What makes sustainability profitable?

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Making sustainability profitable
What business leaders do to drive real value from sustainability initiatives?
MAKING SUSTAINABILITY PROFITABLE
Key findings
Some companies position themselves more proactively than others in term of sustainability and seek opportunities to make their activities sustainable, but there is still considerable room for improvement. Many business leaders ask the question: “How to make sustainability initiatives profitable?” This report should help them to identify opportunities to benefit from their environmental initiatives. Key findings of the survey are: • Sustainability is not an option any more! There is a gradual shift in the global mindset and most of the companies start or continue to integrate this new element into their business transformation. With an increasing pressure from different stakeholders, ignoring the imperative for sustainability action could put your company’s business at risk in a very near future. • Develop a strategy and integrate it fully. Sustainability transformation must be coherent. The business strategy built on sustainability offers the framework for articulated and related initiatives. Companies that have fully integrated sustainability into their strategy execution are more likely to drive value from their initiatives. Commit the top executives and fully involve management and employees at each level. Free the necessary resources and avoid the middle management squeeze or the executive vacuum! • Measure your environmental performance. Performance evaluation is essential to align your actions with the execution of the company’s strategy. Metrics will support management for decision-making. To assess investments, take all aspects of the environmental initiatives payback into account. Increase your traditional cost-benefit analysis with impacts on risk mitigation and brand value. • Follow risk and anticipate change. Environmental risks are real and companies have to protect themselves against them. Assessing and following threats seriously help to uncover new opportunities and anticipate future changes. Use sustainability as an income driver and benefit from the change. Move ahead of issues or stakeholders will force you to do it! • Move first and make it visible! Be the first to move to develop the competitive advantage. Communicate about your efforts and actions that make sense. Pairing profitability and growth with sustainability is more than doable. Plenty of opportunities exist to do so and it is by embracing sustainability that it becomes the most profitable.
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Table of Contents
Introduction 4
Business and Sustainability
9
Sustainability in the business
17
Evaluating, monitoring and reporting sustainability
27
Environmental Risk mitigation
33
What makes sustainability profitable?
39
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Introduction
I. Forewords
Nowadays, most companies are aware of the increasing necessity to build a future based on sustainable principles. More and more executives express their convictions that, in a wide range of areas and corporate activities, the approach towards business has to change from the traditional way to more sustainable activities. Still, it is noticeable that, when proactive management decisions related to sustainability are needed, there is generally a gap between talks and actions. However, some companies seem to position themselves faster than others and seek for opportunities to make their activities sustainable. Some have succeeded in making sustainability profitable and drive real value from each one of their initiatives.
II. Objective of the survey
This report explores how and why companies in Belgium engage for sustainability, how they integrate different sustainable concepts inside their strategy and what is the level of implementation within their activities and their different functions. It also covers how these companies assess their efforts, which difficulties they experienced while striving to engage towards sustainability and how they manage operational risk linked to the environment. Finally, this survey aims to highlight how companies that have succeeded in making their sustainability initiatives profitable, differentiate themselves. Making sustainability profitable implies making the change towards sustainable business an opportunity to create value for the company. In other words, it means managing sustainability issues while offering profitable benefits, in the short and long terms: in the short term by driving revenues or reducing operational costs, in a longer run by reducing environmental and regulatory risks in the supply chain and by creating and benefiting from intangibles such as enhanced brand value and competitive advantages. This report aims to explore strategies and tools used by companies to identify and benefit from environmental opportunities. Even if they are complementary to make business sustainable, environmental and social issues are different kind of challenges. This study focuses especially on the environmental and economical dimensions of sustainable development.
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III. How this study is build
Business and sustainability
Environmental challenges Pressures to changes Various responses
Sustainability in the business
Perception Strategy Pitfalls
Measurement
Importance of measurement Difficulty to measure
Risk Mitigation
What is tracked? Who is tracked? How is it tracked?
Making sustainability profitable
IV. Approach
This report is based on quantitative data collected through an online survey and on qualitative data collected through face to face meetings with people in charge of sustainability within their company. The survey was conducted by Kurt Salmon in autumn 2010 and received complete responses from 85 companies. They were selected from a wide range of areas of activities and from medium to large companies. The panel consists of Belgian companies and multinationals operating in Belgium. Respondents are either C-level or Management in charge of sustainability and environmental responsibilities. Those quantitative data were complemented by 35 qualitative interviews with companies that have demonstrated that sustainability constitutes a lever for their development.
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V. Respondents information
Figure 1 - Sector distribution
Retail Transport, Energy & Utilities
2% 10% 21% 11% 18% 15% 12% 11%
Others Telecom & Media Professional Services Financial services Engineering & Construction Manufacturing, Consumer Good and Wholesales
The sample is covering all types of activities across various sectors.
Figure 2 - Turnover distribution
15% 5% 16% 6% 58%
0-500 500-1.000 1.000-5.000 5.000-10.000 > 10.000
Around 40% of the surveyed companies have a turnover over 500 million€.
Figure 3 - Number of FTEs
14% 5%
0-500 500-1.000
15% 11%
55%
1.000-5.000 5.000-10.000 > 10.000
About 45% of the surveyed companies employ over 500 full time equivalents.
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VI. Acknowledgements
Kurt Salmon is very grateful to all companies, respondents, and interviewees who have been involved in this survey as well as the companies who accepted to meet us and provided us with valuable information, in particular: • Francis Blake, Director at Derbigum • Fabio Boccalatte, Director CSR and Group Communication at AGC Glass • Magda Buelens, Public Affairs & Environment Director at Tetra Pak Benelux • Pierre Coërs, Corporate Senior Sustainability Advisor - Corporate Management for Health Safety and Environment at Solvay • Eric Coiffard, Senior Property Manager at Cofinimmo • Stephan De Brouwer, Managing Director at McDonald’s Belgium • Isabelle de Cambry, Associate Director Corporate HSE & CSR at UCB • Olivier Dautrebande, Eco Manager at Total Belgium • Bruno Defrasnes, Director Sustainable Development at Electrabel • Philippe Dembour, Head of Corporate Responsibility and Sustainable Development at ING • Veerle Demol, CSR Communications Officer at KBC • Jean-Christophe Donck, Vice President at UCB • Guy Ethier, Senior Vice-President Environment, Health & Safety at Umicore • Concetta Fagard, Vice-President Group Reputation, Vice-President Group CSR, Sponsoring, PR & Events at Belgacom Group • Marc Flammang, Managing Director at Bank Degroof Foundation • Stéphane Geerts, Director General Services at Group RTL Belgium • Aurelie Gerth, Public Affairs and Media Relations Manager at Unilever Benelux • Mia Goetvinck, Director Business Excellence/CSR at Ricoh Belgium • Dr. Hildegard Deweerdt, Environmental expert at KBC Bank • Laurent Kahn, General Manager at EXKi • Catherine Kinet, Head of Corporate Social Responsibility at BNP Paribas Fortis • Rikkert Leeman, Chief Technical Officer at Befimmo • Pascal Léglise, Quality and Sustainable Development (CSR) Director at Carrefour Belgium • Olivier Marquet, Managing Director at Triodos Belgium • Xavier Milcent, Global Marketing Manager at ExxonMobil • Florence Rossi, Corporate Social Responsibility & Quality Manager at Sodexo • Hannelore Schotsaert, Marketing & Communication Manager at BMA Ergonomics • Géraldine Tondreau, Sustainable Development Advisor at Electrabel • Vincent Vanwijnsberghe, Government Affairs & Public Policy Manager at Baxter • Mieke Vercaeren, Advisor public affairs at Colruyt • Gaëlle Vervack, Responsible Renewable Energy and RUE at Elia
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Business and Sustainability
Global warming is unequivocal!
