What is Sustainability?
Sustainability is a journey rather than a destination in itself. It starts with the decision to explore these issues. The obvious issues are usually visited first – energy consumption, recycling, finding ways to minimize risk. Some companies move past these to the less obvious opportunities, such as product innovations.
Other leading companies will take the less traveled routes and make discoveries which will put them ahead of the pack. Sustainability for business is always changing and evolving.
Managers often think that once they have put a strategy in place, they have reached their destination. But there is no final destination, it is the journey that counts.
To take your sustainability journey, it is important to understand where you currently stand and where you want to go. Whether you are just starting out, or you have already begun to explore sustainability issues, your journey will be different depending on the needs of your company.
However, there are some common stages that companies might find themselves at along the way.
Not yet on board . . .
1. Reject sustainability. Rejection may occur because a company is unaware of sustainability, or believes it has nothing to do with their business.
In some cases, it may be because a company is involved in illegal activities – either through ignorance or inaction, or deliberate actions. Others will see what they can get away with, and think that even if they get caught they can still get around it.
2. Bare minimum. Companies are compliant, but barely so, and not necessarily on everything. They have no sustainability strategy, and at this level, a company is doing the absolute minimum required to stay in business.
Typically, they only act when a situation occurs that forces them to react. If they do anything beyond the bare minimum, they often expect to be rewarded for it.
3. Seen as a cost. Some companies see sustainability as a philanthropic activity that is just a cost. There may be other smaller initiatives or individuals across the company who are interested in sustainability, but nothing is coordinated.
In some cases, they will communicate things that they haven’t actually done, or exaggerate claims for things they have done.
Jump on board . . .
4. Cutting costs. Companies begin exploring the opportunity to cut costs by reducing consumption. This usually starts with office-greening projects coordinated by inspired employees. It can then progress to finding ways to save costs across the operations.
5. Risk management. At this stage, companies begin to see that governance structures – including policies, performance standards, management systems, reporting, assurance processes, and sustainability tools – allow them to better manage their risks.
6. Indirect benefits. Companies now begin looking beyond just saving costs and managing risks, to identify the opportunities that sustainability can present. They are also beginning to recognize how it can have a benefit across the business, such as internal benefits of recruiting better employees and suppliers.
Moving forward . . .
7. Opportunities. Companies are now actively engaged on multiple fronts, exploring opportunities across the business in the form of new products, exploring new markets, and partnerships with outside organizations.
8. Strategic approach. Beyond significant levels of activity on new opportunities, companies begin to look at these individual activities across the organization with the goal of bringing them together as part of an overall strategy.
Upper management is fully involved and reinforces these messages in communications internally and externally. Sustainability reporting is adopted throughout the organization. Efforts have become cohesive, moving the whole company in a common direction.
9. Integrating. Sustainability begins to be really integrated into the way that everyone at every level does business. It is part of people’s job descriptions and is incorporated into compensation, rewards, and performance evaluations. All departments are involved in doing their part to move the agenda forward.
10. Continuous improvement. A company works with other businesses to really push these issues forward, raising the bar throughout the areas in which they operate.
At this stage, companies continually revisit their processes to make them stronger and to acknowledge and work on their weak spots.
Some points to keep in mind when trying to assess where you currently stand:
Different initiatives will be at different points along this journey.
The inherent complexity of organizations means that a company or an organization will have many different departments, projects, and activities that are at different signposts on the sustainability journey. Use the above model to see where different parts of the business stand, and also for the company as a whole.
Sustainability is a complex area that is continually changing and growing. Everyone is still learning and the bar is constantly being raised. Therefore, it is not just about whether or not you are involved in the debate, but at what level. Are you:
Saying you are when you aren’t really? (Greenwashing)
Doing just enough?
Doing the same as other companies in your industry? In other industries? In your country?
Doing better than other companies in your industry? In other industries? In your country?
Doing the same as other companies internationally?
Doing better than other companies internationally?
A leader in this area?
How to move from one level to the next. There are many drivers that push companies to move from one level to the next. Most often this will be a passionate CEO or manager, or engaged employees.
It could be a negative event that forces a company to react. Anything in the business case can be a driver to change. Ultimately, a company can only reach the higher levels with senior management involvement, and where sustainability is part of a cohesive strategy.
Remember, this all takes time. Sustainability isn’t a light switch that you turn on and off. Implementing a sustainability strategy takes time, energy, resources, real commitment, and often a cultural change within your company. However, done properly, the paybacks more than justify the investment.
What does a leading company look like?
Companies get involved in sustainability are providing more and more information on their activities through their websites, annual reports, and other communication means.
However, even with all this information, many consumers are not convinced. So how can you distinguish a leading company from a laggard?
Unfortunately, this is not always easy. We often judge organizations as single entities, but they are made up of many separate parts, some good and some not so good. Here are some things you can look at to help you decide whether a company is serious about these issues:
Look at whether or not it makes sense. Can you understand their sustainability strategies? Do their products and messages make sense? Is their sustainability strategy consistent?
Are they seeing themselves within a larger system of the world? Are they focusing on the issues that you think are most important, or that their stakeholders think are important?
Look at their approach to sustainability. Is the company proactive or reactive when it comes to sustainability? Is the company going beyond minimizing risk to exploring new opportunities?
When a problem occurs or the company is criticized for their actions/inactions, how does the company react? Do they take proactive measures to make sure it doesn’t happen again?
Look at how they engage. How do they engage with business and non-business partners, their suppliers, their peers, the community, their employees?
Are they actively involved in sustainability networks at the local, national, or international level? Are they fulfilling their membership requirements of these networks?
Look at the future. Although the past will tell you where the company has come from and what their record is, it is not necessarily a good guide to future activities.
Look at their current performance and published policies and future commitments. How quickly are they moving? How does this compare to their peers?
Are they focused on continuous improvements? Leading companies set goals that challenge and inspire. They also have clear steps that show how they will attain those goals.
Look at who is driving the change. The commitment of the board and the CEO is a good indicator of how seriously a company is taking these issues. Speak to employees working for a company.
Do they know about the company’s sustainability strategy? Are they involved? Is it part of their jobs? If sustainability strategy is part of the way that they speak about business then this is a good sign that management is committed.
Look at the resources allocated to sustainability. How many people are responsible for implementing sustainability strategies within a company?
How much power and influence do they have? What kind of budget do these activities have? How much time do people have to work on these issues?
Look at how they communicate. Do they make claims in their promotional materials? Are these backed up? Are they credible, or are they greenwashing? Do they seem to be genuinely engaged in these issues?
Don’t just base your opinion on what you hear. Just because a company is not vocal about its sustainability commitment, in no way means it is inactive.
Some companies are very active in this area but just don’t have the budgets or choose not to communicate these efforts widely.
Look at how they report. Look at the quality, quantity, and transparency in the information they put in their annual reports.
Do they truly understand the issues affecting themselves and their stakeholders? Do they follow certain reporting guidelines such as the Global Reporting Initiative?
Look at the whole as well as the parts. It is often difficult to say whether a whole company is good or bad. All companies will have examples of successful projects in this area and parts of the business that need more work.
Leading companies are those that are proud of their successes and who acknowledge and are working on their weak spots.
Look at what gets cut. When times get tough, are the sustainability policies the first to go?
Where to find leading sustainable companies
One way to identify which companies are doing interesting work is by looking at the annual awards and rankings. There are now countless awards given at the local, national, and international levels, many of which are mentioned throughout this blog.
Companies take their position on some of these lists very seriously and will often use this in their communication material if they are ranked highly, and respond by making changes in their organization when lower down on the lists. A few examples of international rankings include:
The Global 100 Most Sustainable Corporations in the World, announced each year at the World Economic Forum in Davos (www.global100.org). The Sustainability Year blog, an initiative with SAM and PwC of the world’s 2500 largest companies based on the Dow Jones Global Index (http://www.sam-group.com/yearblog).
Business Ethics magazine and KLD Research and Analytics’ list of 100 Best Corporate Citizens (Home).
Some tips for navigating the different rankings and awards lists:
Look at the scope of the award. Is the award being given to companies who are part of a particular industry? Is it about one particular element of their strategy, such as their approach to supply chain management, or does it cover the full company and all its activities?
Look at which companies are up for the award. Awards don’t always invite all companies to enter a given award or ranking. More often than not, rankings and lists focus on larger, international companies, or only those who choose to nominate themselves. Does it include both public and private companies? Is it looking at both big and small ones?
Look at who is giving the award. Is the ranking or award is given by a consulting firm, the media, consumers, international organizations, an NGO? Is it being given by a recognized organization?
Look at what kind of data they are measuring. Companies often tend to use data that are readily and inexpensively available. Do companies submit the information themselves?
Is it collected through questionnaires, media and stakeholder reports, publicly available information, interviews directly with the company? Is the awarding organization doing its own independent research?
Look at the criteria and weightings. What are the criteria for the award? Every ranking or award will have a different set of criteria to determine the winners. These criteria should be transparent and easily accessible in order to give some insight on how the awardees are being chosen.
Step by step
In the same way that there are no simple checklists on what to do to create a successful business, there is also no single way for a company to incorporate sustainability into its operations. But the good news is that employees and managers can get involved in sustainability without becoming experts in this area.
Employees at all levels are coming up with an incredible variety of very different ways to bring sustainability into their employer’s strategy and operations.
For instance, some test out sustainability tools on a small scale – with a particular product, site, or service – while others choose to embed it across the whole business.
Every organization will develop these issues in widely different ways and needs to find the way that works best for their particular situation, location, client base, or strategy. The following list provides a guideline for getting started.
1. Understand where you are 4. Engage others and now gather support
2. Find out what is happening 5. Put your plan in place around you and make it happen
3. Decide where you want to 6. Keep it going go and why
1. Understand where you are now. Start by taking some time to think about what kind of company you work for. How is your organization impacted by society? How does it impact society?
What are the issues that are important to you? Explore what is currently happening and whether you could build on from initiatives already taking place in the company or whether to start a new one.
Where do you currently stand? Does your company reject sustainability, is it non-responsive because of a lack of awareness?
Is it interested but not sure where to start? Has it already. Today, employees in organizations of all sizes and in all sectors are applying sustainability strategies to their work and are increasingly outspoken about the benefits.
Those who are successful are building a business case for sustainability that suits the unique needs of their project, their initiative, their division, or even their whole company.
While the details of the sustainability strategy adopted by each business will vary, here are some compelling reasons why businesses are incorporating sustainability concepts into their day-to-day operations:
1. To reduce costs 7. To satisfy customer needs
2. To preserve resources 8. To meet stakeholder
3. To comply with legislation expectations
4. To enhance reputation 9. To attract capital investment
5. To differentiate 10. To capitalize on new
6. To attract quality opportunities employees 11. To increase transparency
1. Reduce costs. All companies have an interest in keeping costs in check. Sustainability provides a mechanism to reduce costs by focusing on using fewer resources (e.g., raw materials, energy, hazardous materials, people, and water), making processes more efficient, and minimizing or eliminating waste.
Often these kinds of changes are referred to as ‘low-hanging fruit’ or ‘easy wins’ because, at least initially, small changes can have a big impact.
However, larger structural changes that can be more complicated and take a longer time to implement can also have the greatest impact in the long run. Procter & Gamble’s program to ‘Design manufacturing waste out,’ for example, has saved the company over US$500 million and eliminated 2 million tonnes of waste.
Preserve resources. A key element of sustainable business practices is the preservation of the resource base. Companies are realizing that the raw materials they depend on to produce their products are being threatened.
For example, Brazil-based Natura has a program to sustainably use locally available raw materials that form the basis of their range of cosmetic products.
Natura works closely with certifiers to guarantee the proper sourcing of its resources and to promote conservation through compliance with environmental and social guidelines.
Comply with legislation. There is an increasing number of control mechanisms, regulations, and standards being put in place that companies must follow.
These cover a wide range of areas, including the discharge of pollution, worker safety, product content, technical performance, labeling, requirements for reusing and recycling, and ecosystem protection.
Some of these, such as the Global Reporting Initiative, is currently voluntary but will increasingly be considered industry standards.
Others are mandatory, such as the European WEEE initiative or ‘take back’ laws, which require manufacturers to take back all vehicles and electronics equipment sold in a particular country and recycle or dispose of them safely after use.
It is likely that regulations and ‘voluntary’ standards will increase, both in number and stringency. In addition, the costs or consequences of not conforming, or leaving it to the last minute to confirm, need to be considered in a business case.
Enhance reputation. As Warren Buffett puts it, ‘it takes twenty years to build a reputation and five minutes to ruin it.’ Today, those five minutes may feel more like 30 seconds.
Petrobras, Brazil’s national energy company, stunned by a series of catastrophic oil spills and other accidents around the turn of the century, realized it would have to fundamentally change to protect its business and reputation.
The company launched the biggest environmental and operational safety program in Brazil’s history, overhauled its operations, and pushed cultural change from the top down.
Environmental and social performance is now central to the firm’s strategy and Petrobras is recognized as a global leader in the oil and gas sector, led actively by its CEO.
5. Differentiate. Being seen as sustainable can help differentiate your business. This can increase income by securing the loyalty of current customers and attract new ones, resulting in increased market share.
Businesses can grow revenue from new markets for sustainable products and services, and they can also grow market share through better-quality products that benefit the customer.
One example of this is MAS, a Sri Lankan apparel manufacturer with customers including Victoria’s Secret, Gap, Marks & Spencer, and Nike.
In a market replete with low-cost rivals, MAS differentiated itself based on its exemplary employment practices (called ‘Women Go Beyond’), its green plant, and organic and fair trade products. This persuaded several western firms to choose it as a strategic partner.
Attract quality employees. The former CEO of IKEA, Anders Dahlvig, said that the pressure to be ‘green’ is ‘now coming from underneath, from our co-workers themselves who expect us as a company to do more, faster.’
Employees are more likely to feel proud of working for employers who take their responsibilities to society seriously.
More businesses are realizing this, and are prioritizing these issues in order to maximize their capacity to attract and retain skilled and talented employees, which in turn increases their ability to innovate and compete.
Satisfy customer needs. Public expectations of what is possible are ever increasing. The eco-conscious consumer is a growing population who expects the brands they buy to meet their green standards while also meeting their product needs.
Many organizations are getting involved in sustainability because their customers, clients, or business partners are asking them to. People are increasingly looking to do business with companies that share their level of commitment.
8. Meet stakeholder expectations. In 2005 the then CEO of Wal-Mart, Lee Scott, recognized that the time when CEOs could sit in their towers and make decisions without consulting stakeholders was over.
‘We thought we could sit in Bentonville, take care of customers, take care of associates – and the world would leave us alone.
It doesn’t work that way anymore. Companies need to earn their ‘license to operate.’ They kicked off an environmental initiative to improve their environmental stewardship reputation and increase their bottom line.
Conversely, constant failure to address the concerns and expectations of these groups will reduce investor confidence in the firm’s stock, impacting the cost of financing and thus profit-making opportunities.
