R. Paul Herman: Why Is Business Blind to the Potential Profits from Sustainability?
What do you do if you suspect your mother is sick? Maybe she just has a cold, maybe a serious disease — wouldn’t you want to know for sure? You’d seek the advice of a doctor, find out what the options are, and make sure she gets any necessary treatment — thereby avoiding a rush visit to the emergency room, certainly before it’s too late.
Well, like the rising cost of health care, our expected burden of caring for the air we breathe, the water we drink and the land where we grow our food, is increasing. Yes, our own living conditions and planet (sometimes known as Mother Nature) are at risk of being very sick. The State of the Ocean is risking “mass extinction,” according to the International Programme on the State of the Ocean (IPSO).
Here in the U.S., we have about 5% of the global population, but 20% of the world’s economic output and 18% of the world’s emissions post-recession. However, China continues to grow with nearly 20% of the world’s population, 13% of the global GDP (adjusted for purchasing-power) and a world-leading 25% of worldwide emissions (with most exports shipping to America). US and China combined produce more than 40% of all global pollution, mainly from burning fossil fuels used in driving cars and trucks, heating and lighting buildings and manufacturing.
The effects of this could be traumatic. Scientists and economists estimate that climate change itself could cause drops of 5% or more of global GDP. Yet those same scientists also estimate that investing in solutions now to stem climate change effects could more than halve that to only a 2% GDP drop. By making transportation, manufacturing, and agriculture more energy- and carbon-efficient, we can avoid economic disaster and make our planet healthier. If facing a similar dire situation with our health, it would be more prudent to eat less and exercise more, rather than waiting for an impending and costly heart attack or brain aneurysm.
Some companies see this and are already acting, seeking to solve the crisis ecologically with financial benefits too. More than 1,000 firms — and 40 cities including New York City — are collecting metrics of environmental “health” through the equivalent of “CAT scans” and x-rays of their businesses; by mapping their emissions “footprint”, they are seeking out and pursuing ways to save money and generate revenue from new products, while also nursing earth back to health. Alcoa requires all new projects to be reviewed for environmental impacts. GE has built a carbon accounting system, and requires managers to hit emissions-reduction targets. Interface Inc. is progressing towards its goal of zero eco-impact by 2020, so it can become “restorative” to our environment, a potential “fountain of youth.”
However, esteemed business leaders and fiduciaries — including the Oracle of Omaha
Warren Buffett of Berkshire Hathaway says that the environment and associated weather volatility are not important: “climate change is not a material factor to [Berkshire Hathaway’s] businesses,” Buffett said to 19,000 shareholders crammed into the Qwest Center stadium in Omaha on April 30 for Berkshire’s annual meeting. This statement was in direct contrast to Buffett’s initial 15-minute explanation to shareholders that 2011 is unlikely to be profitable for insurance businesses Berkshire owns, due to the losses related to weather volatility and the Japan nuclear leaks.
What’s fascinating is that the insiders at insurance and re-insurance companies are actually pricing out climate change — and the potential costs of carbon pollution. Maybe that’s also why Buffett thinks that the “price of reinsurance doesn’t match the risk” — because he doesn’t yet fully or clearly see the liabilities of environmental degradation that also causes increased weather volatility. American business desperately needs leadership — and Warren Buffett is someone whose leadership could ignite that.
A favorite drink of Warren Buffett and a core Berkshire Hathaway holding is Coca-Cola, which uses more than 2 liters of water to make 1 liter of soda. It’s an ecological emergency as well as a health one. The U.S. is the only country where Coke sells drinks with high-fructose corn syrup (also using fossil energy to convert it), and this ingredient is linked to increased weight and diabetes. Some are convinced the food industry could be at risk for a $ 175-billion dollar lawsuit as the tobacco industry was penalized for causing deaths from addictions like smoking.
There is a both a health and environmental pandemic worldwide and we can see its effects from scientifically calculated charts and metrics. As we learned in the Oscar award-winning movie, the inconvenient truth is that we are addicted to fossil fuels whose saturation contribute to climate change, just like our diets are addicted to salt and sugar which can lead to obesity and major life-threatening and expensive health consequences.
Companies are already on the path towards improving customer nutrition and employee wellness. Campbell’s Soup has examined its products, set targets for healthier offerings, and is now making 32% of their top-line revenue with high nutrition products, like “organic, full vegetable serving, light, low fat, reduced sodium and whole grain” products. (It might be even higher if consumer tastes weren’t so salt-oriented.) And Safeway the grocery chain attracts employees with $ 20 per week incentives to get measured for their body mass index, and tests to signal diabetes or other diseases, so people will address these conditions. Walmart now has an incentive for its buyers to value “sustainability” factors, whether in healthier foods and consumer products, or that reduce the environmental pollution; Walmart has committed to “zero waste, 100% renewable power,” and an increase in products it offers from 60,000 suppliers that generate revenue and societal or environmental benefit.
Meanwhile, back in Omaha on Saturday April 30, Berkshire Hathaway shareholders enjoyed eating “Dilly Bars” from Dairy Queen but rejected a fellow shareholder petition for the Board to “take a temperature” of the conglomerate’s health, specifically regarding “if it had a fever”, caused by the pollution and emissions caused by running its energy, utilities and other businesses. One shareholder publicly mocked this proactive approach to measurement around “climate change risks to the business” as a “false religion” — similar to a Christian Scientist who rejects medical attention because of their beliefs rather than the science that could save them personally.
