Does It Pay To Be Green?
The carbon tax, the cost of raw materials, lobbying from environmentalists: the pressure on business to be environmentally responsible is intense. But can sustainable development – the combination of economic growth and ecological balance – be a business reality? UQ Business School’s Professor Peter Clarkson asks under what circumstances business can turn green practice into profit?
Without business on board, sustainable development is likely to remain the catch phrase of election campaigns and a footnote in policy papers. After all, compared to most governments, businesses have the flexibility to react, the global reach to have impact, and the economic clout to matter. Take Walmart. If Walmart were a country it would rank 25th in the world by GDP.
Operating under 55 different names and with two million employees over 15 countries, it reaches into the economies and the lives of millions of consumers. When a business on this scale decides on a course of action, the implications reverberate across economies.
Take US Steel maker, Nucor Corporation. Nucor has met its greenhouse gas emission reduction targets six years ahead of schedule. The US Government has yet to sign the Kyoto protocol.
It’s how business decides to behave that is likely to determine whether the global economy finds an environmentally sustainable operating model. And it seems that business is taking the responsibility seriously.
As Jennifer Westacott, Chief Executive of the Business Council of Australia put it: “The competition for resources simply means that we must use resources more efficiently. However, the first critical introductory point is that the sustainability agenda and the economic growth agenda should not be in competition with each other. If we are to have a sustainable future we must have strong economic growth.
In turn, if we are to have a strong economy in the long term we must have sustainable and resource efficient growth.”
The research team set out to examine in what conditions sound environmental practise created value for business. Could business translate the message of ‘do more with less’ to improve the bottom line?
Their findings identified three ways enhanced environmental performance can create competitive advantage and add value, but, emphasises Professor Clarkson, the circumstances have to be right.
When waste is pumped into the environment it’s called pollution. When it comes to balancing the books, waste is a cost that cuts into company profits. With the cost of raw materials soaring and pollution charges becoming standard around the world, improving wasteful production processes can translate directly and rapidly into cost savings.
Raw materials in the steel-making process are now, according to Bluescope Steel, 70% of production costs. Using those raw materials efficiently can mean the difference between a viable and a non-viable business.
A company’s environmental reputation – and the cost of losing it – is ever more visible on the balance sheet.
The cost of the oil spill in the Gulf of Mexico to BP’s brand has been estimated at $1 billion US. After the accident, BP shares hit a 14-year low, and analysts questioned the company’s ongoing status as partner of choice for governments looking for mineral exploration and exploitation partners. Two years on, BP have announced a $500 million spend to rebuild its brand in the US and finally lay to rest the memory of the world’s worst accidental oil spill.
KEEPING UP WITH REGULATIONS
As a sector’s environmental performance improves, standards rise, and often, so do environmental regulations. According to Professor Clarkson, there is evidence that companies can achieve competitive advantage by anticipating changes in the law and by adapting their environmental performance early.
This is what Sony Ericsson did when they decided to eliminate the use of beryllium, and other toxic chemicals, from their manufacturing processes. Anticipating future recycling advantages and legislation making producers responsible for their products once they’d come to the end of their useful lives, Sony Ericsson’s vision paid off with a host of environmental accolades, which has established them as market leaders in eco-friendly phones.
Professor Clarkson adds that companies who lead when it comes to environmental performance not only gain competitive advantage over rivals playing ‘catch up’, but they have the opportunity to influence future legislation in their sector.
Despite the apparent simplicity of this 3-step approach, Professor Clarkson warns that “evidence suggests that not all firms can pursue proactive green strategies successfully, and that firms wishing to pursue green investment strategies must carefully plan for such investments.”
The research – covering firms in four high-polluting industries over a 13-year period (paper and pulp, oil and gas, chemicals, metals and mining) – finds a key factor in the successful implementation of environmental policies is the existence of a good resource base and a strong management team. Firms with these in place are most likely to benefit economically from improving their environmental performance.
The question asked was, which comes first, improved financial performance or improved environmental performance?
They found that firms experiencing a significant improvement in relative environmental performance over time had earlier experienced significant increases in return on assets and operating cash flows.
It indentified a virtuous circle in which it can ‘pay to be green’: improved financial performance leading to improved environmental performance which creates further competitive advantage.
With a good resource base and strong management, not only can it pay to be green, but green investment may even turbo charge differentiation, widening the gap between successful firms and their competitors.
If saving the planet needs a business case, could this be it?