Attract capital investment. Just as consumers are becoming more aware of the importance of sustainability issues, so are investors and shareholders.
There is growth in socially responsible investment and ethically screened funds, embedding ESG issues into investment analysis, as well as a growth in industry standards such as the Dow Jones Index, FTSE4Good, London principles for financial institutions, and Equator principles for project finance.
As environmental and social criteria are becoming a standard part of lending risk assessments, sustainable businesses are more likely to be able to attract capital from banks and investors.
Capitalize on new opportunities. Mexican cement company Cemex considered ways to create a whole new business around improving the living standards of the 20 million people with inadequate shelter in Mexico.
As a result, they now provide housing for poor people at a profit through a special program that enables low earners to pay weekly installments of US$11.50 for 70 weeks to gradually buy the building materials they need to build a home.
The program, called Patrimonio Hoy, provides quality products on low-cost credit at fixed prices, as well as technical building advice.
So far 83 million US dollars have been granted, with an on-time payment rate of more than 99%. The program has expanded to over 100 centers across Mexico and South America.
Increase transparency. Customers, investors, and businesses are asking for more and more information about what a company is doing in sustainability, not just in terms of its own operations but also those of their suppliers and sometimes even the suppliers of their suppliers.
They are being asked to share this information publicly, both good and bad, on their websites, in annual reports, and increasingly it is required for the growing number of ratings and awards that categorize companies based on their efforts and the sustainability aspects of their products.
While the previous list shows some of the reasons you should consider adopting a sustainability strategy for your business, the actual reasons why managers are getting involved in the sustainability debate can vary widely.
For some, involvement occurs as part of a personal journey, a realization that what they do today will affect their children and families, and the desire to contribute in a meaningful way.
Others are forced into reacting as a result of a public relations scandal or accident, or because customers, regulations, or other employees are asking for action on these issues. Regardless of how it starts, there are some points to keep in mind:
Sustainability is already a part of how you do business.
For most businesses, this does not mean starting from scratch. Sustainability is about making the business more efficient and can be built into the way that companies already operate.
It doesn’ t matter how or why you begin . . . Exploring sustainability in a company can begin in the smallest way, such as through a recycling program or offering employees a subsidy for taking public transportation to work.
Simple, small things can make an impact over time. . . . what matters is how you continue. The benefits you get from particular decisions or choices to start exploring these issues, or the reasons that you continue to develop them further might be quite different from the original reasons you chose to get involved.
The potentially high cost of inaction for both the business and society. Even if an organization can find no obvious opportunities to cut costs or increase revenues through sustainability initiatives, inaction in this area can lead to increased costs and loss of revenue.
Multiple benefits. A positive change in one area can also result in positive changes in others. For example, applying eco-design principles to a product can not only result in a superior product but also save money, give access to new markets and new customers, and inspire and engage employees and stakeholders.
The impact is strongest when it is embedded in strategy and culture. Virtually every sustainability expert will tell you the same thing – a company will experience some benefits of sustainability, but will not maximize these until it is mainstreamed into the way that the company does business. Look for truly sustainable solutions that make sense for both business and society.
The CEO must be on board. The leading companies in this area all have programs that were started by, or actively driven and pushed by, their upper management, in particular, their CEOs.
But employees are key. Without employees engaged and active in sustainability, a sustainability strategy will go nowhere.
These are some of the primary reasons why adopting sustainable business practices makes good business sense. You will find more details on the business case as it applies to each core discipline throughout the blog.
The sustainability sales pitch
Author Bob Willard tells the story in his blog, The Sustainability Advantage, of when he worked at IBM. He writes that he spent six months drafting a letter to the then CEO, Lou Gerstner, asking him to embed sustainability into IBM ’s business strategy.
His letter included phrases such as ‘business will play a vital role in the health of our planet’ and ‘funding research on the causes of environmental issues.’ When written, in 1997, the letter was treated as a philanthropic request and directed to the corporate community affairs director.
Thinking back, Bob says that his original letter should have said ‘Dear Lou: I have some thoughts on how IBM could increase its profit by 38%. Interested?
Yours truly . . .’5 ‘That all sounds nice but . . .’ is a familiar phrase to sustainability champions. In fact, it seems to be much easier for people to come up with excuses and reasons for why not than to try new things, even if they think that it may make sense.
Proper presentation of sustainability-related projects and strategies is crucial in gathering initial and continued support. To do so, consider the following advice:
1. Be informed. Collect all the information you can about what is happening in your own company, in other companies (not just your competitors), work being done by NGOs, and current issues relating to the work you want to do.
If you know what you are talking about, it will make answering questions and getting people on board a lot easier.
2. Create a coalition. Engage other people who share your viewpoint or who are also interested. Focus on getting key people on board who can really help move these issues forward.
3. Pick your moment carefully. Different individuals, teams, departments, or whole companies will be ready at different times to put some of these tools into action. Focus on doing things right the first time, rather than finding a quick fix.
4. Package that information appropriately. People react to information in different ways, so knowing what kind of information to present to a specific decision-making person is key.
An HR manager will be interested in employee motivation and hiring better people, while a CEO will be interested in reputation, brand, and financial impact.
5. Choose who will give the information. Whether rightly or wrongly, people tend to believe information when it comes from certain sources. For example, many are skeptical when NGOs tell business what they should do, as they are seen as outsiders.
Find the right people to present the information, people who are well respected in the organization – even the converted skeptic – and you can make your case more compelling.
6. Think of the reasons why not. In bringing these issues to your team or your organization, make sure you think carefully about the objections your company might raise to doing this.
Consider the different perspectives around the table, the roles they play in the organization, their backgrounds, and personalities, and you can gain a critical understanding of why people may be unwilling to move on certain issues, as well as ideas on how your interests could converge.
7. Make a strong case. Have a strong case for why people should be interested in moving forward on these ideas. Make sure you outline all the potential benefits, both the direct ones and the indirect ones.
Just as important, describe what would happen if the organization doesn’t move forward, such as missed opportunities or negative PR.
8. Offer a vision. Offer a vision of where you want to go in the short, medium, and long-term, and concrete ideas on how to get there. Use stories, pictures, and videos along with hard facts to make your case. Build excitement about being part of something bigger. Think big.
9. Present the underlying problem rather than your solution. Don’t just show up at your team meeting proposing your solution. Instead, discuss the original problem that needs solving. This helps an organization or team gather around an issue and work together to solve it.
10. If calling it Sustainability or CSR won’t work, then don’t. In marketing, a product is often more successful if it’s marketed as high-performing rather than solely as an environmentally or socially friendly product.
In this same way, if a business is skeptical of sustainability, present it as what it is, good business sense, as ways to cut costs, generate revenue, and make production more efficient.
11. Make it straightforward. Where possible, integrate new thinking and requirement into existing processes, which enables others to more easily revise their thinking about existing company resources. Make it easy and straightforward for people to start. Link projects to the company’s ambitions, values, culture, and history.
12. Be patient. Even though you may be ready, for others this may represent a change in mindset and it will take them longer to come on board. started? What kind of expertise is currently in the company in this area? Are there any projects that already exist to build on?
How is your organization impacted by society and the environment? What issues affect your company ’s operations? Climate change? Water? Human rights? What issues do your stakeholders think are important for you to consider? What issues affect your competitors?
What impact does your organization have on society and the environment? How do your operations impact society in positive ways? What about negative ways? Are you releasing pollutants? Generating waste?
What issues are important to you? To your stakeholders? What about to your employees, your customers, your business partners?
What kind of culture does your company have? Is your company open to exploring new opportunities? Is it fast or slow to respond? Is it innovative? Does it have employees who would be keen to explore these issues?
Find out what is happening around you. Once you understand what is happening inside your organization and the issues that affect you, take a look at what is happening around you in terms of regulations, best practices, and interesting initiatives that others are doing.
What regulations affect you? Understand which regulations and industry standards affect you and your operations now and how they could impact you in the future. Above all, make sure you are compliant with the regulations that affect you.
What voluntary mechanisms are out there? Which standards, certification systems, and eco-labels are relevant to your business? Are your competitors using them? Are your customers and stakeholders asking for them? Are they becoming widely accepted industry standards?
What is the rest of the industry doing? What are your competitors doing? What about the organizations in your supply chain, your customers, your suppliers? What about other industries?
Look at the ‘best practices.’ What are the leaders doing in this area in your sector? What about in other sectors? What challenges have they encountered and what lessons have they learned that you can apply?
3. Decide where you want to go and why. Once you understand what is happening around you and how that affects you now and may affect you in the future, determine how you are going to proceed.
What are your drivers? Why are you looking at these issues? Is it because of a passionate CEO? Are your employees asking for it? Your customers? What pressures are pushing you to do this? Are you looking to strengthen your brand, or grow revenue or market share?
What is the business case? Translate the drivers into business reasons. What is the business case? What are the costs? What are the benefits? Will it increase employee retention?
Will it serve to build better products or increase market share? What impact could it have on your reputation and brand? On your relationship with your stakeholders?
What frameworks and tools work for you? An organization can choose a sustainability framework (or create a hybrid) to develop a vision for sustainability. Is it one offered by an NGO (such as the Natural Step)?
Is it the Triple Bottom Line? Is it a framework offered in a blog or through a consulting firm? Is it your own? Use these as a starting point.
What is your baseline? Conduct audits and assessment in order to identify where your strengths and weaknesses lie, to create a baseline to better understand your business and products and track progress toward your goals.
What is the best point of entry? Does your organization want to focus on a particular issue, such as water or climate change? Create new or improved products and services?
Does it want to start small with a particular product or process, or does it want to start big? Are you looking to enter new markets? Do you have any ‘unsus-tainable’ products that you want to remove from the marketplace?
At what scale? Look at individual processes or groups of processes (i.e., production line), a system (lighting or packaging), a product or product line, a facility, department, or location, by regional or geographical groups of departments or facilities, or for the entire company.
What is the budget? What resources are you willing to put toward your plan? How many employees, how much of their time? Will you have a whole team looking at these issues or just a few people?
4. Engage others and gather support. Experience shows that in order for sustainability to be successfully mainstreamed into an operation or business, employees, the CEO, and other stakeholders must be fully engaged.
Engagement requires building active relationships not only with customers and suppliers but also with local communities, social groups, governments, citizens, and employees.
Each has the power to welcome the company with open arms and help it achieve its goals or to block, disrupt, and make its life difficult.
Confirm CEO/management commitment. If the CEO or management is not on board, sustainability activities will remain of secondary importance. CEOs must assign clear responsibility, resources, and authority and communicate these messages consistently.
Build cooperation internally. Involve people from across departments and from all levels of the company. Employees are also a valuable sounding board, they often sense a problem before management acknowledges it.
Engage business partners. Involve suppliers, joint venture partners, contractors, shareholders, and customers in carrying out sustainability strategy. Begin implementing sustainability screens in purchasing decisions.
Identify and engage stakeholders. This includes all groups that are directly affected by your operations, including shareholders, investors, employees, client companies, consumers, local community groups, and supplier companies.
Although this can be a challenging and time-consuming exercise, stakeholder engagement can help identify potential problems before they arise and help a company understand the wider context in which it operates, and where opportunities and threats might come from.
Outside networks. A business can choose to take part in any number of different business and sustainability networks avail-able locally, national, regionally, and internationally, which share best practices.
This includes creating alliances with other companies, NGOs, business industry sector organizations, and industry-specific networks.
Engage your customers. Leverage the unprecedented power of consumers to share information about companies, products, and services to promote sustainable products, usage, consumption, and lifestyles.
5. Put your plan in place and make it happen. Develop a road-map, revisit it regularly, and build it with clear objectives and goals to help the company go where it wants to go. Consider short-, medium-, and long-term perspectives when putting together a strategy.
Create realistic targets and objectives. Define actions and set targets that are SMART (Specific, Measurable, Achievable, Realistic, and Time-Specific).
Break down sustainability targets and objectives in order to make them meaningful for individuals, subsidiaries, divisions, and departments. Select appropriate indicators and metrics to help you keep track of your progress.
Prioritize. Determine what the most important issues are. Be selective and look at prioritizing based on both importance and difficulty. Where do you want to be in 1, 5, 20 years? What do you have to do to get there?
Create a structure. Choose a structure that will enable your strategy to be a success. Will you have a sustainability coordinator? Task forces? A chief sustainability officer? Will it be incorporated into individual jobs? Who will have overall responsibility?
Create pilot projects. Pilot projects and prototypes are a good opportunity to test ideas and show others the impact they can have and learn some important lessons.
Align business systems. Look at ways to embed sustainability goals across all functions of a business; whether it is revisiting incentive systems to align them with sustainability goals in the HR department or exploring eco-efficiency and waste minimization opportunities in the production lines.
Also look at budgeting and training. Depending on the strategy you choose, certain systems and processes may need to be modified to ensure that day-to-day activities are performed in a manner consistent with these objectives.
Give people the tools. Include sustainability targets and objectives in performance appraisal so they have the right incentives. Run workshops to train staff, ensuring that sustainability is the responsibility of everyone in the organization and not just of a specific department.
Keep it going. It doesn’t stop once you have started implementing your sustainability plan. With a strategy in place that engages internal and external groups, and activities starting up, continue to monitor the progress of your strategies and the impact they have on your business both directly and indirectly, and revise as needed.
Successful strategies take time and effort to implement and should be continually revisited.
Communicate internally. Do other employees know what the sustainability strategy is? Do they know what their role is? Communicate continually internally about status, the successes, what needs more work, and so on.
Communicate externally. Publish reports at least annually that detail your sustainability impacts, goals, and progress, and disseminate information to your stakeholders. Use websites and other communication media to tell others about what you are doing.
Monitor. Use status checks and regular audits to monitor how you are doing and communicate that to all relevant parties.
Scaling up. Review what has worked and what hasn’t before increasing the scale of the effort. What lessons have been learned? Can they be applied to other parts of the business?
Look for continuous improvement. Put the plan into action, with a focus on achieving continuous improvement rather than trying to reach a goal and then stop. Keep revisiting the process. A sustainability strategy should complement and build on existing programs and initiatives.
The following will help you, and those around you, to get past the most common excuses.
‘I have no time.’ Do an audit of your time. This often shows that you spend a lot of time on tasks that do not actually benefit your work. At the same time, the audit can reveal that many of the things you currently do are already related to sustainability issues.
‘It’s not my job.’ Imagine if everybody said this – nothing would ever get done! If your job is to help your business be or continue to be successful, then yes, some of the ideas introduced in this blog are and increasingly will be part of your job.
‘I want to make money, not give it away.’ Look at sustainability as being a tool to reduce costs and increase revenue. Revenue minus costs equal profit. Even if you don’t make money by doing the right thing, you can certainly lose money if you do the wrong thing.
‘I’m not important enough.’ If you were hired then it is because you play a role. There is always something you can do regardless of what position you have within your organization.