Despite many quarrels between eco-partisans and eco-sceptics, there is now one certainty: there is no doubt about the truthfulness of global warming and its consequences such as an biodiversity. For years now, many scientific and public figures show us key messages: • Global warming is unequivocal: the world’s average temperature is rising, • Most of this warming comes from human activities, in particular GHG such as CO2 due to the burning of fossil fuels, • It is translated into more negative than positive consequences, and the severity is likely to increase. Furthermore, other major environmental challenges have reached common acceptance such as energy shortage, water stress, waste management, ocean fish depletion and deforestation, to name only a few. In the end, no matter if scientific, eco-partisans or eco-skeptics are right, the general public is now convinced about the necessity to limit our impact on the planet. Clients, consumers, as well as employees and business partners are now expecting companies to respond to these challenges in an appropriated way. More and more companies acknowledge those facts and endorse their part of responsibility regarding the environment. Accordingly they started to integrate sustainability principles within their activities. This trend has been encouraged through initiatives of diverse institutions at international, national and even community level. In this context, this part of the report tends to identify how and why companies in Belgium engage for sustainability. It will first assess what are the challenges perceived as the most difficult for the future. Then, it looks into the different pressures pushing company to take measures and to start initiatives. Finally, it examines which actions are taken by companies to respond to those challenges and pressures.
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I. Companies are preparing to face climate challenges
Figure 4 - What are the most difficult challenges related to sustainability that you are expecting to face in the near future?
Rise in energy cost Climate change and upcoming relevant regulations Rise in transportation costs Rise in commodity prices 34% 31% 59%
69%
28% Public opinion regarding environmental decisions 28% Air pollution and upcoming relevant regulations 28% Waste Management 28% Water scarcity and upcoming relevant regulations 20% Lack of resources needed to produce 20% Bio-diversity and land use related issues 11% Chemicals, Toxics, and heavy Metals and upcoming relevant regulations
0%
10%
20%
30%
40%
50%
60%
70%
80%
While global society is aware of the different challenges, the results highlight 4 major challenges that companies expect to face in the near future. For most of the surveyed companies, “rise in energy cost” and “climate change and upcoming relevant regulations” represent the 2 most difficult challenges for the near future. These are closely followed by the “rise in transportation costs” as well as the “rise in commodity prices”.
For a majority of companies, rise in energy cost and climate changes regulations will be the 2 most challenging issues to manage in the near future.
Worries expressed by companies reflect the awareness that the business as usual is currently putting too much pressure on
key natural resources. Those resources, like oil, commodities and industrial metals, are gradually reaching their limits. On numerous areas, companies cannot continue to go forward with business as usual regardless of the environment. Since energy has taken a central position in our society, it makes this challenge highly visible and shows the constraints imposed by our planet. However, like any challenge, it can be seen as an opportunity. It is an early warning in order to reorient how markets and society function and hence how companies operate in their day to day activities. Challenges expressed also reflect concerns on air pollution and in particular on climate change as regulators worldwide are determined to put pressure to lower this at a sustainable level.
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II. There is an increasing pressure to make companies act in a more sustainable way
Figure 5 - What are the main sources of pressure that drive companies to pay attention to sustainability issues?
According to respondents, 4 main drivers pressure their company to pay attention to sustainability issues: the necessity to strengthen their competitive position, to meet consumers’ expectations, to manage the risk of regulation as well as to attract, motivate, and retain talented employees.
Didier Bellens, CEO Belgacom “CSR helps us to anticipate on societal trends and stakeholder expectations. It drives innovation and opens doors to promising new business areas”
Competition is the most important factor that drives companies to address sustainability issues.
The main source of pressure to address sustainability issues comes from competition. If they want to keep one step ahead, companies have to move to strengthen their competitive position. Environment being more and more important in customers’ minds, companies must adapt to meet consumers’ expectations. Some companies however gain from a competitive position by beating environmental expectations! Francis Blake, Derbigum “Through our program of innovation which started less than 10 years ago, we grew from a company active in roofing systems to one that is ‘Making building smart’. A sustainable approach and a strong R&D program have led us to the development of more eco-friendly solutions which permitted to gain a significant competitive advantage”
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On the other hand, regulatory risk is constantly pressuring companies. Some institutions, such as the European Union, play an important role, pushing companies with more regulations to fight against climate change. The cap-andtrade system for the carbon market and the extended producer responsibility, requiring companies to take the ownership of the product they launch on the market, are good examples of the numerous initiatives taken by the authorities.
Furthermore, on the strength of employee’s expectation, companies tend to act more responsibly. Indeed, in the fierce competition for talent, potential employees also growingly take into consideration the sustainability argument and actual employees want to be proud of their work and of their employer.
Stakeholders’ pressures box
Competition: Through providing more sustainable products & changing behaviours.
• See Derbigum text box
Financial partners: Banks and Hedge funds are now including environmental factors inside their investment decisions
• Equator principles: new standards for decision making about project finance loans • Carbon Principles: agreement to look hard at carbon risk of electric power projects financing (2008, JPMorgan, Morgan Stanley, and City group)
Consumers: Consumer awareness and expectations increase. They demand information such as what is in the product, where it comes from and how it is made. Authorities: Be it from international institutions (United Nations, European Union, etc.), national or local government, the number of environmental regulation boomed in the last two decades.
• At European level, directives and regulations are directly impacting companies’ activities: RoHS (restriction of hazardous substances), WEEE (waste electrical and electronic equipment), REACH (registration, evaluation and authorization of chemicals) • Due to the presence of a contaminating product (cadmium) within their Playstation cables, Sony wasn’t allowed to supply their product just before Christmas 2001 in the Netherlands
Investors and Stock Market: ranking system that refers to sustainability performances.
• SRI indexes: DJSI, FTSE4Good, ASPI, Ethibel Excellence Europe,etc... • Ranking Agencies: Vigeo, SAM, Eiris, etc.
Financial market: Market uncertainty
• Energy costs variation
Local Communities: Local communities are more self-powered and companies need to involve them for opening or expending operations in a region.
• The local community of southern India succeeded to remove Coca-cola’s license to operate in Kerala for its bottling plant due to an over-exploitation of ground water sources and the emission of toxic sludge. As a Result many people in India have cut down or given up on Cola consumption
Employees: Today employees are looking for a meaning in their day to day work. They need to be proud of the company they work for! New employees and competition for talent.
• New generations are more sensitive to green concepts
NGOs & Opinion leaders: Retaining considerable public influence
• Chiquita was pressured in the 1990’s to change its way to work with local farmers • Al Gore’s recent campaign on climate change has tremendously attracted the attention of general public
Business partners: B2B customers are increasingly asking their suppliers to reveal what their products contain and how they make them.
• Walmart is pressuring for sustainability principles compliance concerning products, requesting its 70 000 suppliers to lower fossil fuel use and waste.
Medias: Traditional media (TV, radio, newspaper) but also new media (internet) increase the awareness of consumers
• After a campaign of media harassment through Facebook, Greenpeace urged the agribusiness giant Nestle to abandon oil palm and engage in a policy of «zero deforestation» • The movie «home» from Al Gore has risen the awareness of several million viewers
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Our Point of View
Best performers are always one step ahead of the competition. Indeed, being one move ahead allows you to be better prepared to deal with upcoming problems. We believe that all the signs are present, it is time to jump! In the last few years, watchdogs and opinion leaders have been more urgently raising awareness on sustainability. Media play an important role as well. Major business publications and newspapers, have increased their focus on sustainable development topics and are definitely on the watch for a corporate blunder. Consequently, sustainability issues climb the general public agenda and climate change becomes an increasing concern. As the results show it, consumers, employees, communities as well as businesses and financial partners now expect companies to take their responsibilities and to respond to the challenges in an appropriated way. Those changes of behaviour pressure and affect significantly company’s activities (See Stakeholders’ pressures box above). In addition, numerous examples show that in the race to sustainability, companies that move first gain the most significant competitive advantage.
