The Battle for Sustainability

Well, here we are again, another week and another instalment from Sustainability Inc. But first an interesting bit of news; Google spends $200m on another wind farm, now that is another step in the right direction. Despite, I am sure some people thinking this is just a cynical PR stunt. Particularly in light of the bad press Google have received about not paying their fair share of tax and Green Peace’s report on energy use by their servers being the same as San Diego’s, when operating at full strength.  But so what, this is another step in the right direction and sets a good example for big business and consumers. If you want to operate a large energy consuming business, then build a sustainable way of generating that energy. While at the same time developing more energy efficient ways of producing your goods and services.

Here is a link to the full article http://money.cnn.com/2013/01/09/technology/google-wind-farm/index.html

Now back to the usual, if you remember last week we looked at the importance of politics and policy in the sustainability arena. This week it is the turn of economics. There is of importance of in sustainability and that is as one of the three pillars of the triple bottom line that make up a sustainable business. But, in this article I intend to get under the skin of why it is important, looking at how sustainability and economics are at logger heads with each other and why an understanding of the progress being made in the economics/sustainability will aid a sustainability professional in their role.

Firstly, a basic definition of economics courtesy of Investepedia: -

‘A social science that studies how individuals, governments, firms and nations make choices on allocating scarce resources to satisfy their unlimited wants. Economics can generally be broken down into: macroeconomics, which concentrates on the behaviour of the aggregate economy; and microeconomics, which focuses on individual consumers.’

Read more: http://www.investopedia.com/terms/e/economics.asp#ixzz2Itd3lWAf

And now a definition of Sustainability: -

‘Sustainable development is development that meets the needs of the present without compromising the needs of future generations to meet their own needs’. (Brundtland, 1987)

Economics looks at the way scares resources are turned into goods that are consumed by the market, it does not look at how these stocks, either natural or human can be replenished which would support the consumption for future generations. Also, by economic definition it is only when something becomes scares that it becomes valuable. Meaning that sustainability works against economics, because it looks to make resources renewable.

The fundamentals of economics have not been rethought since the time of Adam Smith and ‘The Invisible Hand’ some 200 years ago, taking regulations, human culture, interaction and quality of life as given. Economic theory needs to be updated to take into account these new factors and this is where ‘sustainable economics’ comes in. 

Sustainable Economics is trying to be more inclusive, by including these factors, human, social, quality of life, see diagram above. Through doing this it also provides a good framework, which can be used to help business to become more sustainable, by meeting Government regulation, and abiding by new initiatives, improving the lives of its workers, which can boost productivity and create saving for the business. The framework can also be used as a tool to assess both sustainable socio- economic impacts the company would have on a State if it chooses to invest there. Which can give business leverage in securing favourable terms to invest in one state over another. Thus freeing up funds to be used to for investing in sustainable technology and practices at that plant, site etc.

Interesting Reading:

The Big Idea: The Sustainable Economy, (2011)

http://hbr.org/2011/10/the-sustainable-economy/ar/1

Harvard Business Review

Toward an Economics of Sustainability, (1997)

http://web.missouri.edu/ikerdj/papers/econ-sus.htm

World Watch Institute

http://www.worldwatch.org

The Institute of New Economic Thinking

http://ineteconomics.org

Politics of Sustainability!

Last week in Sustainability Inc., we listed the skills sets and areas of knowledge needed for sustainability professional, with a brief explanation of why the skills sets were important. This week I am going to start looking into the areas of knowledge and why they are important. The first to be unpacked will be politics and policy, which in my view are very important areas for sustainability professionals to have an understanding of. In this blog I will attempt to explain not only why it has become important, but I will also highlight some relevant areas of policy.

But first a quote that saliently illustrates the political link between Corporations, Society and Government: -  

“The important thing for business and society at large to understand is the limit to voluntary action, which is the point where government need to intervene. If we are to live within the earth’s capacity and share its resources equitably, economies must be transformed. That cannot be done by business alone”  (Cowe R and Porritt J, 2002)

Since this was written the politics have sharpened, with the global economy boom and spectacular crash in 2008, which has created mistrust with the financial sector and big business. Companies have also started to move into markets in the developing world, to create new revenue streams and increase their profits, which brings with it a new political dimension. The growing global populations and the industrialisation of developing countries is adding to pressures on natural resources which is increasing the cost to consumers, as the search for new reserves goes to new parts of the globe, creating more political tension and corporate disasters. Lastly, and by no means least is the increase in natural disasters and extreme weather incidences, which fuels the environment and climate change debate.

The effect this is having on society is dramatic, people are more aware of the environmental impact they are having on the world and want to do something about it, they are concerned about human rights and how people are treated across the globe.  It has created much cynicism about the corporate world and in the information age it is possible to find information on a company’s environmental record and working practices and if these are deemed unacceptable a company’s reputation can be damaged through the use of social media. The knock on effect has been that consumers want to buy products from companies that operate in a responsible way and shun those that do not.

This has lead to business and politics becoming ever more interconnected and because society is more engaged, so have politician. Which in turn brings new white papers, policy ideas and ultimately Government to intervene and facilitate the necessary shifts in behaviour to start answering the big questions around use of natural resources, the environment, energy generation and ethics.

Governments and International organisations have set to work creating a raft of policies and codes of practice for companies to follow. So of which are actions such as health and safety and others being the disclosure of information, creating a carrot and stick.  