‘It’s all too complicated.’ There are a growing number of resources out there to help individuals and companies explore these issues (i.e., this blog!). Find those things that make sense to you and start with them first.
‘No one else around me is doing it.’ If no one else is doing it, then you have an even better opportunity; in addition to the business benefits to your organization, it will give you a way to differentiate yourself and get ahead of the pack.
‘My company isn’t interested.’ Your company is made up of many different individuals, some will be interested, some won’t. Your company may not be interested, but other employees might be. By connecting with them and creating a group, you may be able to influence your company.
‘My company really isn’t interested.’ You may find rare instances where these issues are important to you but not to the company you work for. Remember how many companies there are, and how many of them can use your skills – it may be time to move on to one of those.
‘It costs too much.’ This all depends on how you approach it. Pursuing sustainability strategies that make sense to your business can involve upfront costs with less than hoped for short-term results.
Find the ‘low-hanging fruit,’ where simple changes to sourcing or processes can make a big difference. And remember, middle- and long-term results consistently show both business and societal benefits.
‘All this sustainability stuff will pass.’ Whether you like it or not, this represents the new business reality.
‘I’m not creative.’ Getting involved in sustainability requires commitment more than creativity. If you really have no ideas at all, even after reading this blog, then support other people who do have good ideas.
‘It isn’t important in our industry.’ All industries are getting involved in these issues. Make sure you’re not left behind. Take the opportunity to be an industry leader.
‘We don’t really impact the environment.’ Although the impacts may not always be obvious, every company and every individual impacts the natural and social environment around them in some way.
‘We can’t make a difference.’ Companies of all sizes and individuals in all sectors are making a difference. Some of the leaders are individuals and small companies.
Why is it important?
The rules of the game are changing. Creating long-term sustainable stakeholder value is slowly replacing maximizing shareholder return as the prevailing paradigm.
More people are asking for sustainability information.
Stakeholders are increasingly asking for better, more consistent information to understand how a company is performing.
Governments and the business sector are putting forward voluntary and mandatory disclosure and reporting standards that can significantly impact business.
Accountants need to be able to understand this information in order to report on and comply with requirements.
What gets measured gets managed . . . and what gets managed gets done, as the saying goes. One decisive element of any sustainability strategy is the development of measurable objectives and targets. Accounting has an important role in collecting data to support the decision-making process and to measure the results and improvements.
Better decision-making. Accounting for environmental and social costs and allocating them to the appropriate processes, products, or systems allows a company to make better decisions in relation to strategic planning, projects, material choices, prod-uct pricing, and product mix.
The accounting perspective not only enables a better understanding of the business but also helps to identify possible cost reductions or elimination, and exploration of potential revenue opportunities.
Recognizing opportunities. Identifying and gathering the right kinds of information also permits an organization to anticipate and adapt to a rapidly changing world, including identifying new business opportunities and managing risks.
Getting ahead of the game. Companies will fall behind if they do not stay up to date and active in this area, in particular in the current debates, for example around climate change.
The efforts in climate change are increasingly leading to disclosure requirements in other areas such as water, energy usage, and emissions.
Economic instruments. Accountants need to understand how business may be affected by the increasing number of economic and market-based instruments associated with sustainability issues such as permits, liabilities, charges, and taxes.
Increased demand. Companies are receiving an increasing number of surveys and requests for information in this area, which is leading them to disclose more information publicly.
Full or true cost accounting
One of the roles of the management accountant is to measure the full costs of a firm’s products and services and to correctly assign them to the appropriate parts of the business.
This is important in order to better understand the profitability of their products, prod-uct lines, departments, and customers and to make more informed decisions.
Many would argue that clearer identification of those environmental issues which actually drive costs (i.e., activity-based costing) will reduce costs, squeeze out inefficiencies, and improve margins.
However, many significant environmental and social costs that could affect these decisions are currently not being identified or measured.
Thus, the typical management accountant has an incomplete understanding of the true costs the business faces.
This can lead to an inaccurate understanding of the true costs associated with a particular product or process and can lead managers to miss opportunities to make their products and processes better and more efficient.
Understanding the true cost is not only important for strategic decision-making but also for determining how a product should be priced.
While consumers buy a product based on a price (among other factors), the price often does not fully reflect the real cost of that product to society.
Better incorporation of true costs into products can result in better pricing that allows customers to make purchasing decisions based on information regarding the costs to society of a product and let them know that these costs have been paid for.
Typically, accounting systems classify costs as direct materials and labor, manufacturing or factory overhead, general overhead, and research and development.
Conventional environmental expenses may be classified in any or all of these categories.
Several tools aim at trying to take the environmental expense out of these categories so that they can be understood independently. For example, a particular product may need certain chemicals in its production.
The product price may only include the cost of buying those chemicals but may not include other costs connected with their use, such as training employees to handle them safely, storing them, and ensuring against damage caused by possible spills.
Even if the product price includes all the costs paid by the business, it often does not include the social and environmental costs associated with the use of those chemicals, such as the eventual damage of a spill on the health of local people, animals, and plants.
Government legislation has been working to internalize environmental costs through the use of taxes and fines to ensure that these costs are being adequately passed on to the firm and thereby more effectively allocating them to particular products and processes.
Conventional operating costs such as the use of raw materials, utilities, and waste can be identified and quantified. However, other costs can be much more difficult to identify and quantify. These include:
Hidden and overhead costs. Certain types of environmental costs may be hidden from managers because they are buried in overhead accounts, rather than being allocated to the particular project or process to which they relate.
This affects the actual and perceived viability of such activities. These costs can include:
Initial costs relating to R&D, eco-design, qualification of suppliers, and evaluation of alternative pollution control.
Regulatory and voluntary environmental costs such as monitoring.
Back-end environmental costs that will occur at some point in the future; for example, the costs of decommissioning an old laboratory, waste disposal costs, closing a landfill, or complying with future regulations.
Costs incurred because of past pollution, including clean-up of closed or existing sites, in order to mitigate current pollution and prevent future health and environmental risks.
Contingent or liability costs. These are costs that might be incurred at some point in the future. These are usually estimated based on the probability of occurrence.
Examples include the costs of remedying and compensating for future accidental releases of contaminants into the environment (e.g., an oil spill), or fines, and penalties for future regulatory infraction.
Intangible costs. These are costs that go into one element of the business but that have consequences for other parts of the business.
For example, a company that cuts its sustainability program because they want to save money may experience a drop in the company’s reputation, less motivated staff, decreased productivity, and increased worker absenteeism.
Societal costs. These represent the costs of a business’s impact on the environment and society for which the business is not legally accountable. For example, the cost of delivering goods includes petrol, but not the emissions of air particulates which have an impact on human health.
According to the US Environmental Protection Agency (EPA), ‘the success of environmental accounting does not depend on “correctly” classifying all the costs a firm incurs. Rather, its goal is to ensure that relevant information is made available to those who need or can use it.’
There are a growing number of sustainability-related issues, from water to climate change. No organization can be expected to respond to all of them, especially when the issues are not all seen as equally important to them.
In the world of finance, any issue that has (very) roughly a 5% impact on the net income has traditionally been considered to be material. However, when it comes to sustainability, it is not always so easy to tell because it isn’t as easy to put a price tag on the potential impacts.
So, organizations need to determine which issues are material – meaning which issues could make a major difference to an organization’s performance both in the short and long term.
According to assurance organization AccountAbility, ‘Materiality is determining the relevance and significance of an issue to an organization and its stakeholders.
A material issue is an issue that will influence the decisions, actions, and performance of an organization or its stakeholders.’
The first step in determining which issues are material is to make a list of all the issues that are, or could be, relevant to the business and its stakeholders, and collect the information needed to assess their significance. This includes:
1. Issues that have a direct short-term financial impact. These are resulting from aspects of social and environmental performance that have short-term financial impacts.
For example, carbon emissions have become financially significant for many companies over the past few years.
2. Issues where the company has made policy-related statements or commitments. Issues are material where a company has agreed to policy commitments of a strategic nature, including regulatory or voluntary requirements for non-financial disclosure.
Tesco in the UK, for example, has publicly set out the significance of its treatment of people to its core business strategy.
3. Issues which other comparable organizations consider to be material. To understand the materiality of a specific issue or aspect of performance, look at whether a company’s peers consider it material.
For example, in the pharmaceutical sector access to medicine in developing countries is an increasingly important issue.
4. Issues which stakeholders consider important. It might sound obvious, but a company should take into account the concerns of stakeholders, including employees and customers. If certain issues are important to your stakeholders, then they should be taken seriously.
5. Issues that are considered social norms. Areas that are covered by regulations or could be in the future, best practices and emerging norms should all be evaluated to determine which ones are material to a business. This includes international initiatives such as the Global Reporting Initiative and the Global Compact.
Companies differ dramatically, so what is material for one company may not be for another. Not all the issues a company identifies will end up being significant to its long-term success.
Therefore, once all the sustainability issues that could be material to an organization are identified and assessed, they should then be prioritized according to criteria determined by its management, such as whether they are of high, medium, or low materiality.
Many companies map this information into a materiality matrix, where the extent to which issues are deemed significant to stake-holders is mapped on one axis and significant to the company on the other.
Therefore, the issues that show up in the top right corner are significant to both groups while those issues in the bottom left corner are less significant for the particular company.
Once mapped, and the level of materiality determined for each issue, this information can be used:
To determine the scope of corporate reports and other communication so that they are more strategically aligned and useful to external stakeholders.
To promote internal understanding of the link between sustainable development issues and business strategy.
To feed into ongoing strategy development by highlighting rapidly emerging issues and enabling them to be factored into strategy development.
Anglo American, a global mining company, has determined that their most material issue and number one priority is safety.
The company has created a list of targets around safety and regularly reports on progress made toward those targets.
Based on their efforts, which have included engaging not just their employees but unions and government as well, they have seen a decline of around two-thirds in number of fatalities since 2007.
They have also formed the Tripartite Safety Initiative in South Africa to work on understanding global safety standards, which has not only increased safety at Anglo American but also the safety standards of the mining industry in South Africa.
Key performance indicators
Having the right kind of information at the right time, and in the hands of the right people, ultimately allows for more effective decision-making.
Once environmental, social, and economic goals and targets are identified, key performance indicators (KPIs) are used by organizations to measure their progress against these goals.
Before choosing KPIs, many organizations think they know how they are doing, however, they’re often surprised when they start collecting real numbers.
In order to be meaningful and effective, a company should select KPIs in context with the organization and its industry, so that they make sense for their business and its stakeholders.
While there is no agreement on which indicators to use or how to construct them, there is plenty of guidance. The Global Reporting Initiative, for example, provides guidance for indicators on economic performance, environmental, human rights, labor, product responsibility, and society. It also provides sector-specific guidance.
KPIs can be used to measure progress on anything from how an office greening program is going (e.g., the percentage of paper recycled) to something much larger, such as measuring the impact of certification programs. For example, Danone’s KPIs on projects always include environmental measures.
The company incorporates monthly carbon footprint data at an individual product level in its group financial management systems.
They also introduced a new capital expenditure category, Green CAPEX, which allows for investing in new projects that show a high environmental interest but have a longer financial payback period. Changes are incentivized by, for example, the inclusion of carbon as a KPI in the calculation of management bonuses.
Whatever KPIs are chosen, care must be taken to present them clearly. Many indicators start out as absolute numbers of whatever is easiest to measure. Since these metrics measure basic data (such as total energy use), it becomes all too easy to draw false conclusions from this information.
For example, a fall in emissions could be due to a downturn in business rather than efficiency gains. Therefore, relative/normalized measures such as ratios can be more useful in understanding a company’s performance (e.g., energy use per unit of output). Some pointers to keep in mind when choosing metrics:
Make sure the metrics are related to the goals and objectives of the company. As simple as it may sound, it is important to make sure that indicators are providing information that is useful to the company and provide data on progress toward the company’s goals.
Choose driving metrics. Metrics should drive performance rather than just measure outputs.
For example, a company trying to improve its compliance record with regulators should develop metrics that identify and measure the root causes of non-compliance, rather than simply track the number of occurrences of non-compliance.
Choose leading metrics. Metrics should not just measure things that occurred in the past, such as energy use, but also capture a vision for the future (e.g., size and quantity of cleantech investments).
Leaders are using not just quantitative measures but qualitative as well. Explore using KPIs to measure areas that may not be as simple to quantify, such as intangibles like reputation with customers.
Who is the audience for your metrics? Is it management, government, voluntary business initiatives, investors, employees, consumers? The indicators selected should be relevant to the audience, give the information needed by or of interest to these parties, and be easy to understand and use.
It doesn’ t have to be perfect. A certain level of inaccuracy is inevitable. The key point is to collect information that is useful in moving forward. Indicators should allow you to understand and measure progress. It is better to estimate what you can’t measure, rather than leave it out altogether.
It doesn’ t have to be overly complex. Avoid using too many indicators. Limit the number of metrics that need attention at any one time. A lot of the data needed may already be available within the company.
Measuring social impact
Organizations often try to positively influence the communities in which they operate. In order to do this, they must be able to define the social proposition they are offering and measure the impacts of their activities on the local environment.
This is important in order to improve the effectiveness of programs, increase understanding of the impact of their work, and communicate the value of that work to their stakeholders.
Indicators are used to measure the impact of businesses’ activities on society. According to the Foundation of Social Return on Investment, there are four main elements needed to measure social value creation:
Inputs are the resources you need in order to make something happen. They are measured as a cost (e.g., cost of the program, the value of time contributed).
Outputs are the direct result of your business objectives or program goals (e.g., number of people trained or trees planted).
Outcomes are changes that occur over the longer term as a result of the activity (e.g., new jobs, increased incomes, improved stability of life as a result of programs).
Impacts are the outcomes less an estimate of what would have happened in the absence of your program.
Tools such as Social Return on Investment are used in order to explain the social value in monetary terms. Return on Investment (ROI) is a tool used to understand financial value creation.
If you invest one dollar in a project and more than a dollar is returned, then the project is probably worth further consideration. Social Return on Investment (SROI) works in the same way.
It is a tool used to understand the environmental, social, and economic value being created by organizations. Value is something that cannot always be measured specifically, but SROI tries to provide an approximate value.
‘The essential rationale for calculating SROI separately from financial returns is because the market’s valuation of social benefits is imperfect. In cases where it is perfect, there would be no need for an SROI analysis.’
SROI analysis should include both positive and negative impacts on the assessment and should only include impacts that are clearly and directly attributable to the company’s activities.
SROI analysis takes organizational time and resources. However, when done properly, it can be an effective tool to improve your programs and communicate the value of the work you are doing, whether you are a commercial company or a not-for-profit one.
Several organizations have developed systems to better understand social impact.
Anglo American created the Socio-Economic Assessment Toolbox in order to better understand whether its operations were living up to the company’s stated goal of making a contribution to the economic, social, and educational well-being of the communities associated with its operations.
The International Finance Corporation uses a Development Outcome Tracking System in order to track the development results of its activities to assess whether or not it is achieving its mission.
