Sustainability is the new lingua franca in the marketplace - Economic times
November 27, 2009
"MOTHER NATURE does not do bailouts," thundered Al Gore while addressing the worl''s most powerful CEOs at the World Business Summit on Climate Change in Copenhagen this May. Four years ago, when the former US Vice-President made An Inconvenient Truth - his apocalyptic vision of a world that was living beyond its means - the world sat up and noticed. Box office earnings and a Nobel peace prize nomination notwithstanding, the most significant impact of Gore's hardhitting public lecture was that it took a particularly polemical topic to the top of mind of everyday people. In his latest book Our Choice: A Plan to Solve the Climate Crisis, Gore addresses the business community, sharing his vision for how they can play a role in tackling climate change through investment and innovation. Business has begun to respond. Global industrial giants, from PepsiCo to Walmart and IBM, all recognise that global warming is the new reality in the marketplace. And it isn't just environmental woes; as business leaders come face-to-face with a slew of complex social and governance challenges that present both risks and opportunities to performance and reputation they are viewing business operations through a new lens - sustainability.
"A sustainable organisation runs a profitable operation while continually contributing towards the betterment of all stakeholders. If any stakeholder - whether the environment or your employees - shows deterioration, you're no longer sustainable," says Tata Industries MD Kishor Chaukar. Corporate India too is being dragged into this new regime of operating business; at last count 21 Indian companies had taken up triple bottom line reporting (which, besides financial disclosures, includes disclosures on impacts on society and the environment). "It's not our chairman's (Anand Mahindra) way to shove decisions down people's throats but today for us there is no choice on sustainability," says Rajeev Dubey, president, HR & corporate services, Mahindra &Mahindra.
At ITC's 2009 annual general meeting, chairman YC Deveshwar pushed a compelling case for sustainable growth, emphasizing that businesses had no choice but to build capabilities to address the demands of a low-carbon global business environment. "For a country like India with millions below the poverty line this new paradigm of competitiveness will not only require the creation of "green businesses", but also the generation of "green livelihoods," he added. Being the market leader in the cigarettes business has meant that public perception of ITC has always bordered on the pejorative. Today though, the company is also lauded for its 6,500 e-Choupals (knowledge kiosks for farmers) that cover 40,000 villages and its integrated watershed development initiative that has created freshwater potential across 46,000 hectares in water-stressed areas. ITC has also consciously aligned its new businesses like paperboards and packaged foods with socially and environmentally responsible practices. Its paperboards business, for instance, sources fibre from renewable plantations and has provided livelihoods to marginal farmers and tribals. In a world where consumers, employees and other stakeholders are beginning to ask what role their organisations are playing in the sustainability crisis, corporates are finding that investing in sustainable growth may be a necessary cost of doing business. In fact as Dhaval Buch, executive director, Hindustan Unilever (HUL) says, investing in low carbon technology is capital intensive. "Our challenge is continuing to drive this agenda while ensuring that our cost structures stay competitive," he adds. HUL has chosen to follow a strategy of sustainable growth built on three levers - its brands (that come with clear messages of hygiene and sanitation or environmentally friendly attributes), people (last year its staff put in 49,000 hours of volunteering) and processes (where it is reducing carbon emissions of operations). "If you make a positive impact with your business you connect with the consumer better," says Buch.
Sustainability is not do-goodery. "CSR used to work in silos and issue cheques to the CEO's favourite charity. Sustainability today is deeply integrated with business operations," says Naina Lal Kidwai, country head HSBC India. Three years ago HSBC India began lending to microfinance institutions as a part of its commitment to financial inclusion; today it's a business worth at least US$ 38 million. "They've actually been better customers than our credit card customers," says Kidwai. Plus there is the intangible rub-off on corporate reputation. "If your company is seen as a responsible player in sustainability it creates a lot of enthusiasm among employees, vendors and customers," says Godrej group chairman Adi Godrej; Godrej Industries is a signatory to the Confederation of Indian Industry (CII) code for ecologically sustainable business growth which commits it to protecting the environment in the pursuit of business growth.
Interestingly, sometimes it's the "dirtiest" industries that lead the charge. Cement making is a highly energy and mineral intensive process but ACC Cements came out with its first sustainability report last year and has achieved considerable results, for instance, in the utilisation of hazardous industrial wastes to make blended cements. "There are those who will do the right thing only if driven by law and others who do the right thing because they believe in it and see the all-round benefit of doing so," says Sumit Banerjee, managing director, ACC Cements.
Tata Power, like ACC, believes strongly in sustainability stewardship. "In Australia a law has been passed that by 2020 all power distribution companies must procure 20% of all power through renewable sources. Policy framework will catch up here as well and when it does, we want to have a huge upside," says Banmali Agrawala, executive director-strategy and business development. Given that 25% of the world's CO2 emissions come from power generation, climate change is a serious issue for the company. Despite large-scale plans for expansion of coal-fired generation, Tata Power's vision for the longer term is to reduce the carbon intensity of its portfolio by substantial investments in carbon sequestration, clean coal technology and renewable sources like geothermal and wind.
