Seven Ways Embedding Sustainability Creates Value

7 Levels of Sustainable Value Creation

In the last article of our 2degrees Book Club, Nadya Zhexembayeva and explains the seven levels of value creation that comes from embedding sustainability into your organization.

In the past weeks of blogging, we have been able to distinguish ‘bolt-on’ from ‘embedded sustainability’ and discuss a few key trends that are re-defining the social and environmental performance of business today (like myself, many of you seem to celebrate the death of green!). Now, the question is – so what? What does embedded sustainability offer to a normal, down-to-earth business with (like it or hate it) a bottom-line driven reality? Well, behold the seven levels of value creation:

Value Creation #1: Embedded Sustainability = Risk Mitigation

A couple of years ago, speaking about the very real risks connected to social and environmental performance, I would have spent good few paragraphs explaining the subtleties and shadings of this issue. Now, all I need to say is: BP. While the company is still counting the losses, one ‘old’ number still strikes me: within the first two months of the disaster, BP’s stock price had fallen by over 50 percent, effectively wiping out nearly 90 billion dollars of its market value. No more comments.

Value Creation #2: Embedded Sustainability is an Efficiency Opportunity

The second source of value creation via sustainability efforts is the one most often discussed. Rather than viewing sustainability as an added cost, improving efficiency is primarily about cutting the quantity and intensity of energy, waste, and materials. In essence, environmental and social harm is a sign of inefficiencies that offer a creative opportunity for cost reduction across the larger set of business processes. Over a period of ten years or more, companies like 3M, Chevron, and DuPont have each reportedly saved billions of dollars from environmental cost-cutting initiatives. Walmart estimates that its sustainable packaging initiative launched in October 2005 will globally save $3.4 billion by 2013 – through the elimination of only 5% of packaging materials in its supply chains. Whether it's one-shot gains or longer term and more persistence savings that require changes in capital stock, firms in every sector are finding exciting new cost cutting opportunities. The moral: sustainability is an (eco-) efficiency engine.

Value Creation #3: It’s a Factor of Product Differentiation

I don’t know how you choose your toothpaste, but for me recently this has really become a chore. With walls of toothpaste in front of me, social and environmental performance might just be the thing I need to pick your product or service. In the world where everyone sells the same, customers leave when we do not give them a reason to stay. Yet, as I have made it passionately clear already, we need to put to death ‘green’ products that cost more, and start focusing on smart, new solutions that allow us to create better sustainable value with no green or social premium. My favorite example of this transition is the solid shampoo bar. Produced without plastic packaging (and therefore eliminating all raw material, design, and processing costs related to packaging) the solid shampoo is distributed in bulk and saves tons of shelf space – it would take 15 truckloads of liquid shampoos to deliver the equivalent of one truckload of solids. As such, it is no longer a conventional product, but rather a solution that delivers a universe of end benefits to customers, store operators, the manufacturer, and society at large.

Value Creation #4: It’s a Pathway to New Markets

Sustainability pressures create new market opportunities when businesses and consumers demand solutions for their environmental and social problems. At one end are opportunities to help individuals and companies reduce harm or do less bad, such as end-of-pipe pollution control equipment. In 2010, air pollution control equipment in China alone was a $5 billion market growing at 18% per year. At the other end are opportunities to profitably provide social and ecological solutions such as life insurance and banking services to previously uninsurable and unbankable customers (Grameen Bank, Aviva, Erste Bank Group); a corporate mission to “bring health through food to as many people as possible” (Danone); and the growing number of clean energy and clean water options (see for example, the work of P&G, Siemens, 3M, ITT and upstarts such as Filterboxx Water & Environmental). The conclusion: Growing ecological and social needs are creating huge new markets.

Value Creation #5: It’s a Way to Protect & Enhance the Brand

A century ago, a company’s stock price was 70 percent a function of the value of tangible assets such as plant, property, and equipment. Remarkably, today it is intangibles that account for over 70 percent of the value. With rising expectations for green and socially responsible business, intangible value is increasingly driven by perceived sustainability performance.

Of course, in a world of radical transparency, companies cannot enduringly make claims that are untrue and unverifiable. Someone, somewhere, at some point in time will discover the fib – and will Tweet it to the world. Renault and British Airways both recently faced charges of misleading sustainability claims, according to the Advertising Standards Authority, a U.K. watchdog. Such charges – repeated in blogs and spread across social networks – can quickly undermine a company’s overall image. Thus, a cautionary tale: companies can gain or lose significant market value based on stakeholder perceptions of environmental, health, and social impacts.

Value Creation #6: It’s About Influencing Industry Standards

When DuPont and a handful of other corporations lobbied the U.S. government for strong national legislation to require significant reductions of greenhouse gas emissions, including a cap-and-trade scheme, it was relying on its industry leadership in low carbon technologies to eventually yield competitive benefits. DuPont was making the bet that its competitors would incur disproportionately higher costs as carbon emissions become regulated or priced in the marketplace. The lesson learned: Environmental regulations can create desirable barriers to entry (especially if they help keep out low cost imports.)

Value Creation #7: It’s a Driver of Radical Innovation

Strategists have long seen the potential for environmental and social performance to drive deep innovation. Consider the case of Tennant, a Minneapolis-based maker of walk-behind floor scrubbers for use in commercial buildings, sports stadiums, and other large indoor and outdoor surfaces. While its competitors were busy working to reduce the harshness of their cleaning chemicals, Tennant simply eliminated the use of its chemicals altogether. The company’s flagship product, the ec-H2O, electrically converts plain tap water to perform like a powerful detergent. It uses 70 percent less water than traditional cleaning methods (you can work longer with the same tank fill); it leaves behind no slippery detergent residue on the floor; and it releases no used detergent discharge into water systems. Best of all, the ec-H2O gives its customers the lowest possible total cost of ownership. With several top awards including the European Business Award for innovation, this small company now has a visibility and reputation far exceeding its size.

Nissan is preparing to move beyond fossil fuel engines, investing $6 billion into electric cars at a time when most of the industry is focused on improving fuel efficiency. Monsanto and Bayer Crop Sciences are in the crop protection business, developing plants able to resist pests and increasing drought resistance where water is scarce. California company Calera is developing a cement manufacturing process that captures and stores CO2, while the rest of the industry is aiming to reduce CO2 emissions. Amazon Kindle and Sony are questioning whether you need a paper book to read, instead of focusing on recycling or sourcing from sustainably managed forests.

The insight: looking at your business through the lens of sustainability can be a source of tremendous creativity, helping to fundamentally re-think the nature of your business venture.

So, where does it all leave us? While the obscure CSR efforts continue to promise illusive reputational dividends, and the bolt-on sustainability projects offer limited opportunities with niche focus, embedded sustainability offers a wide range of value creation routes. Pick yours.

What do you think of the seven levels of value creation? Does embedding sustainability actually bring these to a business? Tell us your views and experiences in the comments section below.

Read the previous post in the series, The Death of Green and Other Trends Behind Embedded Sustainability.

Listen to a podcast with Nadya and 2degrees CEO Martin Chilcott.

See more on embedded sustainability in The 2degrees Book Club.