Sustainability in financial statements
Although much of the emphasis regarding sustainability concerns disclosing information in separate sustainability reports (explored at the end of this blog), there is increased work being done on how to include sustainability information in annual financial reports.
Today, the majority of annual financial reports are still issued with little or no environmental or social information. However, more organizations themselves have been exploring ways to incorporate sustainability and financial information into their annual reports.
Within current standards, environmental issues are treated in more depth than social issues. Some examples of environmental issues currently covered by financial reports include:
Liabilities. These can include having to pay fines for non-compliance with laws, legal fees from court cases by shareholders against the company, or costs for cleaning up a polluted site. Liabilities can either be from events that happened in the past, or provision for events that may happen in the future.
Intangible assets. Those elements of a business that do not have a specific financial value, but which increasingly represent a significant part of the value of a company such as brand, intellectual property, and reputation.
Sustainability issues that impact a company’s financials can also be included in the narrative sections of the report.
This gives management the opportunity to provide contextual and non-financial information about how sustainability issues have impacted, or may impact, financial conditions and results (also referred to as operating and financial review, business review, management discussion, and analysis depending on the country).
Companies have several different ways to report on sustainability, including sustainability reports and reporting on sustainability issues directly in their financial reports. Increasingly, companies are choosing to integrate the two reports together into one.
The level of integration varies, ranging from including information on sustainability in the annual report, to combining the two reports one after the other, or fully integrat-ing the two sets of information together – also known as integrated reporting.
Integrated reporting is about exploring the interaction between financial and non-financial performance. According to the International Integrated Reporting Committee (IIRC), an integrated report is ‘a concise communication about how an organization’s strategy, governance, performance, and prospects lead to the creation of value over the short, medium and long-term.’
It combines the different strands of reporting (financial, management commentary, governance and remuneration, and sustainability reporting) into a coherent whole that explains an organization’s ability to create and sustain value.
While sustainability reports are often aimed at engaging a range of stakeholders, they are often perceived to be of limited use to investors.
Integrated reports are intended for investors as well as for those stakeholders who want a more holistic view and insight into the company ’s strategy and performance. They aim to communicate the factors most important to the creation of value over time.
It is about improving the basis of capital allocation by enabling the capital markets to better understand a company’s strategy, align their models with business performance, and make the efficient and forward-looking investment and other key decisions.
The Integrated Reporting Committee of South Africa suggests that the following elements be included in an integrated report:
A description of the scope and boundary of the integrated report.
A concise overview of the organization and its activities, a statement of its business model describing the manner in which it currently creates value, and an overview of its governance structure. A description of the risks and opportunities that are material to the organization’s current and anticipated activities.
A description of the organization’s strategic objectives demonstrating how these have been informed by the risks and opportunities, including sustainability issues.
An account of the organization’s performance in terms of its strategic objectives, material social, environmental, economic, and financial impacts, and KPIs and KRIs.
A statement of the organization’s anticipated activities and future performance objectives, informed by its assessment of recent performance and understanding of societal trends and stakeholder expectations.
An overview of how the organization remunerates employees and senior executives, including factors that could influence future remuneration.
A brief analytical commentary that reflects the understanding of the organization’s governing structure and executive team regarding the nature of the organization’s current and anticipated performance in the context of the organization’s strategic objectives.
One of the challenges to integrated reporting is that many organizations’ ability to produce quality non-financial data is not as high as financial data, meaning it needs to be improved by improving the timeliness and robustness of the data.
At Novo Nordisk, who have been publishing integrated reports since 2004, financial and non-financial performance is reviewed by the Audit Committee of the Board at the same time.
The process for reviewing performance is therefore aligned throughout the company and this increases the robustness of data systems and confidence in data quality.
There is a push internationally to bring integrated reporting to the forefront and to develop standards and guidance in this area. The IIRC was established in 2010 to achieve a globally accepted integrated reporting framework.
Since 2011 all companies listed on the Johannesburg Stock Exchange are required to file their integrated reports on an ‘apply or explain why not’ basis, and most have.
The Corporate Sustainability Reporting Coalition urged UN member states at the Rio+20 conference in 2012 to require public and large private companies to integrate sustainability information in their annual financial reports.
Annual financial statements are subject to an audit or assurance process, which is done by an accounting firm to ensure accuracy and enhance credibility.
This assurance statement is usually found within the first few pages of the report. Although no such regulatory requirements exist for sustainability reports, readers are increasingly looking for voluntary assurance that covers two areas:
Assurance on management and reporting systems and associated performance, which assesses the strengths and weaknesses of the company’s sustainability programs and initiatives.
Report content assurance that looks at the accuracy, completeness, reliability, balance, and fairness of the report, similar to the verification of financial statements on stand-alone sustainability reports and on integrated reports.
Companies that report on their environmental and social performance rely on accounting firms, consultancies, certification bodies, and CSR specialists for assurance of these reports to ensure credibility.
Some – such as Shell, GE, and Nike – have panels of independent advisers that provide expert views as an alternative avenue to enhance credibility.
Although companies are increasingly commissioning assurance statements (more than 70% of the 250 biggest global companies have some sort of assurance), there is no single international set of principles or standard for assurance of non-financial reports.
The leading international standards for assurance are the accounting standard ISAE 3000 and 3410, as well as the multi-stakeholder-created AA1000AS, which looks at both the verification of data and the underlying management and reporting systems.
Even with these emerging international standards, there are still inconsistencies and wide variations in the approach taken for sustainability assurance.
An assurance statement typically looks at the following:
Specific declarations in terms of what kind of audience the statement is aimed at, and whether or not it was made independently from the company, outlining the respective responsibilities in the audit process of the auditor and the company.
An outline of the methodology, how the assurance provider undertook the audit, such as conducting internal interviews, scrutinizing internal data systems, reviewing external documents, interviewing external stakeholders.
In the case of AA1000AS, assurors can provide high assurance or moderate assurance based on the amount of evidence obtained and assuror access to that evidence to support statements regarding the following three principles:
Inclusivity. Has the organization been inclusive in how they engage stakeholders in achieving an accountable and strategic response to sustainability?
Materiality. Have they identified what the material (most important) sustainability issues are to the organization and to its stakeholders?
Responsiveness. Have they responded to these and communicated appropriately (i.e., establishing policies, objectives, and targets, management systems, action plans)?
Recommendations and opinions, which offer insight in terms of performance, strengths and weaknesses, challenges, etc.
In some instances, the reporting organization will also provide a report to management.
Such additional reports should not communicate different conclusions than those found in the publicly available assurance statement, but rather include any limitations in the scope of the disclosures on sustainability, the assurance engagement, or the evidence gathering.
Despite all the work that is happening in the area of sustainability and accounting, there are still several challenges.
Awareness. Many accountants simply don’t see sustainability as relevant to their jobs. The first step is to raise awareness about their crucial role and provide them with further resources and training at all levels to allow them to incorporate these issues into their work.
Quantifying the qualitative. There are many difficulties in estimating the costs of environmental and social issues across the full lifecycle of a product or process.
Moving from costs to revenues. There is a need to move beyond seeing environmental initiatives and values as just costs to be suffered (through legislative imperative) or costs to be reduced at the first possible opportunity.
Companies need to identify the business benefits, and ultimately profits, that correspond to the costs that must be incurred for better environmental and social performance.
Consumers. Responsible companies have competitors who often price their goods below their true cost, discounting the social and environmental costs. In some cases managers who price their goods and services based on full social and environmental costs will suffer until consumers recognize this in their purchasing decisions.
Traditional accounting systems were not designed to enable environmental data to be separately identified or evaluated – such as data on waste management, compliance with laws, insurance. There is a need for more robust information, data, methodologies, and collection systems to allow for more integration of these factors into decision-making.
Assets versus costs. Using traditional accounting methods, end-of-pipe technologies to reduce environmental impacts are accounted for as assets, while attempts to eliminate sources of pollution at the source appear as costs.
Similarly, investments in training and development are recorded as costs, while the collective knowledge and experience this creates are not recorded as an asset.
Short-term versus long-term. There is a need to shift the mentality and accounting practices to look more at the long-term effects, as opposed to simply short-term implications of decisions.
The challenge is to incorporate longer-term, less tangible environmental and social costs into the balance sheet rather than just measuring short-term tangible metrics.
Information not tracked adequately or not available.
Available information is often not sufficiently accurate or detailed for decision-making purposes.
Sometimes the information is collected, but stays within different divisions of the company, where the accountants may never even become aware of its existence.
These divisions will often have different goals, perspectives, and even language with regard to sustainability and inconsistencies may arise in how information is communicated.
Comparability of data. Company disclosures on sustainability issues are often inconsistent and difficult to compare across a single industry. Several sustainability threads are common to all sectors (e.g., energy and water consumption, greenhouse gas emissions) and should be reported consistently across industries.
Bringing it all together
Until now the accounting profession has dealt with economic, environmental, and social issues in relative isolation from each other. However, increasing attempts are being made to bring these together in recognition that conventional accounting numbers do not always tell the ‘full story’ of how businesses impact the environment in which they work.
An example includes work being done by an initiative called Accounting for Sustainability around ‘integrated thinking,’ which looks at new approaches to accounting that will enable organizations in business, investment, and the public sector to better understand, and where appropriate value, ‘externalities’ and incorporate these into decision-making processes.
The International Integrated Reporting Council also looks at integrated thinking, the ability of an organization to understand the relationships between its various operating and functional units and the capitals the organization uses and effects.
Integrated thinking leads to integrated decision-making and actions that focus on the creation of long-term, as well as short- and medium-term, value.
All companies rely on a variety of different forms of capital for their success, including financial (funds), manufactured (physical objects), human (skills and experience), intellectual (intangibles), natural (inputs to the production of goods), and social and relationships capital (links between stakeholders).
Value is created or destroyed as a result of the use of, impact on, and the interplay between the capitals caused by the organization's activities (Integrated Reporting).
The key role of accountants is in measuring and communicating information used both internally and externally in decision-making.
One of the key requirements for moving sustainability forward at the organizational and societal levels is better and more complete information.
Several international initiatives are underway to increase the level of information available and make it comparable across or between industries.
The Carbon Disclosure Project is one example, which collects data and disseminates information on a range of environmental issues from the world’s largest companies and makes it available to a group of institutional investors with a combined US$87 trillion of assets under management.
It holds a database on corporate climate change and water use information on companies around the world. There is also a growing push toward mandatory carbon disclosures; for example, all companies listed on the main London Stock Exchange are now required to report their greenhouse gas emissions.
Recognizing unrecognized assets
Accountants are in an ideal position to uncover where potential revenue-generation opportunities lie and how to take advantage of them.
One example is selling waste for profit, thereby transforming it from a cost into an asset. The protection of natural resources can provide in some instances a credit in market-based regulatory systems that can be sold or traded. It also gives a company a ‘license to operate’ in a given community.
The Elgin Air Force Base in Florida has 400 000 acres of longleaf pine forests. Because of its fire resistance, slow growth, long lifespan, and high value for lumber and resin, longleaf pine has been logged almost to extinction. In fact, 72% of all remaining old-growth populations in the world are at the base.
The US Air Force performed studies in 2004 to assess the potential value of the forest for environment, economy, and surrounding communities.
Today, timber sales generate US$1.2 million a year, and 280 000 acres are open to the public for recreational opportunities that could be worth an additional US$8–12 million a year in user fee revenues.
Different forms of reporting
Companies are experimenting with and exploring a range of alternative options to collecting and presenting their environmental and social data beyond sustainability and integrated reporting outlined in this blog.
Because of the importance that the company places on sustainability, Timberland reports their sustainability numbers on a quarterly basis rather than yearly. The information is presented online, comparing progress against the company’s sustainability goals.
Another example is Puma, who have created an environmental profit and loss statement (Environment P&L) that analyzes and puts a monetary value on key environmental impacts that arise due to Puma’s business from the production of raw materials through to the point of sale and even to the product level.
Their work in this area is inspiring a range of other companies and governments to explore how the Environment P&L could be mainstreamed and used across the business sector.
In 2010 Hershey released its first CSR report outlining all of the chocolate company’s sustainability-related successes. Shortly after, a group of activists and NGOs published their own version of Hershey’s CSR report which instead focused on the company’s human rights abuses in the production of its cocoa.
This kind of report also called a shadow report, is put together by NGOs to supplement or present alternative information to government and UN reports however there are several instances of NGOs presenting such reports about companies too.
Shadow reports aim to supplement or present alternative information to what the company is discussing, to highlight issues not raised by the original report that the shadow report is based on.
Friends of the Earth, a large international NGO has produced a few shadow reports, first in 2009 they released an alternative report for Shell called The Other Shell Report and in 2009 they did the same for BHP Billiton, both times focusing on the company’s exaggerated claims.
CSEAR has done some research in this area including creating shadow reports for Tesco, HSBC, and Ryan Air.
Economics is also the study of how people choose to use resources. Scientists agree that drastic action is needed to save the planet and, if we are serious about doing that, we need to reshape the way that we use these resources.
The good news is that economists are starting to explore opportunities to do just that by creating mechanisms that assist organizations in internalizing these costs so that buyers and sellers can make decisions based on complete information about products and services;
as well as understanding the broader social and environmental consequences of the consumption of these products and services.
Why is it important?
Because the world is changing. The context in which organizations are doing business is rapidly changing. Where before the USA, Europe, and Japan were the leading economies, today there are many other players in the world, including developing and emerging markets. This is creating a more complex business environment with increased risks, but also increased opportunities for business.
Ecosystem services. Nature provides many freely available benefits such as erosion control, climate regulation, and pollination, not to mention freshwater, forests, and wetlands.
Ignoring the environmental impacts associated with economic growth will result in these resources becoming more costly for business.
Understanding regulatory and market-based instruments. Many problems in sustainability, such as externalities, represent market failure where the production or use of a good or service by the free market is not efficient. The mechanisms being put in place to address these market failures will directly affect businesses.
A better understanding of the full cost of business and society's decisions. The costs of activities are not always borne by the parties directly involved, which often results in consumers demanding more of a particular good or service than they would if they had to pay a price that included the full costs.
Increased regulations and standards. Organizations will be faced with an increase in regulations and standards that they will have to comply with from the local to the global level.
The key concepts
Economics is about understanding the incentives in place to pursue unsustainable behavior and in particular how to change these to support more sustainable behavior. It is also about understanding the wider environment in which business operates and how this is changing.
Consumption patterns have been growing rapidly because of population growth combined with the rise of a culture of consumerism.
It is estimated that there will be 9 billion people in 2050, which represents a huge increase in the number of consumers. Globalization and increasing economic power are giving more and more of these consumers access to an increasing number of products and services.
A significant amount of GDP is accounted for by consumer spending on goods and services. However, the resources needed to support these global consumption patterns are putting unsustainable pressures on the Earth’s ecosystems and on human social systems and well-being.
