8/9/2019 BT240610 Sustainability Can Boost Profits
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OVERVIEWBUSINESSES are facingincreasing global pressure
topur-sue sustainable growth by managing stakeholders inter-ests
and the social, environmental and economic impactof their products,
services, processes and other activitiesto achieve both financial
and sustainable success. In factbusinesses can turn this into an
opportunity to boost theirbottom line.
In a Business Times-Nanyang Business School Round-table
discussion series, senior professors at NanyangTechnological
Universitys Nanyang Business School(NBS)and a visiting professorat
the school who isa globalauthority onthe subject,examinehow
businessescan pro-mote sustainability and suggest some ways of
integratingit into their operations to achieve a better bottom
line.
Narendra Aggarwal: Businesses have competing pressuresto produce
profits and to be good corporate citizens bypromoting
sustainability. How well do managers under-stand that these are
inter-linked?
Marc Epstein: Todays managers understand that makingprofits and
being good corporate citizens are linked asthis evolved over the
last two to three decades in globalbusinesses. But while they
understand that these arelinked, their challenge is how to actually
implement it intheir organisations.
While there is a strong desire on their part to be goodcorporate
citizens, their incentives are aligned typicallyaround revenue and
profit goals. So the challenge for
most large companies is to think about how they can en-courage
managers to push sustainable growth while si-multaneously producing
profits for the firm.
Gillian Yeo: Companies need to have a sustainable busi-ness tobe
ableto give backto society ina meaningfulway.To say that they want
to do good and give back to societymay not be good enough. Toyota
developed a hybrid car.Fordgaveover US$100 million to
theBreastCancerFoun-dation. Both are faced with a lot of
challenging issues of sustainability as automobile manufacturers.
If Ford hadintegrated the desire to give back to society by
producingcars that are less harmful to the environment, it
wouldstill have been able to move forward with its
businessproposition and still used its money to give back to
socie-ty.
Businessesshouldnot justmakeprofit.When theypro-fit to the
extreme at the expense of polluting the environ-mentand atthe
expenseof notmeetingthe needs ofsocie-tyand notbeing ethical,then
thatis notright. Whilethis isa complicated issue, they should be
able to draw the linein trying to maximise profit and being
sustainable and so-cially responsible at the same time.
Josephine Lang: Managers want to take socially
responsi-bleactions butthe problemis thatthereare
differentinter-pretations of what doing good entails. While doing
good isnecessarily being ethical too, it has a lot to do with
onesintrinsic values. Then there is accountability. I am good if I
am doing good and am accountable for the consequenc-es of my
actions. For example, if I polluted the environ-ment and I paid to
take care of it, I can say that I am doinggood.
Sothere arevariouswaysto look atdoing good butcer-tain aspects
of doing good may not square with producingprofits.Perhapswe needa
frameworkto actuallyhelpana-lyse which aspects are really needed
todo good, which as-pects of our actions are driven by good values
and whichaspects are needed for us to be accountable for our
ac-tions.
Prof Epstein: Businesses should do things that are good forthe
environment and be concerned about social values.They should also
recognise that another impact of pollu-tion and social performance
is that these may have a fu-ture impact on their bottom line as
they may have to cleanit upand may face a reputational effect. As
we bring inthelong term effect of these external factors, we find
that itdoes cause us to be more socially and environmentally
re-sponsible because we do think about the effect on ourlong-term
profitability.
Sometimes, companies thatdont perform very well forsociety try
to be philanthropic to compensate. But this hasnot been successful.
The biggest impact companies haveis in their primary products and
services. It is their core
mainstream mainline business that they need to focus on.By doing
other things, it doesnt necessarily compensatefor their bad
actions. So I suggest that the company firstfocus on what isthe
basic product andservice they do anddo that well for both the
company and society, and thenthey can think about what they want to
do about philan-thropy.But philanthropyis notthe centre
ofcorporatesus-tainability. The core of corporate sustainability is
reallyaround the companys products and services.
Chung Lai Hong:In the long term, obviously, the managerssee that
link to be good corporate citizens, doing all thosethings around
society and environment that would lead togood financial outcomes
especially when it is consistentwith their business model, enhances
their branding, en-hances how their customers, suppliers and how
everyonesees them so that it is a consistent picture. So
organisa-tions know that by doing good, by being good
corporatecitizens, they will build on these intangible assets
thatthey are fully aware are essential for them to be sustaina-ble
in the long run.
