The "S" word, Part IV

Sustainable capitalism

As part of the discussions on the interrelationship between sustainability and economics referred to in the last posting an interesting report, titled "sustainable capitalism" popped up. The report was prepared in early 1012 by Generation Investment Management, LLP, a UK firm and can be accessed free at their corporate link. One must always read such reports prepared by folks with a particular view toward industry, capitalism and investment, carefully. But, it is interesting and, for sure, we all have "our views!"

To quote directly from the executive summary of the report:

"The challenges facing the planet today are unprecedented and extraordinary; climate change, water scarcity, poverty, disease, growing inequality of income and wealth, demographic shifts, trans-border and internal migration, urbanisation and a global economy in a state of constant dramatic volatility and flux, to name but a few. While governments and civil society will need to be part of the solution to these massive challenges, ultimately it will be companies and investors that will mobilise the capital needed to overcome them.

To address these sustainability challenges, we advocate for a paradigm shift to Sustainable Capitalism; a framework that seeks to maximise long-term economic value creation by reforming markets to address real needs while considering all costs and stakeholders.

The objective of this paper is twofold. First, we make the economic case for mainstreaming Sustainable Capitalism by highlighting the fact that it does not represent a trade-off with profit maximisation but instead actually fosters superior long-term value creation."

They go on to recommend five specific actions that they suggest will accelerate the "mainstreaming of Sustainable Capitalism" by the end of this decade.

These are (summarized from the report):

1. IDENTIFY AND INCORPORATE RISKS FROM STRANDED ASSETS - they define "stranded assets" as "those with a value that would change dramatically, either positively or negatively, under certain scenarios such as a reasonable price on carbon or water, or improved regulation of labour standards in emerging economies."

2. MANDATE INTEGRATED REPORTING - this is intended to allow more comprehensive insight into companies which is now lacking in spite of increases in the volume of information made available by companies and the frequency with which it is produced.

3. END THE DEFAULT PRACTICE OF ISSUING QUARTERLY EARNINGS GUIDANCE - it has long been argued that relying on quarterly earnings statements creates incentives for short term management at the expense of the longer-term, more meaningful measure of sustainable value creation.

4. ALIGN COMPENSATION STRUCTURES WITH LONG-TERM SUSTAINABLE PERFORMANCE - since most current compensation schemes reward  short-term actions disproportionately they fail to hold corporations accountable for the ramifications of their decisions over the long term. Financial rewards should instead be paid out over the period during which these results are realized, and

5. ENCOURAGE LONG-TERM INVESTING WITH LOYALTY-DRIVEN SECURITIES - This practice encourage long-term investment horizons among investors and facilitate stability in financial markets, therefore playing an important role in mainstreaming Sustainable Capitalism.

Wow.

These actions would substantially change they business climate around the world if carried out. What the likelihood of this happening is not known. But to start, the report goes on to describe these ideas in greater detail and includes additional "broader ideas" among which are "integrating sustainability into business education at all levels."

Of course, if one accomplishes that, it will be up to the product designers and manufacturers to execute the business functions at the production level to make this work.

That is, of course, if the company actually "makes something."

The service industry or other non-manufacturing sectors generate less than one dollar of economic activity for every dollar of sector output - unlike manufacturing and agriculture which return more in economic activity than the sector output alone - see the US Government's Bureau of Economic Analysis for more data. Manufacturing and agriculture return $1.35 and $1.20, respectively, in economic activity for every $1 of sector output. Construction, transportation, info tech, finance, etc are less than $1 and as low as $.55 for the retail trade sector.

So, if you want to "leverage" the economy to drive sustainable capitalism - start with manufacturing and agriculture!

Now, if you'd like another perspective including a view of the past and and how we got where we are today and how to become sustainable, I suggest you check out this link to a UK company called RSA Animations. In this animation, titled "300 Years of FOSSIL FUELS in 300 Seconds" a lecture with some very clever animation outlines some ideas for a sustainable world (in spite of capitalism!) I recently came across a number of very interesting animated lectures by RSA while visiting a friend and attending a conference in Brazil. The one I first saw was on capitalism and you can see it by googling RSA Animation and capitalism.