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III. In response to these pressures, companies identified appropriate approaches targeting the highest impact
Figure 6 - Ranking of the most effective actions to reduce a company’s environmental impact
1 2 3 4 5 6 7 8 9 10 11 12
Purchase of Clean energy Production of Clean energy Carbon footprint analysis Waste management Cost identification & reduction Green Procurement Products/services optimization Fleet management optimisation Usage of clean technologies/green IT Smart buildings Environmental Risk Management Search for Subsidies 30% 46% 53% 54% 41% 46%
63%
Rank of the action by order of perceived effectiveness to reduce a company’s environmental impact.
78% 72%
Percentage of respondents already using the action within their company
58% 68% 59%
The survey assessed several levers that can be used as a response to environmental issues. On one hand, one question covered the perception on effectiveness of those actions regarding the reduction of companies’ impact on the environment. On the other hand, another question assessed which levers where effectively used by companies to respond to environmental issues.
For the respondents, the actions and opportunities perceived as the most effective are, by order of effectiveness: the production and use of clean energy, the use of a carbon footprint analysis to assess and mitigate GHG, and waste management. Concerning the actions already used, the most used ones are the improvement of waste management, the monitoring and reduction of costs and the improvement of the fleet selection.
There is a mismatch between the actions perceived as the most effective and the ones effectively used.
The results show a mismatch between the actions perceived as the most effective and the levers currently used by companies to respond to the environmental issues. For example, the use of clean energy is considered as the most effective action, yet regarding the use of
these actions, the purchase of green energy is the fifth initiative the most used and the production of green energy locally is the 11th initiative. Nevertheless, waste management and costs identification & reduction are, in both cases, in the top 4 actions.
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Our Point of View
Most mismatches between actions perceived as the most effective and those currently used by the respondents can be explained by the perceived returns on these actions. The best way to reduce the impact is rarely the cheapest, let alone the easiest! In this regards, governments and institutions can have a significant impact. In the same way, the most significant mismatch of the results is the fleet management which in Belgium can be explained by the federal auto premium as well as the regional incentives. For obvious reasons, policy makers are very active in limiting road transport nuisances which are reflected in the the various European eco-taxes on road transport and fuel consumption. Similarly, even if clean energy is perceived as the most impacting action that a company can take to reduce its impact on the environment, it is generally costly. Indeed, producing your own “green” energy is a considerable investment for which the payback period is relatively long. Additionally, many companies do not own the building they work in, which in case of solar panels and windmills makes it more complex. On the other hand, purchasing clean energy is much easier but it is an investment for which the returns are intangible and difficult to measure financially. Hopefully, more and more companies are seeing the benefits through the costs and clean energy is definitely becoming trendy. Again, governments can and are playing a significant role through “Feed in Tariff ”, green certificates, and other regulations and incentives towards clean energy production. Likewise, the results show that a carbon footprint analysis can be very useful to help reducing the company’s impact. In regards to GHG, it can be used as a starting point from where you can identify where to act in order to have the strongest impact on your emissions. However, it is a complex process for which companies usually do not have the internal competencies and knowledge. In addition, the analysis needs to be done continually or on a regular basis to be the most effective. Though, waste management is a good match because reducing waste to a minimum and by doing so increasing productivity, is part of doing efficient business which is a priority for most companies. Nevertheless, the mindset on waste management is evolving. The change in perspective from an unbounded world with unlimited resources to a constrained world highlights the need for another approach to waste management. The best initiatives start ahead in the supply chain and aim at closing the loop through a cradle to cradle product life-cycle.
Cradle to cradle at BMA Ergonomic’s, Hannelore Schotsaert "Most of the chairs used in an office environment are out of use after 7 years on average. Undoubtedly, most of those chairs are designed to last longer! BMA Ergonomics’ AXIA chair is, through its Design for Disassembly an alternative to the classic cradle to grave products. BMA Ergonomics operate a withdrawal guarantee. After years of intensive use, BMA Ergonomics come and pick up your old Axia chair. In exchange, you will even receive a money coupon to use for a new chair (around 50 EUROS in 2010/2011). The old chair returns to the factory. In the recycling shop, especially equipped for this purpose, and is completely taken apart. Some of the components are directly reused in the manufacturing of new chairs. Others are sent back to their suppliers, who recycle the parts and use them in the production of new materials. Today, BMA Ergonomics guarantee that their products consist of at least 67% recycled materials." This is an example of a Cradle to Cradle Design in which technical materials are viewed as nutrients for new products. This kind of design seeks to create systems that protect our planet by developing almost waste free processes.
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Sustainability in the business
Companies finally acknowledge their environmental responsibility. Therefore, they start increasingly to integrate sustainability principles within their business activities. As shown below, this fact is reflected by an increased environmental focus in their core strategy. In this context, this part of the report highlights the trend to engage in sustainability through a strategy oriented towards planet concerns. It assesses the proportion of respondents who fully or partially implemented sustainability within their strategy. In the first place it looks into the reasons why some did not develop sustainability within their strategy. Secondly, it explores why the others did develop it. Finally, the report studies how companies structure their organisation to support environmental initiatives.
I. Environment is no longer an option, it is now taking an important role within corporate strategy, and this trend will strengthen in the near future
Figure 7 - To what degree does companies’ strategy focus on the different elements of the «Triple P»: People, Planet, Profit?
Planet 24% People 29% Profit 49% People 29%
Planet 34%
Planet 36%
Profit 37%
People 30%
Profit 34%
5 years ago
Today
5 years from now
5 years ago, profit was by far the highest concern of the triple P mix (People, Planet, Profit). Nowadays, businesses strategies seem
to be more balanced between the 3 elements and what is more, there is an increasing trend for planet concerns.
Results confirm that companies are increasing their focus on environmental concerns.
It is manifest that companies tend to integrate sustainability concerns within their core strategy. This shift is visible and companies are responding to constantly growing pressures and try to stimulate environmentally sound behaviours internally. Externally, companies claim not only to be willing to reduce their impact but more and more that they commit themselves to protect the environment.
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Our Point of View
To survive in today’s changing environment, companies are required to adapt their business model. As regards to the environment, they must find ways to stand out from other players and to benefit from competitive advantages. The starting point for this is to develop a strategy oriented toward sustainability. We firmly believe that in a near future, companies that do not have an adapted environmental business strategy will find difficulties to stay in the market. During our interviews and meetings we saw environmental leaders using appropriated sustainability oriented strategies that helped them to: • Cut operational costs and expenses related to environmental issues, • Manage and reduce environmental and regulatory risks, • Drive tangible revenues from differentiation of products and services offered, • Drive intangible revenues from an improved brand image and through improving relationship with their customers, employees, and other influencing stakeholders.
II. Most companies formalised their engagements through the integration of sustainability aspects within their strategy
Figure 8 - Does your company have developed a comprehensive Sustainability Strategy?
Yes, a formal comprehensive and documented strategy
25% 34%
Yes, general guidelines about environment and social responsibility No, we do not have a documented Sustainability Strategy
41%
Our survey reveals that more than 70% of the surveyed companies developed a sustainability strategy, consisting, for 34%, of a formal comprehensive and documented strategy or, for 41%, of general guidelines about
environment and social responsibility. On the other hand, 25% of respondents still don’t have any documented sustainability strategy.