While the profit pressure is there in the short term, weare
increasingly seeing examples of companies sayingthat this need not
bea problem. It need not be a conflict, itcan be complementary in
some cases and the challenge isto be able to do that. Promoting
sustainability can be astrategic issue as stakeholders (eg
customers, employees)begin to focus more on the environment and
social issues.In the past, the strategic issue may have been
competitivefactors of quality or innovativeness. So, in many
ways,what we are doing is still the same, we just have to thinkof
it from a different angle.
Prof Yeo: I think, at the end of the day, companies want tobuild
goodwill. Theywantto build trust bothwiththe com-munity and with
various stakeholders. So the employeestrust them because they are a
good employer. The share-holders trust them because they are able
to generate goodreturns. The union and the government trust them.
Thepotential employee would come to work in the organisa-tion
because it has a good brand name. The reputationand branding is
critical at the end of the day. It is all inter-related in this
sense.
Prof Epstein: A new challenge is that sometimes it is diffi-cult
to foresee what the social environmental costs are.Take the case of
nutrition and obesity. One of the challen-ges for companies is to
try to make predictions to assesswhat the impact is or might be,
and make adjustments. And whatwe find is that thoughsome people are
scepticalof these arguments about nutrition and obesity, otherstake
it seriously and believe that it is the next tobacco interms of
impact. And thus if you are in an industry thatproduces high sugar,
high salt foods, you need to be
aware of these issues and think about how you are goingto deal
with them.
Large companies like Pepsi and Coke are looking seri-ously at
the impact of their products. They are looking atsugary drinks and
salted snacks and asking what impactdoes that have. They look at it
as a potential risk and aspotential opportunities to create new
market segmentswhere they can make additional profits by
producinghealthier foods. I think all the fast food businesses are
do-ing the same. Look at McDonalds menu they are tryingto make it
healthier. They now give the consumer morechoices of healthier food
so that one can go to McDonaldsand not only order the high calorie
foods.
Mr Aggarwal: Are managers rising to the new leadershipchallenge
for achieving sustainable business growth anddo they really know
how to implement sustainability?
Prof Epstein: Managers increasingly want to do this butthis is
more difficult than most other implementations be-cause weare
tryingto implement twothingssimultaneous-ly. In most other aspects
of business, we know that ourgoal is to make a profit. Even in
innovation, we under-standthatthe intermediate challengeis to
buildnew prod-ucts, while the long-term challenge is to increase
profita-bility. Here, what we are trying to do is to think about
cor-porate citizenship and social environmental impacts onthe one
hand and simultaneous trying to increase profits.That can be done
through innovation and creativity but ittakes effort.
If we let short-term interests dominate, it really puts
tremendous pressure on the managers to try to thinkabout how to
balance both the social and financial
per-formanceneeds.Sometimes,we canachieveboth simulta-neously but
sometimes that is really difficult, and so man-agers sometimes
struggle with howto i mplement this suc-cessfully.
Assoc Prof Lang:Managers will rise to the challenge whentheysee
a businesscase,be it corporate social responsibil-ity or whether it
has to do with environmental challenges.But for environmental
challenges, it is more straightfor-ward now as we have more case
studies coming out and alot of governments are taking the lead in
providing gui-dance.
For instance, the Building and Construction Authori-tys Green
Mark awards have generated model examplesfor other companies to
follow. The next step would be toincorporate it into regulations as
buildings account for athird of our energy consumption. The
government has setaside $100 million for promoting green buildings
so it istaking on a significant leadership role to encourage
thetake-up of new technology.
Prof Yeo: Incentives to encourage socially desired out-comes are
helpful, but business managers need to rise be-yond that. In the
longer term, they would still need to be
on their own and innovate and push further on their own.Hyfluxis
anexampleof a companythat startedwith incen-tives and has now taken
its water purification technologyglobal by expanding to China and
other countries, goingas far as the Middle East.
This is an example of a company which got start-uphelp but then,
at the end of the day, you have torise aboveit and that is where it
pushes the innovation drive. In or-der to be sustainable, it really
pushes the innovation driveandthat is thepart I thinkthe government
wantsthe busi-nesses, especially the small and medium-sized
busines-ses, to develop and become global MNCs.
