6 Ways the Sustainability Movement Will Affect Your Company
Note: This story has been updated to correct the figures for Wal-Mart's net sales in fiscal year 2012.
The global sustainability movement, with its strong constituency and sophisticated advocacy at both local and global levels, is a growing phenomenon, with far-reaching implications for businesses everywhere.
Not only has the green movement been successful at driving public policy at the government level (from the top down), but increasingly, the sustainability movement has emerged as a powerful grassroots driver (from the bottom up). Its impact is manifest in consumer preferences for renewable power and sustainable choices, which in turn has an impact on corporate policy and affects investor demand.
Ultimately, the sustainability movement will affect everyone along the value chain. In one form or another, sustainability will factor into the relationships among consumers, suppliers, shareholders, investors, employees, and corporate decision-makers. Below are some of the ways in which this movement will affect the different stakeholders along the corporate spectrum:
- Consumers: Consumer choice will increasingly force manufacturers to consider sustainable practices (i.e., cradle to grave manufacturing) as corporations are adopting green policies to attract consumers. Multinationals such as Wal-Mart Stores Inc. and smaller, more tightly focused corporations like the clothing company Patagonia Inc. are participating in this green revolution. In an effort to build on many customers' desire for a greener lifestyle, home-furnishings retailer Ikea announced in October its "People and Planet Positive" initiative, stating that it will use only solar and wind power in all of its stores and buildings worldwide by 2020, as well as pledging to recycle 90 percent of store waste and utilize only recyclable, renewable, or recycled materials for its packaging and products.
- Suppliers: Consumer pressure will cause companies to examine their entire supply chain and rethink their goals and relationships with suppliers. Wal-Mart provides an interesting case study. The biggest of the big box retailers has set ambitious goals and is implementing a multi-year and multi-faceted effort to go green. A central part of this effort involves Wal-Mart putting pressure on its supply chain to go green as well. It wants its suppliers to reduce 20 million metric tons of greenhouse gas emissions by the end of 2015 (equal to removing 3.8 million cars from the road for a year).
Wal-Mart is also working with suppliers to rethink methods and materials, shipping, packaging, and distribution (examples include selling concentrated laundry detergent and selling toothpaste without a box), and has partnered with the Carbon Disclosure Project to measure the amount of energy used to create products throughout its supply chain. Wal-Mart 's policies will have a very widespread impact. The giant retailer has more than 100,000 suppliers and had net sales of roughly $444 billion in fiscal year 2012, the kind of numbers that guarantee a huge impact across a wide array of industries.
Wal-Mart is not alone. Across the pond, the British retailer Marks and Spencer Group plc was among the earlier large U.K. companies to jump on the bandwagon, committing to becoming carbon-neutral by 2012. By mid-2011, total carbon emissions were already down by 13 percent from 2006, even as the chain continued to grow. The company now recycles 94 percent of its waste. Marks and Spencer generates 54 percent of its energy from renewable sources. It gets 90 percent of its wild fish and 76 percent of its wood from sustainable sources. To achieve these goals, Marks and Spencer worked with 1,500 suppliers using Acorn environmental modeling, which breaks the ISO 14001 environmental management standard into six steps.
Retailers are not the only companies taking action. For example, the European household products and food company Unilever plc introduced a sustainability plan in November 2010, pledging that by 2020 it would cut the greenhouse effects of its products and the waste associated with their disposal in half and that all of its agricultural raw materials would come from sustainable sources. And the pharmaceutical company Novo Nordisk A/S has worked to improve the methods for reporting transport-related emissions and then using the results to cooperate with transport suppliers to reduce the environmental impact of the delivery of its products.
- Shareholders: Shareholder demands will increasingly lead corporations to make sustainability a genuine priority. According to CorporateRegister.com, fewer than 500 companies issued sustainability reports in 1999. That number is now close to 3,500, reflecting the growing trend among companies worldwide to demonstrate their commitment to environmental and social targets, along with traditional financial ones. Shareholder advocacy also continues to grow.
Environmental and social responsibility resolutions accounted for 45 percent of all shareholder proposals during the 2012 proxy season, more than any other category of shareholder proposal (including board-focused, compensation, and strategic proposals). And the level of support for environmental resolutions is similarly rising: The proportion of resolutions that received more than 30 percent of the vote increased from 16 percent in 2007 to 31 percent in 2011.
- Investors: Sustainable and socially responsible investing in the U.S. alone has grown at a rate of 380 percent during the period from 1995 to 2010. Not only is sustainable investing on the rise, but research now suggests that the long-term returns on investments in sustainable companies exceed those in companies not so designated.
- Other Corporations: Sustainability has also become a galvanizing force for collective action among corporations (even among competitors). For example, The Proctor & Gamble Company, Unilever, Tesco plc, Cadbury Schweppes plc, Imperial Tobacco Group plc, and Nestlé S.A. formed the Supply Chain Leadership Coalition, whose mandate is to press suppliers to release data about their carbon footprints and climate change information. Similarly, Burger King Worldwide Inc., Unilever, Nestlé, and Kraft Foods Group Inc. broke ties with Sinar Mas Group, an Indonesian palm oil producer, over environmental concerns, specifically rainforest damage.
- Employees: Sustainability may or may not be a burning issue for employees in your company today, but over time it will be. Future generations will consider the sustainability practices of prospective employers as they enter the workforce. This will affect businesses well beyond the expectations of Generation Y workers, with companies needing to embrace sustainability in an ever more mindful way. Research suggests that Generation Z workers will model their choices around the concept of sustainability even more than their predecessors.
With all of these forces at play, corporations will be well served to examine their current sources of energy, adopt sustainability policies, and re-examine programs currently in place. Among the many questions general counsel and other corporate leaders should ask, consider the following:
- How will your global operations be affected by sustainability policies, laws, and tax incentives of the various jurisdictions where you conduct business?
- What legal and tax incentives may exist today that could benefit your company in the near term and in the long term, and what do you need to do to benefit from them?
- How will existing and prospective laws designed to promote sustainability affect operational plans and decisions you need to make today?
- What are your principal sources of power and what are the economics of non-traditional sources?
- What are the practices of your largest suppliers, and have you conducted a sustainability audit? If so, how can you best address the results?
- What are the expectations of your largest customers, and have they audited you? If so, how can you best address the results?
- If you received a shareholder proposal aimed at promoting sustainability, how did you address it, and what are the best long-term opportunities for your company?
Looking ahead toward an environment where green behavior will be expected by the full spectrum of stakeholders, corporations, and those who provide capital to them, companies must be able to respond to the sustainability movement by assessing their current operations, their current uses of power and other resources, and the opportunities that this new environment presents.
Junaid H. Chida is a partner in the New York office of OMelveny & Myers and a member of its project and infrastructure development and finance practice.