Several tools and indices have emerged to measure and track the state of the world’s ecosystems. The Ecological Footprint, for example, measures how much land and water area a human population requires to produce the resources it consumes and to absorb its wastes, using available technology.
This technique can be used to calculate the footprint of an individual, a city, a business, a nation, or the whole planet. Today, humanity uses the equivalent of 1.5 planet Earth to provide the resources we use and to absorb our waste.
Since the mid-1980s, humanity has been in ecological overshoot with annual demand on resources exceeding what the Earth can regenerate each year.
It now takes the Earth one year and six months to regenerate what we use in a year. If we continue with business as usual, by the early 2030s it is estimated that we will need two planet Earth to keep up with humanity’s annual demand for goods and services.
The problem obviously is that we don’t have two planet Earths, we only have one. But with that one planet, if we change our lifestyles and consumption patterns we can free up the resources needed to support humanity.
As the WWF Living Planet Index Report states, ‘there are many effective ways to change course. While technological developments will continue to play an important role in addressing the sustainability challenge, much of what needs to be done is already known, and solutions are available today.’
Consumers are increasingly concerned with the negative effects that products they consume have on their health and on the environment, as well as the impact of the production process on the environment.
As a result, sustainable consumption policies and initiatives are broadening to take into account the effects of processes as well as products, and the provision of services as well as goods. The need for policies that foster sustainable consumption has been recognized as a priority at the international level.
According to the UN, over 80% of the world’s fisheries are in jeopardy of collapse due to over-fishing. Restrictions are not working because fish are accessible to everyone, and it is difficult to prevent fishermen from taking all the fish they want.
In this situation everyone races to catch as many fish as possible, reaping all the benefits of this natural resource but paying none of the costs. In the long run, when fish are caught faster than they can reproduce, this will result in no more fish for anyone.
A ‘commons’ is a geographical area not owned by any private person or legal entity, and any natural resources contained in a commons thereby belong to everyone. These natural resources include the things that we inherit – such as nature, air, and water.
Often, people will misuse or overuse resources that are freely available, making them increasingly scarce. This is referred to as the ‘tragedy of the commons.’
How to manage the commons has always been an issue of debate. Some say a Chamber of Commons is needed to regulate and protect the commons. Others try to put a financial value on the commons (see Environmental Valuation).
Some of the debates raise the question of whether these common assets which are already being bought and sold in the market – such as trees, water, and fish – are being responsibly managed on behalf of the general public who are the ‘owners’ of these assets.
Tradable permits are one option for protecting the commons. The European Union defines these as ‘an economic policy instrument under which rights to discharge pollution or exploit resources can be exchanged through either a free or a controlled permit-market.’
For example, in the case of fisheries, New Zealand put in place a quota management system to manage its fisheries in a sustainable way.
Once it was determined how many fish could be caught without depleting the fish population, this number was divided up into quotas and given to companies. Companies own the quotas and are allowed to sell or trade them.
The result is that they are treated with the same respect as any other valuable asset. Today, approximately 80% of fish stocks are at or near target levels of sustainable harvest and the total allowable catch for some fish species has even increased.
Another example is from the island of Bali in Indonesia. Rice farmers have been coordinating their use of scarce water for centuries through social networks built around ‘water temples,’ where they meet to discuss water allocation issues. Modern analysis shows that the way they allocate water is close to ideal.
However, in the 1960s the government decided to intervene, bypassing the temples and hiring hydrologists to install modern water systems and introduce heavy pesticides. The result was a disaster, so much so that in the end the government let the farmers return to their original system.
The commons does not just refer to environmental systems. Knowledge and culture created by society are also part of the commons.
Some companies are exploiting traditional knowledge, for example in relation to medicinal and agricultural plants, and creating products for which they are awarded exclusive rights under patent laws (this practice is known as bio-piracy).
For example, the Hoodia cactus plant in South Africa – which has been used for centuries by the Kalahari San Bushmen to suppress hunger – was patented by a pharmaceutical company and developed into an appetite-suppressant drug.
The pharmaceutical company eventually returned the patent to the South African Council for Scientific and Industrial Research. In response to incidences of bio-piracy, databases and archives such as the Traditional Knowledge Digital Library in South Asia have been constructed to try to stop bio-piracy by establishing ‘prior art,’ which disallows patents on anything that has been disclosed to the public in some form.
A company deals with costs and services that have a value set by the market in the normal course of business.
For example, if a company needs to clean up a polluted site, the cost is processed through the traditional accounting system. However, the company’s activities also give rise to external costs, known as externalities, which relate to the effects that the company’s activities have on the environment and on people.
For example, if a company releases untreated water into a nearby river, this has a detrimental effect on both the ecosystem of the river and those communities that rely on the river to survive.
In most cases, these costs (cleaning up the river, helping the people) are currently absorbed by society as a whole, instead of by the company that damaged the environment.
In contrast, an externality can also be positive. For example, if a landowner chooses not to develop his or her land and in doing so preserves a local water source for an aquifer, the landowner usually won’t get any economic benefit from the decision, but society does.
Externalities are important to consider because the costs or benefits to the company are often different from the costs or benefits to society as a whole.
For example, if the cost of polluting is not borne by the polluters, then they will feel no economic motivation to reduce their discharge of waste.
If the price of water is set below the true cost to society of using this resource, this will produce incentives to use excessive amounts of water.
Because these costs and benefits are paid by society as a whole, private economic actors (individuals and corporations) cannot make appropriate and correct calculations about whether it makes economic sense to go ahead with an activity.
In this sense, externalities are often considered a form of market failure, since the amount of activity carried out by private parties in a free market will result in an inefficient use of resources.
Economists are interested in externalities as a market failure for theoretical reasons (e.g., because they can help us to understand how markets work in different societies) and practical reasons (e.g., because market failures justify the intervention of government through legislation, regulations, and other tools that work through the market).
Accounting for externalities is not an easy task because in many cases the extent of the impact is either unknown or difficult to measure. Even when it can be identified, there are significant challenges related to measuring and quantifying the impact on society and the environment.
The most efficient solutions have been to work with the private companies and individuals to internalize externalities through mechanisms such as taxes and compliance costs.
There is a growing realization that one way to reverse the trend of environmental decline and protect many of our common resources on Earth is to use market forces. The idea is that certain unsustainable behaviors of firms or individuals are caused by a lack of economic incentives to pursue sustainable behavior.
For example, landowners who have a wetland or an endangered species on their land may be providing a service to society by choosing not to develop their land, but in the process are losing the financial opportunity associated with developing that land.
In response to this, market-based instruments (MBIs) are being created to provide financial incentives aimed at protecting the environment by altering market prices, setting limits on resource use, improving the way a market works, and creating a new market where one previously didn’t exist.
In the case of the landowners, they can collect payments or ‘credits’ from the conservation of the land, and can then sell these credits to developers who are looking to offset the harm they have caused to the environment.
About US$3.4 billion of regulated biodiversity offset transactions currently occur per year, a number which could grow to US$10 billion by 2020.
Although not all MBIs fit neatly into a single type, there are broadly three types: price-based, quantity-based, and market friction.
1. Price-based instruments work by changing the prices of goods and services to reflect their relative impact on the environment by either adding or removing a tax or fee. The advantage of these mechanisms is that a company knows how much it will cost to comply, but the overall environmental outcome can be uncertain. These can take several forms:
Taxes not only generate the revenue needed to mitigate the negative impacts, but also raise the price of the good or service in question, thereby decreasing the demand. This can be in the form of charges, fees, or user charges.
Subsidies in the form of a payment or tax concession can help encourage changes in behavior that reduce pollution. For example, a subsidy could be offered for the purchase of clean technology in order to achieve a reduction in overall pollution levels.
Charges can be imposed to encourage companies or individuals to change behavior. For example, by charging a volume- or weight-based fee to dispose of garbage, companies can be encouraged to minimize the total waste they produce.
Deposit-refund systems include schemes where a buyer pays an upfront charge in addition to the price of the product, which is then refunded when the product is returned.
One common example of this is the beverage container deposit scheme, which is usually introduced to encourage the return of drink containers for recycling.
2. Quantity-based instruments involve creating markets for the right to undertake an activity that has a negative environmental impact, such as discharging pollutants into a river or the air or for the right to have access to a scarce resource, such as water.
These are used when there is a measurable target that needs to be achieved. As opposed to the price-based instruments, these provide certainty regarding the environmental outcome, but not for the cost to industry of achieving that outcome.
Tradable permits (cap-and-trade) involve determining the amount of pollution that can be released, or how much of a resource can be sustainably used, and then issuing permits for that amount. Organizations can only pollute as much as the permits they own allow.
If they put in place mechanisms that allow them to cut their pollution significantly, they can sell unused credits to other companies that perhaps have not been able to cut their pollution.
Quota management is a way to protect natural resources such as fisheries. Once the total amount of fish available to catch is determined, quotas are then given to fishers.
One fisherman from the Alaskan halibut fishing industry said about the quotas put in place in that industry, ‘Most fishermen will now support cuts in quotas because they feel guaranteed that in the future when the stocks recover, they would be the ones to benefit.’
Offsets are conservation actions designed to compensate for unavoidable impacts on the environment. For example, clearing native vegetation for a development can be offset by protecting another ecologically equivalent area of vegetation.
These are usually only appropriate when the participant has first taken all available measures to avoid and minimize harm.
3. Market friction instruments aim to influence how existing markets work in order to improve environmental outcomes.
One example of this is through product differentiation in the form of certification schemes and eco-labels. Putting these on products enables consumer preferences to be expressed through markets.
For example, the FSC label allows customers to choose products that are made of wood from sustainable forests, thus increasing the incentives for companies to produce such products.
There are many potential advantages of MBIs. They can be more cost-effective for delivering environmental outcomes than regulations or other traditional methods and often give better results.
They provide flexibility for participants to choose how they will reach goals and to reduce pollution beyond targets.
In that way they can act as a more positive influencer, leading to more long-term and self-sustaining solutions. However, markets themselves do not allow us to solve all problems. Markets are very complex and it can be difficult to predict the outcomes of certain initiatives.
For this reason, different types of MBIs are currently being tested around the world, especially around carbon and increasingly around biodiversity and conservation.
Economic progress is usually measured by gross domestic product (GDP). This represents the total dollar value of all goods and services produced over a specific time period.
Although this can give a pretty good indication of the size of the economy, it does not include a number of factors that determine the wellbeing of people. As author Paul Hawken puts it, ‘We have an economy where we steal the future, sell it in the present, and call it GDP.’
There are also several problems with how GDP itself is measured. For example, GDP focuses on short-term economic activities rather than on developments in the assets of natural, economic, and social capital, which are more important from a long-term, sustainability perspective.
Both the ‘beneficial’ activities that cause pollution and the costly activities necessary to clean up the pollution are counted toward a country’s GDP. Cutting down trees and selling timber boosts GDP, but the loss of forests does nothing to decrease it.
Studies often show that as GDP goes up, other measures are leveling off and even declining.
For example, the New Economic Foundation’s Happy Planet Index – which ranks a nation’s progress based on the number of the Earth’s resources its inhabitants use and the length and happiness of people’s lives – found that high levels of consumption do not necessarily guarantee happiness.
As Herman Daly, one of the founders of Ecological Economics, puts it, ‘economic growth may already be making us poorer rather than richer.’ In response, several alternatives have been presented which look at economic, environmental, and social wellbeing. These include:
Green Net National Product (GNNP). GDP less the costs of degradation and depletion of natural resources.
Genuine Progress Indicator/Index of Sustainable Economic Welfare (GPI). Personal consumption expenditures plus the value of ‘unpaid’ work, capital services, and education less the costs of inequality, crime, pollution, loss of leisure, unemployment, and natural capital depletion.
Regional Quality of Development Index. Attempts to identify and connect the components of development quality based on environmental sustainability, promotion of rights, and quality of life.
Wellbeing Index (WBI). Goes beyond GPI; this index also incorporates measures of civil freedom, security, biodiversity, health, justice, and self-sufficiency.
Human Development Index (HDI). Averages three indices reflecting a country’s achievements in health and longevity (life expectancy at birth), education (adult literacy and school enrolment), and living standard (GDP per capita in PPP terms) (hdr. http://undp.org/en/statistics).
Several countries have moved to exploring these alternatives to GDP. According to the Center of Bhutan Studies, ‘GDP is heavily biased towards increased production and consumption, regardless of the necessity or desirability of such outputs, at the expense of other more holistic criteria . . . Indicators determine policies.
The almost universal use of GDP-based indicators to measure progress has helped justify policies around the world that are based on rapid material progress at the expense of environmental preservation, cultures, and community cohesion.’ Bhutan came up with ‘gross national happiness’ (GNH).
The idea is that a country should not sacrifice elements important to people’s happiness to gain material development, so GNH focuses on not just flows of money but also access to health care, free time with family, conservation of natural resources, and other non-economic factors (www.grossnationalhappiness.com).
The global economy is changing from one that was dominated primarily by a few countries, to one where there are a larger number of global economic powers coming from developing and emerging economies.
Developing world economies will account for nearly 60% of world GDP by 2030 according to the OECD. The big emerging markets include Brazil, China, Egypt, India, Indonesia, Mexico, Poland, the Philippines, Russia, South Africa, South Korea, and Turkey.
Emerging markets are crucial players in sustainability for many reasons:
Talent. People have become one of the most highly sought after and valuable resources on Earth, fought over by multiple competitors. Of the 438 million people to be added to the global workforce by 2050, 97% will come from developing countries.
Resources. With increased levels of business comes increased competition for resources such as energy, commodities, and raw materials. Since 2000, these economies have been responsible for 85% of the increase in world energy demand.
New consumers. With up to a billion new consumers in these emerging markets, there are plenty of opportunities to grow market share. Emerging economies will account for more than half of global consumption by 2025.
Because they are growing. From the emerging economies, there are now more than 70 companies in the Fortune Global 500 list of the world’s biggest companies, a number that is rapidly growing as these companies expand and acquire new businesses.
Many everyday brands in Western markets are owned by companies in the developing world (e.g., Tetley in the UK is owned by Tata in India).
Emerging market companies fit into the following categories:
Fully fledged globalizers tend to be older, more established companies that have attained a scale and geographic span on a par with big Western multinationals (e.g., CEMEX in Mexico, SABMiller in South Africa).
Regional players aim to break out of their domestic market in search of greater scale, often fixing their sights initially on neighboring markets (e.g., Vina Capital from Vietnam are expanding into Southeast Asia).
Global sources are interested principally in selling to their domestic market but, because of resource constraints at home, they source internationally.
Global sellers primarily manufacture or source at home, but are seeking new consumer markets abroad in order to increase sales.
Multi-regional niche players tend to be smaller companies operating across multiple regions in niche sectors, usually on the basis of innovative technology or processes.
Where traditionally communication was a one-way street, with help in the form of aid going from developed to developing countries, and developed countries holding the power in terms of business relations with developing nations, it is increasingly the other way around, in particular when it comes to sustainability.