Assoc Prof Chung: In Singapore, a push from the govern-ment
could play an important role as our economy is verysmall. I think
the role of the government is key and if groups such as Temasek,
which has diversified interest invarious industries, were to set an
example and go for sus-tainable growth, they can show that this can
be done, thiscan be profitable, and make it easier for SMEs to
follow.
Beyond government incentives, the ability of leader-ship within
corporations to implement sustainability hasto do with the way they
are structured, the governanceand regulatory structure and pressure
from civil societygroups like Greenpeace. For example, if managers
aresubject to a lot of pressures from various stakeholdergroups
demanding sustainability, that would push themtowards finding
innovative solutions. So at the end of theday, it is the incentives
and pressures that drive the beha-viour of managers.
Prof Epstein: In much of the world, there is not much byway of
incentives. There are some regulations, sometougher than others,
but I agree with Gillian that the big-gestpushesfor pro-profit
companies is tothink about howthey can do it themselves. This needs
to be voluntary acti-vities and I think we all agree here that as
companies rea-lise they need to balance being a good corporate
citizenand being profitable, they need to figure out ways to dothat
through innovation and creativity.
What I found in my research and consultancy work isthat leading
companies use this tension between trying tobalance social and
financial performance as a source of new ideas, creativity and
innovation. They find ways toovercome these challenges through this
innovation and itmakes them work harder but this is the way to
reallygrow, comeup withnew solutions, andincrease
profitabil-ity.
Mr Aggarwal: Are there some good examples of compa-nies showing
concern for the environment and being so-cially responsible from
which others could learn?
Prof Epstein: A good starting point for companies is to
trytoidentify whatis the biggestsocialenvironmentalimpactthey have
on society. Proctor & Gambles story around de-tergent is an
interesting example. P&G determined that its
biggest impact on society was the use of hot water by
theconsumer. It said if it was going to reduce its environmen-tal
footprint, the best way to do so would be by reducingthe amount of
hot water customers used in washing theirclothes.
So P&G came up with cold water detergent. That hasthe
potential of having the biggest cost saving for the con-sumer, the
biggest saving of the environmental impact forthesocietywhile
making significantprofits for thefirm be-cause their sales
increased. This is a good example to fol-low, because what it asks
companies to do is first identifywhat are their impacts and then
think creatively about re-ducing those negative social and
environmental impacts.Sometimes, that is in changing processes,
changing pro-ducts and services or changing the way consumers
usetheir products. This requires a fair bit of creativity butwith
creativity I think, they can both decrease costs andincrease
revenue. And that is how a business can be aleader in
sustainability.
Assoc Prof Chung:Take, for example, how Holcim (Singa-pore), a
leading supplier of concrete products to the con-structionindustry,
respondedto thesand shortageand es-calating costs by developing
green cement. It embarkedon a major R&D project to explore
substitutes and experi-mented with waste materials that were
disposed of aslandfill. After its R&D and testing, it received
approval touse washed copper slag as a partial sand substitute.
Besides the cost benefit, their risk is reduced as nowthey do
not have to depend so much on sand and the mar-ket uncertainty
around it. Moreover, it is also good for theenvironment as they are
recycling waste into somethinguseful and also reducing the demand
for sand which is anatural resource. It is a win-win situation. But
if you arethere for the short term, it is not going to happen as it
re-quires commitment to say that we will spend time onR&D, work
with the regulatory bodies to get the necessaryapproval to have it
as a substitute for sand. Due to theirlong-term commitment, they
were able to do that. This isa good example of a company turning
what was a diceysituation into an opportunity.
Prof Epstein: Nike is a similar story. What is interestingabout
Nike is that it has a large effort within the companyto improve
sustainability while earning a profit. It has agroup within the
company called Considered Designand this group goes around the
different business units toprovide advice as to how the individual
business units canmaximise or improve their sustainability while
makingmore money.
The way Nike views this effort is that it is not atrade-off.If
yousee itas a trade-off,you arenot beingcrea-tive and innovative
enough. You need to overcome thetrade-off by looking hard for
solutions that will give yougreater environmental responsibility
while making grea-ter profits. Through this group, they look and
design theirway out of these challenges, and they have been very
suc-cessful in designing products that are more environmen-tally
responsible.