Finally, the Green Manufacturing Facebook page associated with this blog is constantly updated with tidbits on the topic of green manufacturing, anecdotes, examples and stories of interest - check it out too!

The "S" word, Part III

The economic angle.


We've been discussing aspects of social impacts and sustainability in the last few blog postings. I've recently come across some excellent discussions on the interrelationship between sustainability and economics. The gist of the discussions is that there is not a trade-off between a sustainable business model or sustainable manufacturing and profit - one can minimize the impact to the environment and maximize profit at the same time.

Now, I am not an economist and I am cannot attest to the validity of all the arguments. But, the ones we will review here are logically put forward and seem, to me, reasonable. You can be the judge!

Back in September of 2009 in a posting I referred to a MIT Sloan School- Boston Consulting Group Study on "business cases for sustainability." 

In that report the results of a survey of corporate executives was presented listing, in order of importance, the "sustainability-related issues" that companies believe will impact their business organization. These included:

- government legislation

- consumer concern

- employee concern

- concern over environmental pollution

- depletion of resources (non-renewable and renewable, like water)

- societal pressures

- global political security

- population growth

- climate change

In fact, in the figure below, from the report, it is clear that economic/business issues are the main drivers for sustainable business plans, starting with improved brand image reputation and increased competitiveness. 

A second graphic from the report, below, shows which sectors in which employing sustainability related strategies are seen to be most essential to be competitive. Not surprisingly, the "core industries" like automobiles and commodities are leading with services lagging.

So, companies are paying attention to this! 

I recently read an interesting whitepaper by some folks at Enviance. This was forwarded to me by some folks at Enviance I ran into at a meeting on campus. And, one of my former PhD students (Dr. Corinne Reich-Weiser) works with them. Her work for her PhD was featured in a blog posting some time ago as part of a discussion including a "map" of spatial and temporal levels of design to manufacturing to distribution/enterprise effects - this was part of the "low hanging fruit series."

The folks at Enviance sent me a paper entitled "Bridging the Gap: A financial approach to sustainability (http://www.enviance.com/resources/wp-bridging-the-gap.aspx). The paper  "explores the gap between sustainability and business goals and how to bridge this gap by leveraging financially oriented analytics to make environmental issues relevant to finance and sales professionals." This seems like a great idea to me. Putting some numbers on the link between sustainability and business. The paper begin with a description of the problem which they state as - why is sustainability "still so often dissociated from core business goals relevant to a CFO, a Head of Procurement, or a VP of Sales -- addressing common roadblocks faced by sustainability professionals." The paper then proposes a stratify to bridge the "gap" with a financial approach to sustainability. They present an example of a leading aerospace & defense manufacturer.

I am not going to summarize the whole paper here - download it and read it! 

But, there are a few key items worth repeating here.  They review a set of "common roadblocks"
that prevent most companies from managing sustainability without having a clear picture of the things that matter environmentally and financially. These include: 

1. Lack of Analytic Capabilities - challenges with having "visibility into ... true environmental impacts, costs, and risks." 
2. Knowledge creates liability - thinking one is better off not knowing what their impacts are "in case it might create an obligation to act." (wow!) 
3. Too Busy to Think - understaffing and "drowning in hundreds of existing initiatives" and
4. We Already Know 

If any of these sound familiar, I encourage you to read the paper!

The example, which I will not discuss here, offers some illustrations on how to address, with careful collection and analysis of pertinent data, a view of what's important and what is not and who is responsible for it. The image below is from Figure 1 of the whitepaper.

The environmental impacts on the vertical axis of the figure displays the organizational impact on the environment expressed here in monetary terms based on an emission of some number of tons of CO2 equivalent and the price that environmental economists might assign to that on a per ton basis (for example, from a cap and trade program). The paper describes this in detail as well as environmental costs and environmental risk assessments. The categories of impacts range from CO2 through particulates, toxic metals  and to carbon monoxide.

Overall a very comprehensive discussion of linking environmental performance to business costs and value - an important step in sustainable manufacturing.

Next time we'll discuss an equally interesting topic related to this "sustainable capitalism."

And, a reminder to check out our Facebook page for Green Manufacturing!