There is a growing range of innovations coming from emerging markets, driven by two factors. First, the cumulative performance of these companies matters because emerging markets in total are set to contribute more than three-quarters of global growth by 2025.
Second, those very regions will increasingly be the ones feeling the pressure of resource depletion the most.
Companies in emerging markets are increasingly proving to be leaders in this field because:
1. They innovate continuously to turn constraints into opportunities. Rather than focusing on expensive research into new technologies they focus instead on making products cheaper, more widely available, or better suited to local production processes while also turning constraints in delivery channels into opportunities. They are doing this by:
Using fewer resources. Shree Cement in India which, when faced with limited access to low-cost energy, developed the world’s most energy-efficient manufacturing process and set a global benchmark in cement production.
Turning resource constraints into opportunity. Broad Group in China, a large producer of air chillers, uses alternative energy sources such as waste heat from buildings to power its range of non-electric air-conditioning units.
Educating customers. Jain Irrigation in India uses dance and song to explain the benefits of drip irrigation to local communities, which not only allows them to sell effectively but also to work collaboratively with local communities.
Giving access to financial assets. Kenya’s Equity Bank uses mobile phone technology to enable it to reach small farmers in rural Kenya by partnering with Safaricom to use the M-Pesa financial services platform.
2. They embed sustainability into their company cultures. Companies in these regions are also exploring how to make sustainability an integral part of how they do business. Define a bold vision.
In Egypt Sekem, an organic food producer, uses organic farming as a way to reclaim desert land, producing food for the local market and reinvesting the profits into the community. Sekem also shares profits with the small-holder farmers in its network.
Integrate it into operations. Masisa, a wood products manufacturer in Chile, developed a balanced scorecard on sustainability. Engage their staff. Natura in Brazil invests heavily in staff training on identifying socio-environmental challenges and turning them into business opportunities.
3. They proactively shape their own business environments.
Companies in these regions recognize that in order to have a larger impact they need to engage the wider business system of regulators, competitors, suppliers, customers, and other stakeholders.
Influence policies and standards, especially those operating in weak regulatory regimes. Grupo Balbo, an organic sugar producer in Brazil, is working to turn the entire sugar industry in Brazil into an organic sector.
Partner to achieve mutual goals. New Britain Palm Oil in Papua New Guinea works closely with local NGOs to engage with local communities.
Raising awareness of the importance of sustainability. Suzion in India, a wind power producer, helps shape the debate locally in wind power and works to educate policymakers.
There are a growing number of emerging market countries actively participating in international agreements and organizations, as well as a wide range of emerging market-specific sustainability indexes such as the SSE Social Responsibility Index in China, the Korea Stock Exchange SRI Index, the S&P ESG Index in Egypt, the BMV Sustainability Index in Mexico, and the S&P ESG Pan Arab Index.
Countries in these regions are becoming global leaders in certain areas of sustainability.
How can western firms compete in countries where bribes are seen as an ordinary cost of business?’ There are many other uncertainties about emerging markets, in particular, local governments and their attitude to the rule of law.
‘Will theft of intellectual property be punished? Will lax regulatory enforcement allow your company’s supply chain to be contaminated?’
Uncertainty. Uncertainty is present in how we value all environmental and social problems, as well as the policies that are being put in place to address these problems. Any analysis that fails to recognize this runs the risk of not only being incomplete but also misleading.
Free riders. Free riders are those who don’t take on their fair share of responsibilities, but who benefi t from those that others take on. Free riders in the field of sustainability take the form, for example, of fi rms that sign up to international initiatives and use the logo but who fail to pay their dues or follow the requirements listed for membership.
Everyone needs to do their part. In order for sustainability to move forward, businesses need to do their part but so do consumers, buyers, government, and other actors.
Determining the tradeoffs. Although we would like to believe that all sustainability initiatives are win/win, the fact is that many are not in the short term. This leads us to have to make tradeoffs in our daily decisions and daily lives. How much are we willing to pay? What are we willing to do? How far are we willing to go?
Getting incentives right. Reportedly, only a small fraction of houses being rebuilt in New Orleans after the hurricane meet new stricter building codes. Better-built houses are more likely to survive a storm, but the builders and homeowners know the government will pay them to rebuild if it happens again.
This is referred to as moral hazard, ‘where people behave differently if they are insured against risk. In this case, you have a moral hazard when people choose to build in disaster proven areas because they don’t have to take on the full cost of their decisions.’
Determining what ‘optimum’ means. If you were to ask environmentalists, they would say that the optimum level of pollution is zero, but economists don’t necessarily see it that way.
Pollution is a byproduct of many things that we value and, therefore, some amount of pollution is warranted. For example, even renewable energy produces some quantity of pollution. The question, therefore, is, how much is optimum?
Alternative trading systems
The Seikatsu Club Consumers’ Cooperative Union won the Honorary Right Livelihood Award in 1989 because it was a form of ‘alterna-tive economic activity against industrial society’s prioritization on efficiency.’ This network, made up of Japanese housewives, has approximately 600 consumer cooperatives with 2 million members in Japan.
The cooperative takes advance orders from its members for daily goods such as eggs and milk, and thus is able to ensure proper sourcing and good prices.
It also works together to ensure the right quality by refusing to purchase products that are detrimental to the environment or human health.
The club has gone beyond providing daily goods such as eggs and milk to providing other services such as recycling, health, education, and childcare.
Other models exist where goods and services are traded without money, also referred to as Local Exchange Trading Systems. Members earn credit by providing a good or service that they can later use to pay someone else from the network to provide them with a different good or service.
Transactions are recorded in a central location that all members have access to. These are being used to support local businesses and strengthen communities.
Banco Palmas in Brazil works with the country’s official currency and a social currency issued by the bank called the Palmas currency.
The bank is owned and managed by the community and offers loans for productive activity to stimulate local enterprise and consumer credit, including a local Palmacard credit card, for products and services produced inside the community.
Their intention is to create a local financial system based on a network of producers and consumers.
A new economic model
The conventional neoclassical economic model is based on perpetual growth and is seen as the way to achieving wellbeing. The news media have been full of articles describing how it took just a few days for governments to abandon decades of economic doctrine to try to rescue the financial system.
Why shouldn’t it take as long to introduce a plan for a new, more relevant economic model?
In October 2008 UNEP and leading economists launched the Green Economy Initiative, which ‘will encourage and enable economic, planning, finance, labor, environment, and other policy-makers to support increased investments in environmental assets and green production while ensuring a fair and just transition towards a green economy.’
The ambitious plan calls on world leaders to promote a massive redirection of investment away from the speculation that has caused the bursting ‘financial and housing bubbles’ and into job-creating programs to restore the natural systems that underpin the world economy.
Its mission is to communicate a global plan for a green industrial revolution to be supported by strong and convincing evidence of income generated, decent jobs created, and poverty reduced through investing in a new generation of assets including ecosystems (or environmental infrastructure), clean;
and efficient technology, renewable energy, biodiversity-based products and services (such as organic foods), chemical and waste management and mitigation technologies, and green cities with ecologically friendly buildings, construction, and transport systems. All this could create millions of green jobs.
Estimating the cost of inaction
One of the areas slowing down global action in sustainability is the perceived high cost of taking action. In response, there has been an increased effort to calculate the costs of not taking action in areas such as water and sanitation, clean air, and climate change.
A report submitted to a UN biodiversity conference in 2008 said mankind was causing US$68 billion of damage to the planet’s land areas every year, through factors including pollution and deforestation.
The UNEP Finance Initiative estimates that environmental costs from global human activity cost about US$6.6 trillion estimated annually, with US$2.25 trillion of that caused by the 3 000 largest publicly listed companies. The 2006 Stern Report put a £2.3 trillion price tag on the consequences of ignoring climate change.
It said, ‘The costs of action to the global economy would be roughly 1 percent of GDP, while the costs of inaction could be from 5–20 percent of GDP.’
The OECD also published a report that looked at the costs of inaction on a range of key environmental challenges such as air and water pollution, natural resource management, environment-related industrial accidents, and natural disasters.
For example, the costs of natural disasters (e.g., floods, hurricanes, earthquakes, etc.) to the poorest countries are estimated to be as much as 13% of annual GDP.
A KPMG study showed that environmental costs have risen 50% from 2002 to 2010 for 11 industry sectors. Although the cost of taking the required action today seems significant, many agree that the costs if we take action today are trivial compared to how much this will cost us in the future.
From free to fee
We’ve seen plastic shopping bags move from being a free handout to one that consumers are required to pay for in some countries. In the past, many naturally occurring resources were free (fish, water, and air to name a few).
Future generations will increasingly be living in an environment where these same resources will be priced. It is easy to imagine new housing developments that use the clean air and water in their neighborhood as an important selling point.
The opposite is also starting to happen; sustainable products that were once more expensive to produce will become increasingly less expensive as the materials they use are more readily available and savings from reducing the use of chemicals, petroleum, and other expensive inputs start to show.
Valuing future generations
If valuing current generations and their environmental needs weren’t difficult enough, policymakers also have to contend with how to value future generations. The question then arises – how much should be reserved for the needs of the future when making decisions that affect us today?
In calculating the costs of greenhouse gas reductions one needs to see how these compare to the benefits of the reduced risk of climate change many decades, even centuries, into the future. Should a dollar spent today to prevent climate change weigh equally against a dollar in benefits 100 years from now?
This is where discount rates come in. They are increasingly important and used in cost-benefit analysis and long-range environmental planning. The decision of which rate to choose can have serious implications; higher discount rates make investments less attractive, while lower discount rates make them appear more attractive.
For example, if we estimated the benefits of climate change mitigation at approximately US$1 trillion 100 years from now, and we used a discount rate of 5%, that US$1 trillion would only be worth
US$7.6 billion today. Instead, if we choose a rate of 0.1% then that US$1 trillion 100 years from now would be worth over US$900 billion today, more than 100 times the amount.
The Stern Review chose 0.1% per year to calculate the present value of the benefits of climate change mitigation for future generations. Many environmentalists argue that the discount rate should be zero because it is immoral to value our wellbeing over that in the future. There is no correct discount rate.
The regulatory framework within which companies operate is extensive and complex. As governments become increasingly con-scious of environmental concerns and the public demand action, companies are faced with a growing number of regulations that they must comply with.
The situation becomes even more complex for companies that conduct business across borders where regulations can differ from one jurisdiction to the next, often significantly.
Enforcement of these different mechanisms varies depending on the nature and location of the regulation. Many have their own dispute-settlement mechanisms.
The European Commission is exploring plans to take environmental offenses to criminal courts. Infringers could face jail time for dumping toxic waste or illegally trading endangered species, for example.
The US EPA has also launched an environmental crimes fugitive website to assist law enforcement agencies and the general public in finding fugitives who have violated environmental laws. At the international level, the International Court of Justice is one mechanism that can be used. However, often the most effective is public and political pressure.
SMEs in many cases are leading the way in sustainability. Because of their small size, they are often more nimble and able to adapt quickly to sustainability practices. There is a major need for new, innovative business ideas and services and often SMEs are better positioned than larger companies to provide these.
In addition to SMEs, there are a growing number of entrepreneurs both outside and within organizations, who have the ability to identify underserved markets and come up with innovative ideas to provide new sustainable products and services, either for profit or not for profit.
Why is it important?
Innovation. There are opportunities and demand for a growing number of new more sustainable products, services, and technologies. SMEs and entrepreneurs are in an ideal position to explore and develop these opportunities.
Building a stronger business. Many of the points introduced in the business case introduction are just as relevant to SMEs as they are to large companies, perhaps even more so.
Sustainability policies and practices can help a small company identify and manage risks, cut costs, explore new revenue-generating opportunities, find, retain, and have more productive staff, and increase efficiency.
Business partners are asking for it. For those SMEs that supply, or want to supply, larger companies, these larger companies are increasingly looking to work with companies that share their social and environmental values. Failing to take these issues seriously can result in a loss of business opportunities.
No longer invisible. Gone are the days when SMEs could slip under the radar. Laws and regulations that once mostly affected larger companies are starting to apply to smaller ones as well.
Flexibility. SMEs are able to respond to the changing business environment with greater speed and flexibility, meaning they will be able to integrate sustainability directly into their business plans more efficiently.
Reach and opportunities. SMEs and entrepreneurs may be able to identify and reach markets and groups that are currently not being effectively reached, resulting in new opportunities. This is especially true with the growing number of active social entrepreneurs working around the world.
Influence. SMEs can have an important impact on larger companies. There are many examples now where SMEs with a strong sustainability culture have been bought by larger companies who are interested in capturing and diffusing their approach to sustainability.
The key concepts
SMEs have a potentially large impact because of their sheer numbers. As there are so many different types of SMEs, there are several different ways these groups are having an impact and can benefit from sustainability.
While the key concepts presented below are all important for SMEs, it is worth noting that the other blogs in this blog are equally applicable.
Although the definitions of what exactly constitutes a social entrepreneur vary, the term ‘social entrepreneur’ is used to refer to people who create businesses, both big and small, where social and environmental issues are at the core of their business offerings.
According to the Skoll Foundation, social entrepreneurs ‘seize opportunities that challenge and change forever established but fundamentally inequitable systems.’ The Schwab Foundation refers to a social entrepreneur as a leader or pragmatic visionary who:
Achieves large-scale, systemic, and sustainable social change through a new invention, a different approach, a more rigorous application of known technologies or strategies, or a combination of these.
Focuses first and foremost on the social and/or ecological value creation and then tries to optimize the financial value creation. Innovates by finding a new product, a new service, or a new approach to a social problem.
According to the Skoll Foundation, the difference between standard and social entrepreneurship does not come down to motivation – with entrepreneurs spurred on by money and social entrepreneurs driven by altruism.
‘The truth is that entrepreneurs are rarely motivated by the prospect of financial gain, because the odds of making lots of money are clearly stacked against them.
Instead, both the entrepreneur and the social entrepreneur are strongly motivated by the opportunity they identify, pursuing that vision relentlessly, and deriving considerable psychic reward from the process of realizing their ideas.’ Instead, they say the real difference lies in the value proposition itself.
Social entrepreneurs aim for value in the form of large-scale, transformational benefit that accrues either to a significant segment of society or to society at large.
There are many examples of social enterprises working around the world. Another is Riders for Health, created by the Grand Prix motorcycle racing community. This enterprise looks to tackle a simple yet critical element of the African healthcare system: transportation.
By providing motorbikes and maintenance support services, Riders for Health have extended the reach of healthcare providers to 11 million Africans. The founder of SammaaN, a rickshaw company in India, found that over 90% of rickshaw drivers were illiterate, unable to purchase their rickshaws, and made very low salaries.
The new rickshaw company has worked to improve the lives of its drivers by redesigning the rickshaws to include, among other things, a mobile shop that stocks newspapers, water, and mobile recharge coupons to increase the revenue opportunities of the drivers.
Drivers are provided with free uniforms, a savings bank account, free insurance, and even free evening classes for drivers and their children.