Mr Aggarwal: Do you see the push for new green technolo-gies as
the next big thing that could create the Googlesand Microsofts of
tomorrow?
Prof Epstein: I would like to mention General Electricwhich sees
big demand over the next decade or twoaround environmental and
energy technology, and healthtechnology. Big demand, as there is
greater concern inour society over environment and climate change.
On thehealth side, we have a population that is ageing and get-ting
healthier as it ages, and wants more health technolo-gy. So GE has
invested heavily in developing environmen-tal and health
technologies as it sees them as areas of great profit growth.
As former Unilever CEO Patrick Cescau said: Perhapsthe biggest
catalyst for change is that many of the big so-cial and
environmental challenges, once seen as obstaclesto progress, have
become opportunities for innovationand business development.
Similarly many people, including myself, think that iswhere
thedemand, bigdemandis andthosewho cancrea-tively find solutions to
these challenges are the ones whoare going to create the greatest
amount of wealth in thenextgenerationand come up withthe Googlesand
the Mi-crosofts of the new era.
Prof Yeo: There is thisidea of ecological intelligence, or EI.
What is critical is that there are a lot of consumers who donothave
enough informationaboutthe social andenviron-mental consequences of
many products. So businessesthat are really into green technology
can benefit by provi-ding more information about their
products.
This can be done by having more informative labels sothat when
consumers see the product they would be en-couraged to buy it
because they would appreciate that themanufacturerhas done abetter
job. Itis the same thing asour buying habits for our diet. You look
at a product to seehow many calories it has and then decide whether
to buyit or not. The big challenge is still how to provide more
in-formation to consumers so that they can make
intelligentchoices.
Assoc Prof Lang: One good example is our utilities billwhich
shows how our monthly electricity, water and gasusage compares with
the national average based on simi-lar house-type. When you have
that information and if you see that you are using more than what
similar house-holds do, you try to lower your consumption.
Similarly, manufacturers must give information that iscomparable
and standardised. Otherwise, consumers willbe confused and
companies could be engaging in a type of environmental marketing
which could amount to decep-tion.
Assoc Prof Chung: I recently read in The Business Timesabout an
exhibition in Chicago where 1,000 exhibitorsfrom 60 countries
focused on green tech and biotech. In-terestingly, the article said
that China is making a very bigpush into these areas as it sees
them as a big business op-portunity.
Businesses and consumers can encourage this agendaby voting with
their dollars.
Tothe extentthey make choicesaroundenvironmental-ly responsible
items, they are going to have a long-termimpact on our society.
They can make a difference andshould make a difference by being
more sensitive to theseissues as they learn more about the social
environmentalimpact of products and services, and spend their
moneyaccordingly.
While businesses understand thatmaking profits and being
goodcorporate citizens are linked,their challenge is how to
actually implement it intheir organisations.
Prof Marc Epstein
While it is a complicated issue,businesses should be able to
draw the line in trying to maximiseprofit and being sustainableand
socially responsibleat the same time.
Prof Gillian Yeo
Managers want to take socially responsible actions but
theproblem is that there aredifferent interpretations of whatdoing
good entails.
Assoc Prof Josephine Lang
Panellists from NTUs Nanyang Business School: Professor Gillian
Yeo, Professor of Accounting and Interim Dean, Nanyang Business
School (NBS) Dr Marc J Epstein, Visiting Professor, NBS &
Distinguished Research Professor of Management, Jones
Graduate School of Business, Rice University in Texas, USA Dr
Chung Lai Hong, Associate Professor of Accounting and Associate
Dean, (MBA), NBS Dr Josephine Lang, Associate Professor of
Strategy, Management & Organisation, NBS
Moderator and Writer: Narendra Aggarwal, Director, Public
Affairs, NBS
At the end of the day, it is theincentives and pressures
thatdrive the behaviour of managers.
Assoc Prof Chung Lai Hong
BT-NBS RoundtableTHE BUSINESS TIMES
Sustainability can boost profits
The Bu sine ss Times, Thursda y, June 24, 2010 BT-NBS
ROUNDTABLE19
