The Business Case for Sustainability

Sustainability as an issue of relevance...

Sustainability has received an unprecedented amount of attention over the last several years. Chief executives have aggressively set priorities and goals; companies have issued sustainability reports and undertaken numerous initiatives focused on enhancing environmental performance; and new reports and articles are released on the topic every week. Given this focus and attention, why the need for yet another initiative and report highlighting the risks and opportunities associated with sustainability?

Consumer industry chief executives, in partnership with the World Economic Forum, undertook this initiative, “Sustainability for Tomorrow’s Consumer”, because they recognize the need to view sustainability as an opportunity for innovation and growth rather than a new campaign or a response for the purpose of regulatory compliance. This initiative represents the recognition by industry leaders that there is a need to go beyond the historical response to sustainability – largely focused on incremental improvements – to achieve a desired future state where human consumption is in balance with natural systems.

Sustainability in the context of this initiative is focused primarily on environmental impact, but not at the expense of the social or economic fundamentals. As such, it is important to take a broader view than just environmental sustainability. The 1987 UN Brundtland Commission developed one of the first definitions of sustainability: “Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

Several factors are contributing to heightened interest in sustainability by business: increasing volatility in commodity and energy prices, more public and investor scrutiny of the traditional supply chain, the flattening world of information and complexity of value webs, and the inevitable longterm need for the economy as a whole to innovate to improve resource use efficiency in order to both deliver wealth for tomorrow’s consumer and sustain value creating companies. These factors mean that some forward-thinking business leaders are becoming more interested in sustainability as an issue right across the economic system, and how they can collaborate to make this shift, rather than just how they each might be able to reduce cost or meet regulatory requirement within their own company.

The immediate economic environment...

“This is not the same old sustainability challenge; this is not a fringe discussion about soft power: we’re beyond that. This now requires hard power. It is a security and survival issue.” This was the conclusion of more than 120 environmental and sustainability experts who met across 12 Global Agenda Councils at the World Economic Forum’s global brainstorming event held in Dubai in November 2008. The current refrain, “a crisis is a terrible thing to waste”, seems particularly apt. Given the current state of the global economy, many consumer industry company leaders will have no choice but to focus in the short term on cost cutting and even business survival. However, the sustainability challenge is a shakeout in the making. The current economic environment offers a wonderful opportunity for companies to reflect on how they are run today, and what needs to be different to be prepared for the future. As the framework conditions that govern business are not within the direct scope of just one company, a collaborative setting provides not only the leverage of scale, but also the opportunity to redefine how performance is measured.

Economies moving out of the downturn and into a recovery cycle will present very compelling situations for sustainable technologies and products, though some challenges may remain, particularly in developing economies. As companies plan ahead, there is the question, “When will things return to normal?” It is increasingly likely that there will never be a return to the “normal” of the past two decades. Prices will stabilize over time and parts of the economy will be picking up again bit by bit, but it may take years before economies return to previous levels and when they do, the landscape will look very different than it does today.

Guiding hypotheses...

The realization by industry leaders that there is an increasingly strong business case for sustainability set the tone and agenda for this work. This premise resulted in the development of a guiding set of hypotheses which are addressed in this text:

1. Consumption imbalances: Despite the current economic downturn, global consumption patterns are out of balance – with demand growing more rapidly than supply – and this imbalance is likely to grow exponentially in the future

2. Resource efficiency: The resource intensity of consumer industry products and business models is significant, not well understood, and not reflective of “true” resource costs

3. Bottom line: The financial sensitivity of consumer industry companies to resource constraints is severe and will likely be exacerbated in the future when resources begin to be priced more accurately

4. New opportunities: There is a remarkable opportunity associated with fundamentally reevaluating and innovating how we do business and who we do business with as significant new markets open up globally New business models are needed to respond to these challenges. Companies that embrace these emerging realities will be best positioned to succeed over the medium and long term.

Need for systemic change...

We are a consumption-oriented society. The success of individuals, businesses and societies as a whole has historically been linked with growth in consumption since the industrial revolution. Supply and demand patterns, fuelled by current economic paradigms and continued population growth, put into serious question the long-term viability of continued growth in consumption-oriented behaviour. Even though currently there is a significant drop in global demand in response to the economic slowdown, consumption levels are expected to pick up again once economic activity resumes. Two influences or triggers have the potential to shift behaviours: scarcity and value creation. Whether it is shortage of oil, water, financial liquidity or imagination, we are entering a new era where scarcity will influence the architecture of society and business. As business increasingly looks at meeting the future needs of consumers, there is a new shift towards value creation and innovative business models that extend available resources. This combination of “sticks” and “carrots” will result in increasing wealth and value for tomorrow’s consumers and businesses in an environmentally sustainable manner.

These influences and triggers are not future events for deliberation; they represent the reality to be dealt with today – a journey on which leading innovators are already embarking. Consumer industry companies are experiencing an unprecedented period of change and volatility; even the underlying assumptions on which current business models were built are changing. Access to cheap resources and labour, predictable consumption growth, stakeholder expectations, and traditional business roles and accountabilities represent dynamic business conditions that require new thinking. Globalization, developing market demand, resource constraints and broader environmental concern have created a higher level of inter-connectedness between business and society. The evolution of this global, interconnected model, combined with the volatile business conditions we face today, is challenging the business strategies of many companies.

Volatile input costs, greater societal expectations and evolving policy directions are possible early signals of a transition from a historically consumption-based model to one of sustainable production and consumption. Work through this initiative is intended to facilitate (and hopefully accelerate) the industry’s movement through this transition.

The analysis, recommendations, and insights in this text are intended to represent a balanced view of risk and opportunity and highlight the need for companies to fundamentally rethink their value proposition. While it is unlikely that this work will serve as the tipping point for achieving sustainable growth, it is hoped that it will serve to accelerate industry’s understanding of the key issues required to shift environmental concerns into the core of business.

The long-term trends of resource scarcity along with rising consumer markets in emerging economies will endure the current economic crisis, and so it is critical not to allow the urgent overtake the important. Much as business adapted quickly to globalization, the challenges of sustainability present an opportunity for new investments, new businesses and new business models. Collaborative innovation and a common understanding can increase momentum towards a new future for consumer industries.

To be continue...