The Power of Unreasonable People notes that successful social entrepreneurs:
Try to shrug off the constraints of ideology or discipline.
Identify and apply practical solutions to social problems, combining innovation, resourcefulness, and opportunity.
Innovate by finding a new product, a new service, or a new approach to a social problem.
Focus – first and foremost – on social value creation and, in that spirit, are willing to share their innovations and insights for others to replicate.
Jump in before ensuring they are fully resourced.
Have an unwavering belief in everyone’s innate capacity, often regardless of education, to contribute meaningfully to economic and social development.
Show a dogged determination that pushes them to take risks that others wouldn’t dare.
Balance their position for change with a zeal to measure and monitor their impact.
Have a great deal to teach change-makers in other sectors.
Display a healthy impatience (e.g., they don’t do well in bureaucracies, which can raise succession issues as their organizations grow – and almost inevitably become more bureaucratic).
Exploring new business models
A number of companies are exploring completely different ways of doing business to be more sustainable, reinventing the business model, and looking at how business can do what it does differently.
Throughout the blog, we look at quite a few examples of this, for example, product service systems , which looks at turning a product into a service or companies that take garbage and turn it into new products.
Many SMEs are in a perfect position to question the way we currently do business and to come up with innovative new ways of doing business. The Soap Dispensary in Vancouver, Canada, has eliminated all packaging and invites customers to instead bring their own or buy containers that can be filled with a variety of soaps, household cleaners, and other ingredients.
Guayaki, while market-ing yerba mate as an alternative to coffee in the US market, is enabling the reforestation of the Atlantic Forest in Paraguay, Argentina, and Brazil, which has been largely cut down over the past 30 years.
Guayaki’s business model is that they partner with local communities, paying them for the sustainable harvest of shade-grown yerba mate.
In return, the farmers must repopulate their rainforest with native hardwood trees. Since the income provided by yerba mate is higher than that from cattle, there is an incentive for local communities to protect and reforest the area.
Rethinking the business model is not just happening with small companies. There are a growing number of larger companies that are also exploring alternative business models as a way to deliver their services, including incorporating aspects of social and environmental ventures.
Cemex, a global leader in the building materials industry, created a program in Mexico called ‘blockeras comunitarias,’ where people who want to build a home can use Cemex cement and a block-making machine to produce bricks.
One out of every two bricks goes to the person producing it; the other is taken by Cemex to be sold, which enables the project to remain economically sustainable. The program is so well accepted that people often need to wait up to two months to use the machine.
This model is now being replicated in other countries that the company operates in. Another example is a partnership between two organizations, Grameen Bank and Danone Foods.
They paired up to create a unique community-based joint venture in Bangladesh, which is based on social and environmental concerns and operates in parallel but independently from the rest of the company.
In 2006 they launched a yogurt product called Shoktidoi designed to provide for the nutritional needs of Bangladeshi children at an affordable price that can be bought by even the poorest families.
The plant hires local workers and relies on developing micro farms which supply raw materials used to produce the yogurt. The business provides income to more than 1600 people within a radius of 30 km around the plant.
The plant has a rainwater recovery system and the yogurt pots are made of a material that is entirely biodegradable. Profits are reinvested in the initiative.
Different countries are exploring new alternatives to register companies that consider themselves social/environmental ventures.
Slovenia recently passed a Social Entrepreneurship Act which gives special status to social enterprises that employ at least two employees and generate at least 50% of their total revenues from social entrepreneurship activities, or a business where at least one-third of all employees come from the most vulnerable groups in the labor market.
Making changes from within
Entrepreneurs are not just individuals working outside an organization to develop new ideas. Individuals can also become entrepreneurs from within a company or organization, an idea referred to as intrapreneurship.
Intrapreneurs develop and promote practical solutions to environmental and social challenges within the organization they work for, regardless of size.
Companies, in particular, larger ones, although often slow to change, can bring about significant weight when they do change.
Employees working for these companies are in a unique position to push for change as they have a good understanding of the inner workings of the company. Working from within can give them access to resources, such as people and finances, to make a difference.
It also enables them to incubate their social idea at lower risk than if they were to go at it on their own. If the idea becomes successful, they have helped drive the future success of the company.
This whole blog provides a range of tools for individuals within businesses and organizations to develop new ideas and see how they can apply sustainability to their own businesses and be an intrapreneur.
Companies are finding that promoting and supporting intrapreneurship from within can bring about potentially substantial advantages. Because of this, they are looking at ways to encourage intrapreneurship by providing employees with space, time, and resources to test out new ideas, empowering individuals to make decisions and making risk-taking and failure acceptable.
It is often not about creating intrapreneurs as they surely already exist in the organization, but about finding them and helping them. Some companies have created more structured ways of empowering intrapreneurs:
Provide space (time and resources) for employees to test out new ideas . . . Google allocates 20% of employee time to innovate and the remaining 80% to work on improving existing projects.
Create more structured roles in the company for intrapreneurs . . . Companies such as Dell have formalized the role of the intrapreneurs with official positions such as ‘Entrepreneur in Residence’ or ‘Chief Innovation Officer.’
Have internal competitions . . . At a movie company, Dreamworks staff are trained on how to pitch new ideas, whether it involves creative input for a new film or adding a new food choice to the cafeteria.
Encourage collaborations across departments . . . 3M allows employees to use 15% of their time as ‘innovation’ time. The condition is that they need to share their insights with others across the company.
Create an in-house venture capital pool or grant program to help fund intrapreneurial ideas . . . LinkedIn launched ‘InCubator,’ which is an internal startup incubator where engineers get 30–90 days away from their regular work to develop ideas for their own products.
The program is highly structured, with rounds of judging including a final round with the CEO to filter ideas for the most viable and potentially profitable new products.
Celebrate and reward intrapreneurial behavior . . . through a range of mechanisms including awards, recognition, and/or financial incentives such as profit sharing.
Companies are also looking for entrepreneurs outside the company and giving them the opportunity to work with and within the company. This can be by acquiring new companies or by creating a space for internal initiatives to grow on with some or a lot of independence.
Many companies have discovered the advantages of having teams, also known as ‘skunk works,’ working apart from the main, bureaucratic engine of the company on new projects.
This freedom allows them to be creative in ways they could not from within the company’s mainstream structures. Companies have explored several different ways of fostering new enterprise development from within their organizations:
Islands. This involves initiatives being incubated away from the mainstream business so that they can enjoy a degree of freedom. One of the best ways to do this is to work from a separate building.
Bridges. Some projects will have clear but relatively loose links to the host company, often enjoying more freedom than traditional business units.
Shell ’s wind division in the North Sea was physically located outside corporate headquarters but with access to Shell’s capital and other resources. Their companies and brand give them access to resources they wouldn’t enjoy as a traditional entrepreneur.
Symbiosis. Intrapreneurs that incubate their initiatives right inside the host organization. Unilever’s Shakti program looks at increasing market share in rural villages in India by providing women with training in selling, commercial knowledge, and blog-keeping.
These women can then choose to set up their own business or become Shakti distributors. This department sits at the center of Hindustan Unilever’s sales department and is completely integrated into the business.
Small businesses usually think about how to reach new markets before anyone else does, and typically move faster. So how do they find their inspiration? Entrepreneurs need to ensure that they are targeting real opportunities. Some tips on identifying these include:
Put sustainability at the center right from the start. Taza Chocolate in the USA makes chocolate from all organic and fair trade-sourced ingredients. They make their chocolate in small batches using traditional stoneground techniques and have incorporated sustainability into all aspects of the business, from sourcing to operations.
Put a sustainable spin on something that currently exists.
This involves turning an already existing business into a ‘green’ one. Whole Foods Market is a food store that sells natural and organic products. It started as one small store in 1980 in Texas and now has hundreds of stores in the USA, Canada, and the UK.
See something that you think can be done better. Sometimes the idea already exists, but with some tweaks, it can be reinvented to make it much better. Clif Bar, an industry leader in all-organic energy bars, began with the founder being frustrated by the taste of the available energy bars.
He thought he could make a better bar. Two years later, Clif Bar became a reality and today they focus on continually improving their products, their company, and the planet.
Identify a need that can be better fulfilled. Many entrepreneurs simply see a need for something and come up with innovative ideas on how to better fill that need. The founder of Adventerra Games saw a need for fun activities to get kids and their families excited about saving the Earth.
The result is a small company that invents, produces, and distributes board games in four different languages that help children and their families learn about the planet and how they can make a difference by changing their behaviors and habits.
Operate in a sustainable way. The business does not sell ‘green’ products per se, yet as part of its mission is working in the field of sustainability. UKOS, an office equipment supplier in the UK, was initially skeptical about sustainability.
They started by joining a local network that looked at resource efficiency to see if there were ways they could save on resources like gas and electricity. This led to realizing that they could differentiate themselves from their competitors by being more environmentally friendly.
Understand environmental laws, regulations, and standards as drivers. Current regulations on pollution, safety, product content and performance, labeling, reusing and recycling, and protection of endangered habitats and species can all present substantial business opportunities for those who know how to identify and assess them.
The lengthy time it takes for these to come into effect often presents a window of opportunity during which time entrepreneurs can judge whether a profitable business will result.
Exploit new demand for sustainable technology. Reducing the volume and toxicity of waste and developing products made from secondary materials, also known as clean tech, have become big business.
Change the way a product is presented. Several entrepreneurs have chosen to sell their food from mobile trucks rather than restaurants.
Gmonkey, a 100% vegetarian food truck in the USA, uses resources directly from local farms in its products while Organic Falafel food truck Liba uses leftover cooking oil as bio-diesel fuel for traveling.
Create the environment for others to be more sustainable.
GreenEarth Cleaning, founded in 1999, is now the world’s largest solution provider for environmentally friendly dry cleaning. Customers have the choice to use environmentally safe dry cleaning processes.
It is now used by quality dry cleaners operating more than 1 500 stores worldwide and works with companies such as P&G, GE, and Sanyo.
Identify a resource that is currently being underutilized.
Several companies are identifying resources that aren’t being fully utilized and turning those into new business opportunities. In France, old refrigerators are collected, fixed, and resold by disadvantaged youth, a business that took 4 years to become profitable but is now doing well.
Whip Car is a company where individuals with cars they don’t use often can register their cars online and others who are looking to rent a car for an hour or even a few days can connect and rent those cars directly from the owners.
As an entrepreneur, where you look for funding will depend to a certain extent on the chosen company structure (e.g., not for profit or for profit). There are a growing number of different financing options for sustainable companies.
As with any new business, social enterprise funding sources are similar to those of traditional business ventures and can include:
Family and friends, or personal savings. Often entrepreneurs start out by using their own resources and savings, or by taking loans from family and friends who believe in their vision.
Foundations. A foundation is a not-for-profit group that gives out grants to other organizations and individuals. Each foundation chooses to fund based on different criteria.
Some of the large foundations include the Rockefeller Foundation, Bill and Melinda Gates Foundation, David and Lucile Packard Foundation, MacArthur Foundation, and Ford Foundation. Foundations can be private individuals but increasingly are set up by companies, such as the Burberry Foundation.
Investment funds. The Global Environment Fund invests in businesses around the world that provide cost-effective solutions to environmental and energy challenges. They have approximately US$1 billion aggregate capital under management.
Partnerships and in-kind donations. Funding does not just have to come in the form of cash, it can also come in the form of other kinds of resources including people or organizations donating time, office space, trading of services or products, or even advice.
Combining forces with another entrepreneurial team can make your business case stronger and provide additional opportunities for financing from banks and investors.
Venture capital (VC). Several large VC firms have special divisions focused on social, green, and cleantech ventures. In the not-for-profit sector, there are also social venture funds developing which operate similarly to traditional venture funds but expect a different level of return.
The Acumen Fund is a non-profit global venture fund that uses entrepreneurial approaches to solve the problems of global poverty. Green VC provides additional news and resources on green venture capital, funding, and start-ups.
Angel investors. Angel investors are high-net-worth individuals with extensive business experience who invest in companies. They generally provide advice and a funding amount that bridges self-funding and large venture capital investments.
These investors add value to the organizations they invest in because they bring expertise along with capital investment.
Business plan competitions. There are a growing number of sustainability awards and business case competitions which have various prizes, including cash rewards, associated with them.
For example, the Global Social Venture Competition is a global MBA student business plan competition for social ventures. Winners get mentorship, exposure, and cash prizes.
Government and local grants. Government grants can be a good source of funds for starting social enterprises. Grant writing, application processes, and making deadlines can be challenging, so be sure to understand all requirements as early as possible.
There are several websites that can be resources to finding available grants: Welcome to GOV.UK has a well-defined grant section for UK businesses, http://www.grantslink.gov.au in Australia, and www.grants.gov can be a source for US-based start-ups. Many other countries have similar sites of their own.
Going public. An IPO is a way for a privately owned SME to take in additional capital for growth. When Google went public, it included in the provisions of the original IPO that 1% of its equity, 1% of its profit, and 1% of its manpower would go to solving major world problems.
Company challenges. A growing number of large companies involved in sustainability are looking for new ideas to invest in that could help the company moving forward. GE invited small businesses with innovative products in renewable energy, grid efficiency, and eco homes/eco-buildings to compete in the
Ecomagination Challenge. Winners were provided with a US$200 million capital pledge from GE and its venture capital partners, evaluation of the entrant’s business strategy through in-depth discussions with GE’s technical and commercial teams, exploration of partnership opportunities with GE to scale a business and create global reach;
leverage of GE’s technical infrastructure and global research centers to accelerate technology and product development, and the opportunity to utilize existing GE customer relationships for their go-to-market strategy.
Investing in individuals. Around the world there are a growing number of organizations that provide small amounts of funding to individuals who have passion and an interest in social entrepreneurship, to enable them to start exploring their idea. This includes Unltd, Pave, and Echoing Green.
Crowdsourcing. A growing number of entrepreneurial ideas are being funded by the public. Kickstarter, for example, is a funding platform where since its start in 2009, more than 3 million people have pledged over US$450 million to fund more than 35 000 creative projects.
Mosaic connects investors to high-quality solar projects. Other similar sites exist for specific kinds of projects and entrepreneurial activities, including IndieGoGo, Quirky, Etsy, RocketHub, FundRazr, and PledgeMusic.
Resources. Insufficient technology, expertise, training, and capital can be a barrier for SMEs interested in adopting environmental and social responsibility. The need to deal with more pressing matters – such as upgrading the quality of technology, management, and marketing – often prevents them from taking a more sustainable approach.
Part of the problem. There is an increased recognition that many SMEs are part of the problem when it comes to unsustainable business practices.
In many countries, environmental health and safety inspections of SMEs are either not required or are not being performed as rigorously as with large enterprises. Although one small business may not think that it can have any impact, collectively they can and do have a major impact.
Balancing priorities. Finding time to incorporate sustainability practices into a start-up or SME can be challenging, as entrepreneurs and SMEs typically have a lot of things to be thinking about and seemingly never enough time to do them all.