The truth is that measurement of the environmental aspects of a business is equivalent to an x-ray or CAT scan to find the maladies in a business system and supply chain which can be addressed and cured. Using this type of approach, Procter and Gamble launched Cold Water Tide to reduce the amount of unnecessarily heated water used for laundry, thereby saving the majority of pollution — and energy — by the use of its product.
Almost no one actively avoids reliable information on how they could live longer — unless they are in denial, the first stage of the famed 12-step program. We need to get well fast. We already know many of the prescriptions and solutions. You take your car for a tune-up regularly to check the spark plugs, transmission, and tires. Why can’t a business do the same on the factors of production – land, labor, and capital? Corporate fiduciaries typically do an excellent job of measuring the money — tracking the stock of capital, its costs, and returns. However, labor and land are not closely measured.
This is surprising, since people are frequently claimed as the most important and valuable asset of a company. Yet people appear nowhere among the measured assets in traditional financial statements — they are costs on the income statement, and liabilities on the balance sheet. Hence, there is a gap in GAAP, our generally accepted accounting principles. This failure of financial accounting leads to an ongoing misallocation of capital. Professor Alex Edmans of the Wharton School of the University of Pennsylvania has found that returns from the “best companies to work for” actually outperform the general market by several percentage points per year, indicating that more financial returns are realized by those companies treating employees well. In addition, when ecological services are quantified as to their potential economic value, scientists and economists estimate that for every 1 dollar of GDP, there are 2 dollars of environmental management services that Nature provides — free of charge!
We have the tools, talent and technical expertise to diagnose the diseases our companies have today. One tool is the Carbon Disclosure Project, which more than 3000 organizations and 551 institutional investors covering $ 71Trillion, participate in. The CDP collects and shares information about companies’ waste, pollution and eco-efficiency so that investors can make better judgment about risks and opportunities. This has become so successful that a Water Disclosure Project is being launched.
These metrics have remained invisible as the ultraviolet spectrum of light, social-metrics maven Sara Olsen of SVT Group highlights. Therefore, we cannot manage what we have not measured. When a company actually measures the volumes of materials that it uses, and the related outputs can be eye opening. “Only 6% of the raw materials extracted by the economy from US territory winds up in durable products,” according to Natural Logic CEO Gil Friend; “94% of the mass winds up as ‘non-product’, adding value to neither customers nor to shareholders.”
Leading companies are creating revenue from these opportunities. General Electric’s Ecomagination initiative generates revenue of $ 18 billion, or 10% of its top line revenue, from fuel-efficient locomotives used in railroads. Interface Inc. has saved $ 400 million since the 1990s by re-designing its products for re-use, and channeling waste heat, formerly dissipated into the environment by expensive radiators, to power its manufacturing. Alcoa measures and manages its environmental measures as well as financials, reviewing all new construction projects for ecological and social factors. This lines up with the Creative Capitalism concept that Bill Gates presented at the Davos World Economic Forum in 2008.
Investors are benefiting too. Goldman Sachs’s Sustain Portfolio, Generation Investment Management (co-founded by a former Goldman Sachs executive) and Portfolio21 mutual fund all have attractive investment track records financially and ecologically. Like health technicians in a DNA lab who analyze your blood to see what is ailing the patient, these funds are investing in companies that provide the salve or surgeries to help dirty business behavior become more clean.
From 1900 to 2000, both developed- and developing-world citizens have dramatically increased our life expectancies. This amazing accomplishment in life expectancy was achieved through an openness to discovery of ailments we didn’t yet understand, and then developing the solutions to extend our desire to live and thrive. Similarly, we have an opportunity today to do the same for our own health and the air we breathe, the water we drink and the land we till for growing food. However, the longer we remain in the dark about ecological measurement of business, the more likely we are “killing ourselves with blindness.”
Companies and fiduciaries that ignore the data, science, and solutions will lead a riskier life, and face bank-breaking contingent liabilities, just as those who cannot or will not take advantage of modern knowledge about nutrition and health care continue to have lower life expectancies.
Our grandfathers risked their lives fighting World War II, and our grandmothers invested their livelihoods during that time in manufacturing and providing the tools we needed to win. The resulting Cold War led to innovations like the microwave and the Internet, and a race to the moon in which we beat the Soviets.
Can we be inspired by their courage to use our tools, talent, and technical expertise to fight today’s battles for cleaner uses of energy, less waste, and innovations that let us do more with less? We need to measure how we are polluting, and then eliminate that waste, and reinvent how we live, work, and consume. Let’s create new jobs by leading the world in innovations, just as the U.S. built a decades-strong, export-led innovation economy after World War 2. Venture capitalist John Doerr, whose firm funded Google and Amazon in their early days, sees eco-innovations as the biggest investment opportunity of the 21st Century.
Let’s get the x-ray of our businesses, take our aspirin, prepare for any surgery, and train ourselves to win the industrial versions of the Olympic decathlon of innovations linked to environmental and energy breakthroughs. Let us honor the sacrifices of our grandparents by listening, learning, measuring, improving, innovating and inventing.
Otherwise, today’s crisis of health care will seem like the sniffles compared to the radical amputations we will likely require to our future way of life. As Hunter Lovins, co-author of Climate Capitalism as well as Natural Capitalism, quotes Interface Inc.’s Chair Ray Anderson: “What’s the business case for ending life on earth?”
What to do? Take action. Get a “checkup” on how your company is treating the air, land and soil. Then set some goals, apply some salve, schedule some surgery — and let’s get healthy again. It’s likely to be more profitable too.