The drivers for sustainability in India are varied - energy insecurity, regulatory frameworks or even because ethical work practices and supply chain integrity are suddenly non-negotiable for export. Independent think tank and strategy consultancy SustainAbility India's director Shankar Venkateshwaran believes that leaders from long gestation sectors like power tend to be more farsighted on the business imperative of sustainable growth. "They are able to recognise the dangers in the future," he says.
For some companies, like Mahindra & Mahindra, the catalyst comes in the form of a financial investor that requires disclosure on the company's environmental and social impact. In fact, the volume of mainstream investors that now use Environmental, Social & Governance (ESG) analysis as a standard practice in their investment decisions is growing, compelling disclosure by Indian companies. "Our assessment of ESG risks associated with every investment always runs in parallel to the business and investment due diligence," says Ritu Kumar, senior advisor UK at private equity major Actis, adding that this approach has actually revealed greater opportunities for value creation and reduces investment and portfolio risk.
What disclosure does is firmly establish a company's commitment to sustainable growth, but as Arvind Sharma, associate director, KPMG Advisory Services says, the journey is long and "most companies are still grappling with the enormity of the sustainability challenge". Footprint reduction is typically the first step where companies try and reduce specific energy consumption, recycle wastewater or reduce dependence on fossil fuels. HUL has committed to reduce the carbon footprint of its operations by 25% from 2004 levels by 2012. The next step is the greening of supply chains; Godrej admits this is challenging when there isn't a well-defined supply chain but the group is committed to building efficiencies and promoting sustainability performances among its vendors. The final stages involve actually designing new products and services based on sustainability and eventually transforming the business model itself.
For Indian companies, as Deveshwar points out, social impact and governance are critical parts of the sustainability puzzle even if the Western discourse on sustainability places a premium on the environment piece. At Wipro, according to PS Narayanan, general manager and head - sustainability, the pillars of sustainability are as much about ecological impact as they are about health and safety standards and employment practices. "Business today has to earn the license to operate both from the social and environmental perspective," he says.
SustainAbility is helping Tata Power, through an exercise it calls Materiality, map community groups displaced by company operations and articulate a company-wide strategy covering land acquisition and rehabilitation. "The idea is to ask each of your stakeholders what their expectation is of the company, what they think are the biggest risks, build your strategy around that and then report based on that. That way you worry about what is important as defined not by you but stakeholders," says Venkateshwaran. The Materiality exercise, also conducted at ACC, generated much awareness. "I think our team is convinced that sustainability pays in the long run; in some cases even earlier," says Banerjee.
Ultimately sustainability has to go beyond the CEO's evangelism to touch every employee in the organisation. The entire managerial team at Tata Power has just completed the measurement of their individual carbon footprints using three simple levers - fuel consumption, units of electricity used and cooking gas consumed; Agrawala admits he was embarrassed by his own personal footprint.
Experts say employees are best won over when CEOs position the whole sustainability strategy as a business opportunity. Indeed, being socially responsible doesn't have to be at odds with being financially profitable. GE led the way in 2005 with 'Ecomagination', a portfolio of products that aimed to "solve the world's biggest environmental challenges". By 2008 GE increased its portfolio of Ecomagination offerings by one-third and grew revenues of Ecomagination offerings to $17 billion. "Ecomagination is not a campaign or slogan, it's a business strategy; how to make sustainable cleaner technology while making a buck at it," says Pratyush Kumar, president & CEO- infrastructure, GE India.
M&M is making inroads into 'greener' businesses like electric cars and three-wheelers. "In every business, we're looking at what opportunities are created by our sustainable agenda," says Dubey. And Godrej is particularly excited about Godrej Garden City, a township development in the city of Ahmedabad, a largescale urban development project that strives to reduce the amount of on-site CO2 emissions to below zero.
The challenge however is not that there isn't an emerging consumer market that seeks products with a lower carbon footprint, but that consumers still do not want to pay more for them. But customers are evolving, says Agrawala: "At every customer meet the standard question is: What can you as Tata Power do to help me improve my energy efficiency at home."
The greening of the consumer also requires credible systems of information to be made available so they can make informed choices. Last year IFC and Standard & Poors launched the ESG India Index, drawn from the largest 500 companies listed on the National Stock Exchange, whose business strategies and performance demonstrate a high level of commitment to ESG standards. "We expect that as ESG becomes more entrenched in company practices, this index will provide evidence of that and in turn lead people to really value it as an investment tool," says Alka Banerjee, vice president- index services, Standard & Poor's.
The ultimate push could come from December's climate conference in Copenhagen. Of course the fundamental sticking points remain between developing and developed nations over the balance between the need for development and the challenges of mitigating climate change, and the transfer of technology and aid from rich to poor nations. "Ultimately business in India will have to enable development but the challenge will be to ensure that the carbon footprint does not mirror the Western paradigm of development," says Venkateshwaran.
Whatever the outcome, it is clear there will be newer challenges post-Copenhagen that will significantly alter the paradigm of competitiveness for businesses globally. As Andrew Witty, CEO, GlaxoSmithKline once said; "With nothing certain, we (big pharma) should never take for granted our right to exist … We are earning it by meeting the expectations of society. When you start to think like this, you see the world differently." It is becoming increasingly clear that while corporate executives can ignore the issue of sustainability, they do it at their own growing risk.