Tailored initiatives. There are a growing number of initiatives open to larger businesses focused on different sustainability issues. However, there is still a lack of initiatives tailored for small companies, although some organizations are starting to work on this (e.g., GRI reporting guidelines for SMEs).
Gaining recognition. Most of the leaders we hear about in sustainability are those that have the time and budget to communicate their successes. The kind of sustainability practices which are common amongst SMEs, such as their role in the local community, also needs to be celebrated.
Merging and selling
As the number of companies focused on sustainability continues to grow, these same companies are becoming more powerful and visible because of an increase in mergers and sales deals.
We are seeing sustainability-focused companies coming together to create larger companies that are starting to be able to compete against the mainstream companies.
For example, Ecover, a leading environmental cleaning company in Europe, and Method, a leading environmental cleaning company in North America, merged to create the largest environmental cleaning company in the world.
Founders of SMEs focused on sustainability are also seeing the opportunity to sell sometimes very young companies to much larger companies. Some larger companies interested in green business are choosing to buy green companies rather than reinvent the wheel.
When Danone took over Stonyfield Farm, the CEO of Stonyfield Farm said he accepted the deal because he wanted to change Danone from inside in order to have a greater leverage on the food market.
While Danone took an 80% share in Stonyfield Farm, they left him in complete control. Coca-Cola bought a 58% stake in Innocent fruit juice company, hoping to learn more about its sustainability approach.
This not only gave Innocent access to Coca Cola’s network but also enabled it to scale up its sustainability operations.
Microbusinesses are small businesses that can easily be replicated by following proven marketing and operational concepts. These can sell for anything between US$25 and US$6 000.
For example, The HealthStore Foundation, based in the USA, gives healthcare workers in Kenya microloans to open their own for-profit Child and Family Wellness shops that distribute medical products and services to remote communities in Kenya.
Applying the basic principles of successful franchising, the foundation then trains the franchisees in uniform procedures, carefully selects locations and conducts regular inspections to ensure quality and consistency. The franchise can also exploit economies of scale to obtain safe and effective drugs at low costs.
Microlensing is another opportunity available. In the case of Honey Care in Kenya, beehives are sold or leased, to individuals who are also provided with basic training in bee-keeping, basic record-keeping, and management skills.
The group also offers the farmers a stable and year-round market for their honey by agreeing to buy their honey at a guaranteed and mutually acceptable price for a period of 2 years or more, allowing farmers to plan ahead.
Social stock exchange
In order to develop strong social enterprises, large amounts of capital and support need to be made available. Therefore, organizations are starting to explore alternatives to the traditional stock exchange by putting in place exchanges that focus on developing social value rather than financial value.
Global Exchange for Social Investment, launched in 2002, worked to create such a global social capital market by linking charitable donors, entrepreneurs, and investors in funding social businesses in low-income regions around the world.
The Social Stock Exchange in Brazil, launched in 2003, brings together non-profit organizations with the São Paulo Stock Exchange investors who are interested in supporting those efforts.
The South African Social Investment Exchange, launched in 2006, makes carefully selected social development projects available as investment opportunities with a social return.
Investors can buy shares in SASIX projects and can track online how their investments are performing and view the impact they are having. Keep an eye out for other social stock exchanges being developed in England, Germany, New Zealand, Portugal, the USA, and Thailand.
Working with big business
For businesses, working with entrepreneurs can be one of the most effective ways to explore and ultimately serve underserved markets. Enabling small, local firms to supply goods and services to larger enterprises creates more efficient supply chains by optimizing cost, quality, flexibility, and other considerations.
This can also allow a larger company to gain the local knowledge and contacts required to operate effectively and profitably.
It also encourages small companies to improve their standards and practices to meet the stricter requirements of the larger company. Often, larger companies include working with and supporting local SMEs as part of their sustainability initiatives.
In 2007, HP globally invested US$47.1 million (or 0.51% of pre-tax profits) in educational, economic development, environmental, and local community investment projects. There are several ways for large companies to work with SMEs:
Create links with local SMEs in the different areas of the value chain; for example, procurements, agriculture, manufacturing, sub-contracting, etc.
Fortescue in Australia is committed to providing sustainable business opportunities to local Aboriginal people by allocating over US$1 billion in contracts to Aboriginal businesses.
Work to strengthen the SME environment and its role in local economic development by supporting their activities, providing financing, training centers, etc. COOP Italia, a large retailing enterprise, is helping its 350 SME suppliers to meet CSR standards by providing training and support.
TriSelect, a French urban waste recycling business, offers distance learning for low-skilled employees to improve their knowledge of health and safety in the workplace.
Create new distribution networks. Amanco worked with a farming cooperative in Mexico to develop a new distribution a system that enables it to sell its irrigation systems to small farms in poor rural areas.
Deliver better-quality products. SC Johnson is the largest buyer in Kenya of pyrethrum, produced by some 200 000 subsistence farmers.
SC Johnson worked with local organizations to provide these farmers with better access to manually operated irrigation pumps, which has not only helped the Kenyan farmers but also ensured the long-term availability, quality, and lower cost of natural pyrethrum for SC Johnson products.
Marketing on a shoestring
In 1997, according to Interbrand, the Body Shop – which had less than 0.5% of the global cosmetic market – was the 28th most valuable brand in the world. How?
These companies, who have today grown into international leaders, looked to market their products in whatever way they could, online, on-pack, in-store, through their positions on different issues (in this case animal testing), and through strong relationships with NGOs. Some common threads to the marketing approach of these companies are:
Intuition led. Based on the founder’s intuition and vision rather than on market surveys, finding innovative low-cost techniques to use because of tight budgets.
Guerrilla marketing. Online, on-pack, and in-store campaigns where companies take strong stands on issues which, among other things, spotlight the controversial practices of their competitors and highlight the comparative benefits of their products. The Body Shop took a stand on animal testing, Ben and Jerry’s took a stand on bovine growth hormones.
Strong relationships with NGOs. Through charitable donations, cause-related marketing, joint campaigns, or activities in which they are involved. Limited use of mass advertising.
Either due to cost constraints or the necessity to communicate a sophisticated positioning, they remain consistent with their activist approach. Most companies have been reluctant to use ‘traditional’ forms of mass media advertising.
Their communications focus on the high quality of their products and services. These companies go beyond social and environmental selling points (i.e., Patagonia ’s outdoor clothes have a lifetime guarantee).
Accountability and transparency. Ben and Jerry’s was the first company to voluntarily report on social performance in 1989.
Using social media. Whether it is Twitter, Facebook, or Pinterest, social media platforms provide a growing range of ways to reach your target audience for free.
Some advice for entrepreneurs
A failure is an option. The fact is that the majority of entrepreneurial projects fail. If failure isn’t an option, then there is no room for experimentation or risk or growth. Most successful entrepreneurs talk more about their failures and the lessons they learned that enabled them to have some successes.
Keep an open mind. Think as if there were no borders, no constraints. What could you do? Often companies spend their time trying to preserve the status quo rather than trying to open new markets.
Money does matter. Whether or not you are starting a for-profit, a not for profit, or a charity you still need to approach any new venture as a business. Even not for profits need money to operate.
Focus on solving a problem, not selling a solution. Often people are quicker to recognize the problem than the value of a particular solution. Position your product or service as a solution to a particular problem that is easily recognizable by your target audience.
There is no right or wrong way to do it. There is no one way to be an entrepreneur. There are no rules as to what you do and when you do it. For many people, it is just something they have in them. The combination of personal drive and focus combined with a winning idea makes it happen.
Focus on people. It doesn’t matter how great you think your idea is, if people don’t buy it, want it, or need it, it won’t go anywhere. Without good people working with you, life will be difficult to treat your people well.
Network. Almost every person that you speak to could possibly support your success through offering contacts, ideas, references, time, or even just an ear to allow you to practice speaking of your organization so that you are more effective in future conversations with investors.
Continuous focus on your key priority. Whether it is getting members signed, selling the product . . . make sure this is a driver every day as all of the little stuff and side ideas can really distract from this key success factor.
Do not be afraid to reposition based on new information gained. If it is discovered that the original idea is not the ideal solution, avoid becoming discouraged, focus on the specific area of problem or issue, and adjust it to become the ideal solution . . . continuously remolding the idea so that it achieves the driving goal.
Don’t do it alone. Great ideas are usually not developed alone, but with a partner. If it isn ’t a co-owner or formal partner, there at least has to be one person to brainstorm with who knows the plan as intimately as you do and cares about it almost as much.
So much the better if they have a good intuition in the areas you don ’t. Support. Many people with knowledge, connections, influence, or simply time to turn on Internet research want to help entrepreneurs. Find them; you don’t have to do it all yourself.
Checklist for getting started . . .
Identify a problem. What would you like to change? What do you think could be done better? What is missing?
Think about many possible solutions. Have some of them already been started? Did they work? If they didn’t, why didn’t they?
Pick a solution and devise a strategy. How are you going to sell that solution in practice?
Think about all the strengths and weaknesses of the ideas.
Build the business case. How are you going to be self-sufficient? Are you looking to make a profit? Will the profit be reinvested into the company?
Explore the potential social and environmental impacts your solutions could have. Look at quantifying these.
Assemble your team. Find a partner – two minds are usually better than one.
Network and create partnerships. Which groups can help you bring your solution forward?
Gather resources to get started, such as office space and initial cash. Many entrepreneurs and small businesses are also choosing to report. Of course, the scope and scale is not at the level of large companies. GRI has a special section for SMEs on sustainability reporting.
Get working! If you succeed, congratulations. If you don’t, learn from your mistakes and start again.
‘The resilience of cooperatives, including in times of crisis, testifies to the sustainability and adaptability of the cooperative enterprise.’
INTERNATIONAL LABOUR ORGANIZATION
The UN defines cooperatives as ‘business enterprises owned and controlled by the very members that they serve.’ A cooperative is a business like any other. It is subject to the same needs and demands.
But, in several important ways, cooperatives are also unique and different. Most distinctly, a cooperative is created, owned, and democratically controlled by the people who use it – its members.
For cooperatives, generating a profit is only part of the story. Cooperatives put people before profit by helping their members achieve they're shared social, cultural, and economic aspirations.
Cooperatives seek to optimize outcomes for a range of stakeholders without seeking to maximize the benefit for any single stakeholder. In that way they are increasingly important builders of sustainability.
They make significant contributions toward alleviating world problems such as environmental degradation and resource depletion, increasing inequality, and a growing global governance gap. In many cases, cooperatives have been innovators in this area.
For example, food cooperatives have provided important innovations in the areas of unit pricing, consumer protection, organic and bulk foods, and nutrition labeling.
Cooperatives also, by their very nature, internalize many of what economists would term ‘externalities’. Governance based on the balanced democratic control means a cooperative holds itself accountable for limiting impacts that might otherwise go overlooked. This makes it an interesting sustainable alternative to the typical viewpoint of a public or private enterprise.
There are over 1.4 million cooperatives around the world, with over 1 billion members. The largest 300 cooperatives account for over US$2 trillion in turnover, equal to the 10th largest national economy.
In India, the consumer needs of 67% of rural households are covered by cooperatives. 40% of African households belong to a cooperative, and 250 million farmers in developing nations belong to a cooperative. In Finland, 62% of households are part of the S-Group cooperative.
In New Zealand, cooperatives are responsible for 95% of the dairy market and the export dairy market and 70% of the meat market. Cooperatives are present in nearly all economic sectors, including agriculture and food, consumer and retail, industry and utilities, health and social care, banking and financial services, insurance and mutual, and a range of other services.
Mountain Equipment Co-op in Canada produces and sells a range of outdoor equipment and clothing. For CDN$5 you get membership, which allows you to buy from stores located across the country. The business already has 3.3 million members.
Mondragon – a worker federation cooperative in Spain involved in manufacturing, retail, and financial services and created to support employment for residents of the Basque region – is made up of more than 83 000 employees and 9000 students, making it a force to be reckoned with.
Because so many individual consumers, as well as SMEs, are members of cooperatives they have the potential for a significant impact on sustainability in the business sector, including but not limited to:
Reducing costs. Several communities are putting into place wind-power cooperatives where local communities provide funding for a wind farm that then allows them to reduce their energy costs in the long term. In North Frisia, Germany, 90% of the 60 wind farms are community owned.
Empowering individuals. The Vanlaxmi Women’s Tree Growing Cooperative was organized by women farmers who had lost access to their land. The cooperative uses scientific agricultural practices, including horticulture, agro-forestry, drip irrigation, compost pits, and rainwater harvesting techniques in their operations.
Recovering from adversity. The Watthan Artisans Cooperative in Phnom Penh, Cambodia, brings together individuals with injuries from landmines and bombs, suffering from deafness, psychological scars, or the aftermath of polio. They are trained to work with cotton, silk, reclaimed hardwood, and recycled materials to create artisanal products.
Inspiring change. In Brazil, Sicredi Pioneira RS has a membership of 70000 and is one of 116 credit cooperatives in the historic Sicredi organization. Sicredi Pioneria supports a range of initiatives including another cooperative, the Scholar Cooperative, which encourages students to organize themselves into cooperatives.
The power of consumers. Seikatsu Club Consumers’ Cooperative Union in Japan was started in 1965 by a single housewife, who organized 200 women to buy 300 bottles of milk in order to reduce the price.
It has since grown and now places an emphasis on direct product/consumer links and is dedicated to the environment, the empowerment of women, and the improvement of workers’ conditions.
Today there are 600 consumer cooperatives with over 22 million members who buy a wide range of food products, clothing, publications, and daily goods.
Setting fair prices. The Kuapa Kokoo cooperative in Ghana is made up of 6500 cocoa farmer members who receive a fair trade price for their cocoa. They also own a 45% share in Divine Chocolate company, which uses their cocoa to produce high-quality chocolate sold around the world.
Selling direct. Associations for the Preservation of Peasant Farming (AMAP) in Italy allow consumers to deal directly with growers, committing themselves several months ahead of the harvest to buy a selection of fruit and vegetables from a particular farmer. AMAP regularly delivers over 66 000 boxes of fresh vegetables.
Providing benefits. In Stockholm, Sweden, the HSB Housing Cooperative comprises 31 regional associations representing 330 000 apartments and 555 000 members, about 10% of all housing in Sweden.
Providing services to the needy. Cooperatives will do business where others might not consider it economically viable.
Financial cooperatives are some of the largest providers of microfinance services to the poor, reaching 78 million clients living below the poverty line of US$2 per day. Pampas in Senegal provides affordable insurance for savings and healthcare to disadvantaged and low-income families.
Long-term view. Mondragon in Spain, mentioned earlier, has groups specializing in cross-product initiatives coming from different divisions to explore new business ideas, which eventually are elevated to the cooperative-wide level for production. A funding mechanism ensures the survival and success of new initiatives.
Cooperatives can offer a range of different services to serve more of their members’ needs. For example, the Co-operative group in the UK has a presence in food retail, banking, insurance, funeral care, pharmacy, travel, and other services.