The majority of companies have formalised their engagements on the environmental challenge, ranging from general guidelines to more formal documented strategy
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Our Point of View
As seen previously, in our complex and interconnected world, taking the environment into account is no more an option. On the contrary, it can be seen as an opportunity. While the world becomes global, it is more and more difficult for companies to differentiate themselves. To this end, an environmental perspective can help to reduce risks, cut costs as well as to drive revenues and enhance hard to measure but significant intangible value. Hence, the development of an environmental strategy has become a critical point for competitive differentiation. Indeed, developing a strategic approach to environmental issues helps to identify the opportunities related to the environment a more natural part of doing business. We are confident that building an appropriated environmental strategy will provide companies with an essential framework for actions. A structured and formalised approach will translate the c-level commitment towards environmental issues and is an essential tool to develop coherent actions aligned with the core activities of the company. During our visits we observed several examples of a successful sustainability strategy creating real value for the company. Nevertheless, it is worth mentioning that for some, temptations to fool the audience are real. Several pitfalls should be avoided and could be revealed as problematic in the future: • Some companies are exclusively committed on “trendy” topics such as GHG reduction. Of course, climate change is an issue of utmost importance for the future. However, to ensure the viability of their business on the longer run, companies must embrace sustainability globally and accommodate their business model accordingly. You cannot see the forest for the trees. • When reporting results, a year’s comparison can make a tremendous difference in the perceived results of the efforts announced. Making bold statements should not only look good but be good and translate real commitment! • In various cases, especially in the retail industry and fast moving consumer goods, companies are announcing efforts and formalising engagements without consulting the operational level on the feasibility of their commitments. This can easily lead to unreached targets.
III. Why have some companies not yet included sustainability within their strategy?
Figure 9 - Primary reasons why companies do not yet have a sustainability strategy?
Does your company have a developed sustainability strategy or guidelines? No
Lack of human resources to drive the changes
Why?
63%
Not relevant for our sector of activity
42%
26% No clear vision of what could be done 25% 16% We are waiting for the right time 11% We don’t see the benefit
Yes
75% 11% There is no time to implement such a change
0% 01
10%
02
20%
03
30%
04
40%
05
50%
06
60%
0
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Among the 25% of respondents who have not yet developed a sustainability strategy, more than 60% claim that they do not have enough human resources available to do so. About
40% believe that the development of such a strategy is not relevant for their sector of activity and 26% claim that they have no clear vision on what could be done.
The most important reason for not integrating sustainability within their strategy is the lack of human ressources.
When looking at the size of the companies who did not implement a sustainability strategy, the human resource issue makes sense: 78% of these companies have less than 500 employees. Moreover, 57% of the companies which believe that the development of a sustainability strategy is not relevant for their sector of activity are active in the professional services sector (not including bank, finance and insurance activities).
Our Point of View
We are convinced that in the today’s world no company big or small, in manufacturing or services can afford to neglect environmental issues. It makes senses that the small companies and service companies feel less concerned about sustainability than others because their impact is already small, the pressures on their activities is limited and they are usually more flexible to adapt quickly without supporting unbearable costs. Nonetheless, stakeholders’ expectations are rising. Even if the pressures are lower, they rise as well for smaller companies and for the professional service industry. Different reasons make us believe that even those companies should take sustainability into account within their strategy. Firstly, more and more large customers are putting pressure on suppliers, big or small, and encourage them to comply with environmental standards. Indeed, as it is the case for 54% of the respondents, many companies are developing “Green Procurement” practices to assess the sustainability of their suppliers. As a result, even for small companies and the service industry, a sustainable strategy can be used as a serious asset to differentiate oneself from its competitors. Secondly, legislation applies also to smaller companies. To meet ambitious commitments made at International level, and in particular at EU level, authorities will increase their requirements towards companies in the coming years. Notably, a recent study on SMEs and the environment in the European Union, conducted jointly by Planet SA and DTI, highlights that small and middle sized companies account for 64% of the industrial pollution in Europe. Hence, some legislation will accordingly be directed towards them. As the REACH directive demonstrated, regulation can have a serious impact on small businesses. Thirdly, we live the information age which has two major impacts on companies, taking all categories together. On the one hand, there are now plenty of tools allowing a higher level of information to track environmental impact. New sensors and information systems make tracking affordable for smaller companies. On the other hand, information travels faster and almost at no cost, which makes small companies more vulnerable to watchdogs and other stakeholders’ scrutiny than they ever were.
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IV. When and for which motives did companies integrate sustainability within their strategy?
Figure 10 - For which motives did companies integrate sustainability within their strategy?
Does your company have a developed sustainability strategy or guidelines? Why?
Improve corporate and brand reputation Differentiate the company’s products Motivate and retain employees 62% 60%
78%
Comply with legal and stakeholders requirements 59% Cost reduction Identify new growth opportunities 52% 48% 47% 47% 43%
No 25% Yes 75%
Increase efficiency Customer retention Improve risk management
0%
01 01
10%
02 03 02 20% 0330% 04
04 40% 05
50%
05 06
60%
06 08 07 70% 0 80% 0
The four main reasons put forward by respondents to explain why they chose to integrate sustainability within their strategy are: • The improvement of their corporate/brand reputation: 78%, • The differentiation of their products: 62%, • The fact that it helps to motivate and retain employees: 60%, • And the fact that it helps to ensure the compliance with legal regulations and other stakeholders pressures: 59%.
Figure 11 - How long ago did companies integrate sustainability within their strategy?
35 35% 30 30% 25 25% 20 20% 15 15% 10 10%
34%
22% 19% 14% 8% 4%
Less than 6 months 6 - 12 months 1-2 years 2-5 years 5 - 10 years 10+ years
5%5 0%0
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Another question assessed the moment in time when sustainability started to be implemented within their strategies. More than 75% reported
having done it in the last 5 years, and more than 20% during the last year.
Most companies implemented sustainability in their strategy to improve their brand reputation and differentiate their products.
There is a recent shift in the way corporate drive changes towards sustainability. While companies were used to perceive sustainability constraints as negative, many see them now as businesses address sustainability in a way that is directed to preserve or improve their brand reputation. In addition, many companies know that they could capitalise on sustainability to differentiate their products and strengthen their competitive advantage. Employees’ motivation and retention is also identified as an important priority for which sustainability plays a growing role. As explained before, employees increasingly search for a meaning in their day to day work and need to be proud of the company they work for. As a matter of fact, since new generations are more sensitive to green concepts, sustainability is now significant in the competition for talent. It is interesting to assess when companies started implementing a sustainability strategy. Most companies did it during the last halfdecade. However, our meetings revealed that in the past, even if sustainability was not expressed directly into the strategy, several actions were done already. This changes and there is now a clear necessity for companies to express it more formally. The trend can also be confirmed by the recent increasing number of new sustainability reports which has boomed in Europe in the last ten years.
Our Point of View
There are many motives for companies to develop an environmental perspective in their strategy. We identify three basic reasons that encompass all motives. First of all, a sustainability strategy helps companies to yield tangible profits and reduce costs. Companies reported to us that when they started addressing sustainability within their strategy, they uncovered upside potentials on both the short and long run. Among other benefits, sustainability pushes them to increase efficiency, to reduce their waste as well as to be more innovative and to uncover new opportunities to increase sales. Secondly, by acting towards sustainability, companies provide consumers and employees with a proof of genuine concern to the growing global unease about the future and about doing the right thing for the next generations. Hence, implementing sustainability into the strategy has a tremendous impact on brand reputation and definitely helps to attract and retain customers as well as employees. There is now a growing need for companies to be more visible regarding their environmental behaviors. Last but not least, sustainability helps them to manage the downside risks. Risk management and compliance with legal constraints as well as with stakeholders’ expectations become crucial for some companies to keep selling their products. To sum up, integrating sustainability within your strategy becomes a “must do” because it lowers business risks while protecting value creation! This fact is strengthening over time: as the results shows, during the last half-decade most companies started to officially commit towards sustainability. Before that, it was risky to communicate on environmental matters because it often meant exposing yourself to watchdog’s scrutiny. Nowadays however, increasing upsides exceed risks. What is more, not to talk about it may well reveal being even riskier!
