.com
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Sample questions from Walmart…
Energy and Climate: Reducing Energy Costs and Greenhouse Gas
Emissions
1. Have you measured your corporate greenhouse gas emissions?
2. What is your total annual greenhouse gas emissions reported in the most
recent year measured?
Material Efficiency: Reducing Waste and Enhancing Quality
3. If measured, please report the total amount of solid waste generated from the
facilities that produce your product(s) for Walmart for the most recent year
measured.
Natural Resources: Producing High Quality, Responsibly Sourced Raw
Materials
4. Have you established publicly available sustainability purchasing guidelines
for your direct suppliers that address issues such as environmental compliance,
employment practices and product/ingredient safety?
People and Community: Ensuring Responsible and Ethical Production
5. Do you know the location of 100 percent of the facilities that produce your
product(s)?
6. Before beginning a business relationship with a manufacturing facility, do you
evaluate the quality of, and capacity for, production?
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