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MAKING SUSTAINABILITY PROFITABLE
V. Which structure is supporting sustainability initiatives within the company?
Figure 12 - Who is responsible for ensuring that the environment is taken into consideration in your company?
Board of Directors CEO
31%
62%
CFO
12%
Management Team
CSR/EnPurchase & vironment Logistic Unit
51%
Prod. & Engin.
HR
Mktg & Sales
IT dpt.
Adm. & Account.& Fiscal dpt. Control
Financial dpt
45%
26%
23%
18%
14%
8%
5%
3%
3%
For most of companies surveyed, the CEO, the Management Team and a specific Environment or CSR unit are responsible for ensuring that
the environment is taken into consideration within the company.
Figure 13 - Which structure is supporting sustainability initiatives within the company?
At each level of the company, almost everybody is involved to some extent
Number of persons involved in the company
19%
Several teams, each dedicated to a department 7%
16%
A team/departement with more than 5 people 29% 29%
A team of 2 to 5 people 1 single person
05
10
15
20
25
30
0%
5%
10%
15%
20%
25%
30%
Regarding the number of employees working to support the ecological dimension of sustainability in the company, most respondents
reported that their company has dedicated 1 single person or a team of 2 to 5 people to support sustainability initiatives.
Top management functions are generally responsible for a sustainability and most respondents have a unit dedicated to sustainability comprising 1 to 5 people.
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MAKING SUSTAINABILITY PROFITABLE
To make sustainability part of their day to day activities, most companies have put in place a dedicated team for CSR activities (1 single person or a team of 2 to 5 persons). During our meetings we observed that the team is in general composed of people who previously worked for the same company but in other functions (related or not to environment and sustainability), notably people from the Quality or Safety departments. However, in some cases, companies hired new comers, generally experts in CSR. The persons accountable to ensure that sustainability is taken into account in the company are for most of respondents their CEO and Management. The CEO can have a key role to make sustainability initiatives effective and a clear message from the top ensures leadership for sustainability and optimises the chances for a successful implementation throughout the organisation.
Umicore: A clear example of commitment Due to its historical activity, mining and smelting, Umicore, formerly know as «Union Minière» faced pollution issues. Thanks to the commitment of its CEO, it has gradually evolved into a responsible company specialized in materials technology. Its engagement is clearly visible in its statement «materials for a better life». During the transition period, the communicatioon from the CEO has been strong and clear. Their sustainability approach has also been clearly detailed in their booklet «The Umicore Way» which is distributed to all Umicore employees worldwide.
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MAKING SUSTAINABILITY PROFITABLE
Our Point of View
If the commitment is real, “Green teams”, as we call them, are very important to catalyse initiatives and make environmental actions more coherent with the company’s strategy. Nevertheless, having a team assigned to deal with environmental matter is not sufficient. The latter cannot do much if the CEO, the corporate culture and the resources investment are not there to back it up! Furthermore, relying solely and blindly on such a team can undoubtedly create problems as well. Notably, by being isolated from the rest of the company the team can sometimes deter other employees’ involvement. To avoid such issues, it should be actively involved in the company’s process and convey and stimulate employees’ commitments. There are several pitfalls that managers should bear in mind concerning the structure used to support environmental initiatives: First, the support of top management is essential. Most of successful initiatives we learned were backed up by c-level engagements. A clear message and vision must come from the CEO to push the entire company to act responsibly. This is even more the case for companies historically not involved in environmental matters. Such support shows to the entire company that environment is an important aspect of the strategy and that the company looks towards the future through a sustainability that goes beyond short-term targets. Second, if top management is where commitment starts, middle-management is generally where sustainability initiatives are brought to a halt. Since middle-managers are frequently holding what seems to be the weight of their agencies on their shoulders and are often “squeezed” from all around, they are stuck between the call for more sustainability, from top management or the “green team”, and all the other day to day objectives such as boosting profit margins, increasing sales or cost cutting targets. To respond to those pressures, middle-managers have to prioritise. Obviously, if the environmental areas are not high enough in their priorities, they will go by the wayside. Hence, involvement of operational management is critical. To avoid middle-management squeezed from all directions to overlook environmental objectives, they must get a clear signal that sustainability and environment is a part of their job. Signals can be given through the integration of sustainability goals within their job descriptions, bonuses, and the definition of environmental metrics as key performance indicators of their activities. TNT Express for example has given CSR targets to all its managers and includes CSR and environment within the bonus schemes. Ensuring that incentives stimulate to prioritise green initiatives is necessary to align employees’ goals with environmental targets. The number of trainings given on sustainability can also send clear messages to executives and employees in general. Finally, aside from the lack of involvement from the top and operational management, another recurrent problem for green initiatives is the lack of resource investment. To be meaningful, sustainability strategies like any other strategies require the availability of various resources. These can be material or immaterial, be human or financial and it can even be information, knowledge, involvement or commitments. All these resources are decisive to guarantee the success of initiatives. Of course, companies could, and often should, perform pilot project to assess the potential of an opportunity. Even so, while the same initiatives prove to be very successful for other companies, we have seen pilot project being so poorly invested in that it had no chance to yield positive results. To sum up in one sentence: “the wise one does not seek to jump halfway across a ditch!”
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MAKING SUSTAINABILITY PROFITABLE
Evaluating, monitoring and reporting sustainability
Along with the integration of sustainability principles within the business activities comes the need to assess, monitor and report on sustainability performances. Leading companies are now integrating key environmental concerns into their management, measurement and reporting processes. Yet, a majority of companies are only starting to evaluate, measure and report their environmental performances and face difficulties to do so. An appropriate measurement and monitoring brings substantial benefits to the company. Firstly, potential initiative and performance evaluation are essential to implement, follow up and align actions with the company’s strategy. The metrics will support management during decision-making processes and post decision analysis. Hence, measuring performances shows improvements and helps to identify areas that need attention and initiatives that should ultimately be discontinued. Secondly, it is essential to communicate on achievements both internally and externally. Last but not least, managing and measuring the company’s environmental performances provides a protection for the long-term share-value. This section highlights the importance of monitoring and reporting on environmental performances and underlines the fact that most companies face difficulties to evaluate environmental initiatives and to measure their environmental performances adequately. It presents the major roadblock to adapt assessment and measurement in order to integrate the company’s environmental considerations.
I. Measuring sustainability performances is important but measuring it precisely is a real challenge
Figure 14 - Are you able to measure and monitor your sustainability performances?
50 50% 40 40%
46%
33% 30% 30
20% 20 10% 10 0% 1%
Not at all No Imperfectly Yes Absolutely
10%
9%
0
About 42% of the respondents reported their company as able to wholly measure and monitor their sustainability performances. The
remaining 58% face difficulties and among them, 11% are ultimately unable to do so.
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MAKING SUSTAINABILITY PROFITABLE
Most of respondents were imperfectly able to measure and monitor their sustainability performances
While companies strive to reduce their environmental impacts and take many sustainable initiatives, most face difficulties measuring results and tracking their environmental performances. Since for an initiative to be really meaningful for the company, progress needs to be measured, this constitutes a major issue for decision makers. The results show that companies investing in sustainable initiatives are more often than not imperfectly able to monitor environmental performances. Consequently, they cannot properly estimate returns on their initiatives.
Our Point of View
Performance evaluation is essential to implement, follow up and align actions with the company’s sustainability strategy. Decisions should not be taken blindly. An old management adage says “You can’t manage what you do not measure”. We can at least say that you cannot manage what you do not know about. Metrics support management during decision-making process and post decision analysis. Clearly, measuring performances does not only show improvements, but also help to identify areas that need attention and initiatives that should ultimately be discontinued. Without a doubt, information is a basis for managing business and to ensure an alignment between results and objectives. Finally, it is also essential to communicate on achievements. Accordingly, many companies face difficulties to make their actions visible and miss a substantial part of the return they could get from environmental initiatives. Although respondents indicated that sustainability dimension of their strategy mostly consist of improving brand reputation and differentiate their products, they communicate mainly through low-impacting media such as Sustainable Development websites and CSR reports. As a result, many actions are not conspicuous enough and fail to be noticed by general public. An appropriate measurement and reporting is crucial to capitalise on past achievements and to gain visibility by providing essential information to the outside world. However, monitoring sustainability results is far from being an easy task. Environmental issues tend to be complex and in many cases potential solutions will uncover new issues that can be even worse than the initial one. This complexity makes measuring performance a real challenge. The traditional cost-benefit analyse is not appropriate to measure potential initiatives and to compute returns on current projects related to the environment. Indeed, payoffs from environmental initiatives can take various forms and are often diffuse, delayed and not easy to see. Hence, to measure fully the results of environmental actions, companies need to broaden their measurement methodology. They should take into account the various aspects that returns can take. Those are traditionally not taken in consideration into investments calculation and performance measurement. For example, protecting your brand reputation and shielding the company against upcoming regulations. To help in this process, we recommend categorising payoffs as in Daniel C. ESTY and Andrew S. WINSTON (Authors of Green To Gold, John Wiley & Sons, Inc. – 2006) framework presented in Figure 15. In this framework, the traditional cost-benefit point of view is aggregated with less certain payoffs that are generally hard-to-see intangibles or risk related benefits.
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MAKING SUSTAINABILITY PROFITABLE
Best performers we met had often changed their environmental related investments decisional process and their performance measurement to take those less certain returns into consideration. Obviously, those returns cannot be measured precisely. However they exist and constitute a real benefit for the company. Hence, they should not be disregarded! To sum up once more in one sentence: “In the country of the blind, the oneeyed man is king.”
Figure 15 - D. Esty and A.Winston strategic framework
Capitalize on the upsides
Capitalize Revenues
Build Reputation
Manage the downsides
Reduce Cost
Mitigate Risks
High Short Run
Certainty
Low Long Run
II. Companies face difficulties when measuring and monitoring sustainability performances
Figure 16 - What are the main difficulties that you experienced in measuring and monitoring your sustainability performances?
Lack of indicators and data Lack of knowledge and expertise Internal level of priority Suppy chain complexity 17% 14% Consumer awareness 39% 39% 37%
44%
Lack of international regulations and standards
01 0%
02 10%
03 20%
04 30%
05 40%
0 50%
The survey questioned companies on the main difficulties they experienced when measuring and monitoring their sustainability performances. The results show that main difficulties are related to 1. The lack of indicators and data for 44% of the respondents 2. The lack of knowledge and expertise on tracking environmental performances for 39% of the respondents 3. The internal level of priority for 39% of the respondents 4. The supply chain complexity for 37% of the respondents
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MAKING SUSTAINABILITY PROFITABLE
Main difficulties for companies to track environmental performances are related to the lack of indicators and data as well as the lack of knowledge and expertise.
The lack of indicators and data is not surprisingly the highest difficulty of measuring and monitoring performances. First of all, sustainability is usually a new dimension for which data collection was not originally planned in the company’s reporting structure. Secondly, as we have seen the aforementioned performances can take many forms that are sometimes difficult to evaluate. In addition, as sustainability is a recent concern, companies often lack of knowledge and expertise in tracking environmental performances. The company has to either train current employees in order to learn the necessary knowledge, hire new employees with specific skills or ultimately get the expertise from the outside. We can also see that difficulties are also coming from the internal level of priority and the undervaluation of environmental aspects. If environment is not perceived as a priority then the urge to measure it is weak. This can be partially explained by the lack of involvement of top management and middle-management overlooking environmental aspects, as we have seen above in the chapter “Which structure is supporting sustainability initiatives within the company?” in page 18. Finally, supply chain complexity is a major difficulty, especially for companies that face difficulties to identify the causes of their environmental impacts and when the highest impact occurs outside the company’s walls. However, companies can no more consider that what occurs outside their internal activities is not part of their business. Even if the supply chain is very complex, not assessing suppliers correctly can lead to serious troubles.
Our Point of View
While for some companies, the collection and use of accessible data to generate appropriate environmental indicators is already business as usual, most companies need to develop new metrics more appropriate than previous ones with regard to sustainability. Hence, the lack of indicators and data is perceived as a major difficulty. Even so, gathering underlying environmental data and indicators alongside with economic and social ones is critical for management and decision making. Hence, the question is why this lack of data and indicators. We know that sustainability is usually a new dimension for which data collection was not originally planned in the company’s reporting structure. Therefore, companies need to adapt. Various methods, numerous techniques as well as countless solutions exist to identify what to track and to ensure a reasonably correct level of information on environmental performances. The problem is that companies face difficulties to implement such a change. Those difficulties are often due to the lack of knowledge and expertise. The first step to overcome this issue is probably to get help from the outside. Several environmental leaders we visited were partnering with knowledgeable actors and specialists to shape an appropriate reporting system regarding their environmental performances. Experts, and sometimes academics or even NGOs, can offer a real added value to companies seeking to make their sustainable initiatives profitable. Another recurrent issue is the low internal level of priority of environmental challenges although the CEO and top management commitment are a key success factor. A clear message must come from the executive committee, and the CEO himself must commit the whole company to improve its sustainability. From there and let alone the building of a coherently aligned sustainability strategy, companies can start implementing systems to track relevant information and evaluate performance towards sustainability.
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MAKING SUSTAINABILITY PROFITABLE
Also, a common dream among top managers would be to have all the information they need on a company within one single indicator. Similarly, we met companies who were trying to synthesise all information about sustainability and their environmental impact into one to three metrics. Unfortunately, it is not an easy task and it more often than not lead to focusing attention to a bunch of trees regardless of the whole forest. To manage the environmental aspects of a company correctly, using a wide range of metrics is definitely wiser. In this regard, Pierre Coërs, member of the Corporate Sustainability Commiittee of Solvay, came up with a comparison that illustrates this remarkably: the dashboard of a manager is not that different from the one of an airplane‘s pilot. The challenge of limiting the impact of our activities on the environment is inevitably multidimensional and the focus of managers, as well as for pilots, has to shift according to the situation. Another difficulty lies in the choice of what and how to monitor. Among the most relevant metrics we observed, were those disigned to inform about Energy consumption (reduction and use of renewable sources), Air quality (greenhouse gas emission and emission of particulates), Water (reduction and pollution) and Waste management (reduction and quantity recycled). Assessing the carbon footprint becomes increasingly popular amongst large companies. With regards to GHG, it helps considerably to realize the sources of highest impacts and to understand which levers would be the most effective to mitigate them. Finally, companies find it difficult to track their business correctly due to its complexity. However, even if the supply chain is very complex, assessing it rigorously is likely to pay off.
Pierre Coërs, Corporate Management for Health Safety and Environment at Solvay “Concerning indexes and tools, at Solvay we regularly perform evaluations of indicators necessary to manage the risk. This allows us to identify what we need in house and to answer questions from the different stakeholders. We have about 55 parameters; some measured for a very long time, others have been modified to better respond to changes. Their respective importance also changed with time, especially lately given the recent increase of focus on climate change and the renewal of our strategy. The idea is to have a large number of parameters, but to focus on some, given the circumstances. The metaphor of an airplane cockpit explains it quite well: A pilot has countless instruments. However he does not pay attention to all the instruments at the same time. Some are for the take off, other for the landing, other for flying or assessing weather outside. It must be the same for managers. For me, business is still an organization that responds to external pressures, but it may as well anticipate future pressures in order to gain market shares.”
Some of the companies we visited decided to follow specific metrics appropriated to their business activities. - Tetra Pak is closely tracking the progress made in recycling of its products. One of the goals of Tetra Pak is that the cartons they manufacture are recycled after use and likewise in every country. The challenge is that they do not control recycling; they can only facilitate it by working with other partners in every country. Nevertheless, about 20% of the cartons they manufacture were recycled in 2010 worldwide. - Cofinimmo and Befimmo are closely monitoring indicators of progress that assess the environmental performance related to major renovations. - AGC Group found an interesting way of calculating the impact of their activities. They estimate their environmental impact in relation to their econo-
mic contribution to the country’s GDP. Hence, to improve the indicator value they must reduce their emissions beyond the reduction rate achieved by the entire world/country. They call it the “AGC Environment Indicator” and use it to analyze their environmental impact in an objective manner by putting it in relation with their economic contribution:
The indicator is calculated by comparing their sales to the global/country GDP and the amount of substances of concern (SOC) emitted from their activities on total global/domestic SOC.
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MAKING SUSTAINABILITY PROFITABLE
Environmental Risk mitigation
Environmental risk is not an issue that companies can afford to neglect in Belgium. Impacts on reputation, finances, consumer trust, boycotts and other risks linked to the environment can no longer be ignored. Still, it seems that many companies only start to integrate environmental risk management into their daily management and that others do not assess environmental risk recurrently. Nevertheless, companies are becoming more inclined to evolve towards greater risk integration in the management of their activities. Obviously, the goals put forward by companies do not always reflect a genuine concern for environmental protection. Above all, companies are afraid of the potential consequences that an environmental incident can have on their activities. As we will see, various methods and tools have been developed and used to measure the risk on their operations, but companies are still facing some difficulties in identifying all the sources of potential environmental risks and threats. In this context, this part of the report tends to identify which risks are assessed by companies. Then, it looks into the different stakeholders that companies regularly assess and particularly the influence those can have on their activities. Finally, it examines the different tools used by companies to identify, assess and measure potential threats and their likely outcomes on companies’ results.
I.What is under the environmental risk scrutiny?
Figure 17 - What potential long term risk does your company currently assess?
#1 #5 #2 #3 #5 #5 #5 #9 #4 #11
Rise in energy cost Waste Management Climate change related risks Rise of transportation cost Public opinion regarding environmental decision Air pollution related risks Water scarcity related risks 30% 26% 50% 49% 46% 59%
66%
#
Ranking of the most difficult challenges perceived for the near future
26% Lack of resources needed to produce 24% Rise of commodity prices 21% Chemicals, Toxics, and heavy Metals related risks 20% Inability of future technologies to respond to environmental challenges
#9
16% Bio-diversity and land use related issues
0%
01
10%
02
20%
03
30%
04
40%
05
50%
06
60%
07
70%
0
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MAKING SUSTAINABILITY PROFITABLE
The survey highlights that the primary long term risk that companies are currently assessing is the rise in energy cost, assessed by more than 66% of the surveyed companies. Subsequently, waste management and climate
change with respectively 59% and 50%, complete the top 3 topics of environmental risk assessment. These are closely followed by the rise of transportation cost and the public opinion regarding environmental decisions.
The first risks to be assessed are generally related to financial risks
The first risks to be assessed are generally not the ones perceived as the most challenging for the near future but those that have a direct and visible impact on the company’s financial results. Previously in this report, we had identified which environmental challenges, that companies expected to face in a near future, were perceived as the most difficult (see Figure 4 in page 6). According to the results, the most difficult challenges are, by order of importance: “Rise in energy cost”, “Climate change and upcoming regulation”, “Rise in transportation cost” and “Rise of commodity price”. It seemed reasonable then that these should as well be the ones that are primarily assessed through risk management.
However, the results presented in Figure 17 show some contradiction with this last assumption. Clearly, there are discordances, especially regarding “Waste management” and “Rise of commodity price”. As regards waste management, it can be explained by stronger legal requirements which push companies to pay more attention to risks relating thereto. On the other hand, concerns regarding “Rise in energy cost” and “Rise of transportation costs” are positioned similarly. Those topics impact noticeably directly on companies financial performances and are accordingly managed first.
Our Point of View
The concept of risk can often prove to be difficult to measure. Often, when the risk contains a subjective component such as the view of the company in the eyes of other stakeholders, companies seem to disagree between the perception of the risks and the need to manage those risks closely. Yet, even if they are difficult to assess, those risks can seriously impact the company in the long run. However, when the risk in question is more objective, for example the likelihood of a direct impact on financial performances, it becomes easier to grasp and to track because it can be translated into tangible impacts to the results of the company. As we will see below, pointing out the different risks and assessing the expectations and influences of the different stakeholders is of great importance.
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MAKING SUSTAINABILITY PROFITABLE
II. Who is under the environmental risk scrutiny?
Figure 18 - Assessment of the main sources of pressure that drive companies to pay attention on sustainability issues
Responses show that the stakeholders that are the most regularly assessed are Rule makers, Customers and Competition. These are closely
followed by Employees and Business as well as Financial partners.
Rule makers are the most rigorously scrutinised stakeholders
The results show that the main sources of pressures identified previously (see Figure 5 in page 7) are effectively the ones that are the most closely watched by our respondents. Despite a reversed order, the Top 3 sources of pressure identified corresponds to the Top 3 stakeholders regularly assessed.
Our Point of View
From Rule maker’s for regulation to NGO’s for their influence on public opinion, stakeholders are pressuring companies to face their responsibilities towards the environment and inevitably to manage whatever environmental risk they deem as related with their activities.
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MAKING SUSTAINABILITY PROFITABLE
Stakeholders’ influence can affect companies significantly, resulting in some cases to brand damage and strong financial consequences. Assessing them is thus essential to ensure that the company keep its licence to operate. In other words, stakeholders possess the power to revoke a company’s right to operate. If a company crosses the line, stakeholders’ pressure can ultimately destroy its business. Hence, a licence to operate illustrates stakeholders’ power and can be fragmented into regulatory, economic and social licences which are monitored and enforced by a variety of actors, which commonly seek leverage by exploiting a variety of licence terms. Taking seriously into account stakeholders’ point of view as well as their influence on your business does matter. Knowing and mapping your stakeholders play an essential part in managing today’s environmental issues. Questions to be addressed by companies are: • Who are the key players that the company has to face? • How can they interact or interfere with the company’s activity? • What are their interests and concerns? • Which level of influence do they have on the public opinion? On company’s activities? • What is the possible impact of each of them, today? In the future? • Are we putting (enough) effort to understand their key concerns? • Are we prepared to answer their requests? • Which type should then be prioritised? • Finally, which ones should be selected to initiate relation? The last question is capital and should be based on the answers from the previous questions. Partnering with appropriated stakeholders may well be the best way to deal with external problems and pressures. Recently, we have seen more and more leaders which, like Delhaize with WWF, engage partnerships with NGOs, authorities and communities. Many companies entrusted us that they used to ignore and to avoid confrontation with complainers. Now they tend to be growingly debating with big protesting groups. Guy Ethier, Senior Vice-President Environment, Health & Safety at Umicore We learned from history the added value to work hand in hand with stakeholders: whether with client and suppliers, through collaboration around our « sustainable procurement charter », or with authorities to repair soil pollution and the impact of our previous activities, as Union Minière. We even work with outsiders, as Michael Broungart (author of Cradle to Cradle).
III. From talk to action, what are the methods and tools used to measure potential environmental risk?
Figure 19 - Methods and tools used to measure potential environmental threats and their possible impact on future results Develop and monitor KPIs
Does your company include the sustainability dimension in its recurring risk management process?
50% 50% 50% 40% 33% 28%
Perform Internal survey
How? No
Perform Scenario analysis Study future trends
38%
Yes
Follow financial indicators Perform external survey 15%
62% Perform pre/post analysis
10% Use a software suite to manage environmental risk
0%
10%
20%
30%
40%
50%
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MAKING SUSTAINABILITY PROFITABLE
To prevent environmental risk from impacting their activities, more than 60% of our respondents have included the sustainability dimension in their recurring risk management process. To do so, they mainly develop and
monitor environmental Key Performance Indicators, perform internal survey and carry out scenario analysis on possible environmental developments.
More than 60% of companies have included a sustainability dimension in their recurring risk management process
Giving serious consideration to the environmental risk allows companies to spot issues before they occur. Hence, it is surprising that only 62% of our respondents are assessing environmental risk recurrently. Furthermore, 33% of our respondent did not develop any tools or methods to assess their environmental risks. However, the need to follow environmental risk carefully varies from one sector to another. Some, such as the chemical industry, face a wide range of legislation that encompasses the principles of environmental risk assessment.
Our Point of View
Although the call for assessing environmental risk depends on the activity of the company, assessing it can help to uncover new opportunities through the anticipation of future changes. As business risks can come from various and sometimes unpredicted sources, companies have developed countless methods to identify and protect themselves from environmental hazard. The methods and tools reported in Figure 19 are commonly used. Apart from those, we encountered during our meeting various other tools exist such as scenario planning, stress scenarios, supply chain auditing, statistical analysis of environmental figures, etc. In any case, even though many methods exist, environmental risk assessment usually covers the following 5 key steps: • Identification of the hazard and formulation of the problem • Identification of the consequences this hazard could have if it occurs • Estimation of the scope and magnitude of those consequences • Estimation of the probability of those consequences • Assessment of the risk significance by taking into account the likelihood that the hazard occurs and the seriousness of its consequences However, assessing risk appropriately, especially selecting the risks to assess, is worth trying. Hazard may arise from within as well as from upstream through the suppliers and from downstream through the clients. Therefore, looking for environmental risks to mitigate their impacts requires an assessment that goes beyond the companies boundaries. Going even further, environmental leaders we met assess risks not only in their supply chain but through their whole value chain. The difference between supply chain and value chain is not very easy to grasp. To put it bluntly, environmental leaders are assessing environmental risk not only from a product perspective but as well as from a value perspective. The latter depends on customers and other stakeholders’ perceptions and implies broadening the analysis to potential opinions and feelings rather than limiting it to facts. Indeed, protecting your brand reputation for instance involves taking perception into account because what your customers believe is your company’s reality. Climate changes could be the biggest scam of the century that it would not make any difference for your company. As long as your customers believe in it, you should investigate what it implies for your business.
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MAKING SUSTAINABILITY PROFITABLE
What makes sustainability profitable?
We make clear that, following actual trends, integrating sustainability into your business operations is no more an option. Based on this statement, a company may as well use it as an income driver and benefit from the change. In other words, perceive the change towards sustainable business as an opportunity and less as a constraint. There is no need to argue that sustainability can be a source of value creation, be it tangible or intangible. The previous chapters presented several examples of what environmental leaders usually do. Those companies are the ones we identified as driving real value from their investments in sustainability. The approach to sustainability followed by those companies presents a number of similarities.
Figure 20 - Are the initiatives taken in sustainability generating financial value?
+32%
60 60%
Does your company have a developed sustainability strategy or guidelines?
+17% 57%
Company with a comprehensive sustainability strategy
50% 50 47%
40 40%
Profitable?
+15% 30%
30 30%
No 25% Yes 75%
20% 20 10% 10 0% 0
25%
28%
Companies with general guidelines regarding sustainability
13%
For a majority of initiatives
Uncertain
For a minority of initiatives
Firstly of all, as Figure 20 shows it, the companies that have fully integrated a sustainability strategy in their activities are more likely to drive value from their sustainability initiatives. Note that companies tend to follow this example, and among our respondents who do not have a strategy driven by sustainability principles, 83% plan on doing so in the near future. Secondly, environmental leaders are usually innovative and move first on sustainable initiatives in order to develop and maintain a competitive advantage. Best initiatives we saw are aiming at closing the loop through the development of fully reusable products at their end life. By doing so they mitigate their risks, ensure supply and gain tremendous visibility. Thirdly, they set bold, clear objectives supported by the top management and involving almost everyone at each level of the company. By doing so, they ensure commitment throughout the organisation and stimulate employees. Fourthly, they free the resources necessary to complete those objectives and broaden their investment assessment processes to take all aspects of payback environmental initiatives into account. The traditional cost-benefit analysis increased with the potential impact on risk mitigation and brand value.
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MAKING SUSTAINABILITY PROFITABLE
Fifthly, they communicate actively on what they do in order to benefit fully from the impact on their brand reputation, in order to gain visibility and to attract new clients, employees and partners. Finally, they measure their performances and follow environmental risks closely by taking into account not only facts but also stakeholders’ perception. By doing so they can review their action, anticipate business changes and identify new opportunities. Obviously, this is far from an easy task for companies just starting to approach sustainability as an opportunity. We then recommend following these pragmatic guidelines: • Start low by working on the obvious and derive the maximum from it. First, focus on efficiency, cut unnecessary wastes and improve the logistic. This will derive returns that will help to finance other environmental initiatives. • Communicate intensively about previous and current actions related to the environment. Make it visible! • Do not get lost in the forest. Look at the big picture, know where your impact lies and focus on the most meaningful actions that differentiate your company and its products/services from the others. • Make sure of the C-level commitment. The CEO should be the flagship of sustainability in your company. • Give incentives to stimulate environmentally sound behaviours and initiatives. • Develop “green” relationship with external partners.
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MAKING SUSTAINABILITY PROFITABLE
Contacts
Kurt Salmon: an actor engaged in sustainable development As an expert that helps to transform organisations, Kurt Salmon has invested in sustainable development through strategic alliances and collaboration, but as well through an array of cuttingedge proposals and cooperative efforts with leaders in the field. For 4 years, Kurt Salmon collaborates in the organisation of Planet Workshops Forum, a major event which gathers 600 business leaders and representatives of national and international. The forum offers the opportunity to reflect together on issues of sustainable development, compare their views and initiate solutions. It also focuses on the exchange in order to understand how to integrate sustainable development at the core strategies and business practices and institutions. About Kurt Salmon Kurt Salmon, formed by the merger of Kurt Salmon Associates and Ineum Consulting, is a global management consultancy of more than 1,600 consultants in 15 countries across five continents. Our clients are industry leaders who benefit from our deep industry and functional expertise. As trusted advisors, Kurt Salmon partners with clients to design, and then drive, strategies and solutions that make lasting and meaningful impact. We are committed to delivering measurable results for our clients through executional excellence. Kurt Salmon is a company of Management Consulting Group.
Your contacts Luc Moeremans Managing Partner Belgium Office luc.moeremans@kurtsalmon.com Diego Van Hufflen Director in charge of Sustainable Development diego.vanhufflen@kurtsalmon.com Thomas Jeukens Consultant in Sustainable Development thomas.jeukens@kurtsalmon.com Sébastien Pinta Consultant in Sustainable Development sebastien.pinta@kurtsalmon.com
Disclaimer All information published in this report is protected by copyright (including text, data, figures and photos). This report is based on public information, questionnaires, interviews and phone conferences and has been produced on the assumption that such information is accurate and not misleading. The source information has not been verified or checked in any other way. Any methodology, idea, concept, information and know-how developed by Kurt Salmon in the course of this study provided may be used in any way Kurt Salmon deems appropriated. © 2011 Kurt Salmon All right reserved
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