Policy makes are aware of the power the consumer has over companies now, so they rely on public opinion as a stick and an increase in revenue as the carrot. An example of this type of policy is in the UK, where a new regulation came in in 2012 to help with carbon emission targets as set out in the Kyoto Protocol. Companies must publish their carbon emissions on an annual basis, not reduce them. Politicians are then able to say that they are not overly legislating business, with the aim being that companies reduce their carbon footprints voluntarily. The last, two voluntary codes of practice I shall highlight is the UN’s Global Compact, (2000) and Guiding Principles on Business and Human Rights (2011); these are voluntary guidelines for companies to follow with some of the largest Corporations already registered.

There are also policies in the development stage in renewable energy field, which when implemented could offer could encourage business down a more renewable path through the use of incentives and grants and more aggressive fines if targets are not met.

This is a brief outline of the politic to sustainability and a description of the types of policies and codes of practices, which are currently being drafted. The amount of legislation that will follow on sustainability will only increase. It will be up to the Sustainability Professional to not only interpret these rather opaque documents for the company they serve, but then be able to implement an action plan to ensure the company is compliant. With a view to saving the business revenue, ensuring all potential grants and incentives are gained and working within the supply chain to ensure reduction in energy.

I hope that this goes some way to explain the complexities of sustainability and why it is important for the professional to have a grasp of politics and policy if they are going to add value to a business.  

Some interesting areas of policy for Sustainability:

UN Global Compaq: -             

http://www.unglobalcompact.org/

Guiding Principles on Business and Human Rights: -      

http://www.business-humanrights.org

IFC Sustainability Framework: -

http://www1.ifc.org/wps/wcm/connect/Topics_Ext_Content/IFC_External_Corporate_Site/IFC+Sustainability/Sustainability+Framework/Sustainability+Framework+-+2012/

The Voluntary Principles on Security and Human Rights: -

http://www.ipieca.org/publication/voluntary-principles-security-and-human-rights-implementation-guidance-tools

Skill Sets and Knowledge

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Happy New Year and welcome to the first post from Sustainability Inc. for 2013.

In my last post at the end of 2012, I started to talk about the different skills and areas of knowledge that a practitioner working in Sustainability, or as I like to call it sustainable business, would need. I have listed the disciplines here, as a reminder and for reference purposes: -

Skills required:

1. Project Management:

2. Communications

3. Strategic Management
4. Risk Management

Areas of Knowledge:

1.    Politics/ Policy: Frameworks/ Environment/ Human Rights/ Communications

2.   Economics: - more specifically macro- economics

3.   Operations Management

4.   Finance: - Corporate Finance/ Strategic finance,

5.    Technology: - Non technical understanding/ Strategic Management

6.   Innovation: - Consulting methods

In this blog I shall briefly outline why the three skills are important for a Sustainability Professional and then over the next few post I shall take topics from the ‘Areas of Knowledge’ and explain why they are important for someone working in Sustainability and how

Skills

The three skills are not the only ones required, but they are in my view to of the most important to enable someone to function correctly in a sustainability role.

1.    Project Management is very important because a Sustainability Professional would have to be able to roam across all departments of a company putting together projects and successfully managing them to conclusion. 

2.   Communication is important, the Sustainability agenda and the subsequent recommendations it generates are new concepts for businesses, which have to be explained clearly to all stakeholders of a company. For a sustainable project to be implemented successfully it is important that stakeholders have a clear understanding of the proposals in the project for a number of reasons: -

·      Stakeholders would be able to make recommendations to improve the proposals.

·      Good communication increases the chances that the project will be talked about across the company, creating better buy in and increasing its chances of success.

·      Good communication is also more likely to influence stakeholders to adopt the proposals and see the project implemented. Especially the Executive Management Group who need to understand how the project will enhance the strategic direction of the company, improve productivity and increase sales and importantly approving the project.

·      Communicating the sustainability message to the company’s customers and the press is important. As consumers over the last 15 years have become more selective about which companies they purchase from. There is evidence that companies that engage in sustainable practices have seen an increase in their profits and they are less likely to receive negative press.

·      Communication is also an important aspect of project management, areas such as, influencing and communicating the successes of a project. This is not an area I intend to cover in any depth, as it is part of the discipline of project management. 

3.   Strategic Management is an important skill required because Sustainability is a strategy that must be implemented into a company from the Board to all areas of the business. Firstly, the strategy has to be developed, ensuring it meets the required goals of the organization, both internally and externally and then it must be implemented across the business. 

This is a brief explanation as to why these skills are important for a Sustainability Professional. There are others skills, which are needed, but they are also required in any roles, as such I shall not dive into them.

Over the next few post I shall take topics from the ‘Areas of Knowledge’ and explain why they are relevant for someone working in Sustainability

Responsible Or Irresponsible: That is the Question?

Over the last few days I have been thinking about what was said to me at a dinner I attended last week. The companion seat on my left and I started talking about Corporate Social Responsibility, and he made a very interesting observation. ‘It is not that companies want to be responsible, it is more that they do not want be irresponsible.’ This started me thinking, was it that Corporations currently do not want to be responsible due to a perceived impact that this can have on the productivity of a business or is it because they do not have the innovation skills to conduct business in a responsible manner and are unaware of the benefits of being responsible, which is a pro active approach. Where as not wanting to be irresponsible is passive approach, taking into account important issues such as health and safety, human rights and environmental issues, but it does not seek out innovation and new methods to conduct business.

My companion sat on the left who made this remark, had spent many years in the real estate industry followed by 20 years working for a large investment bank, doing real estate finance on both sides of the pond. So he had a good understanding of the corporate psyche and well placed to comment on it.  At the centre of his argument was that Corporations are businesses. Their ‘raison d’etre’ is the production of goods and services, and the generation of profits for their shareholders, who, in the majority of cases, invest in a company for profits and long- term growth of their capital investment. This in turn places pressure on the executives running the corporation to run the business in the most efficient manner or risk losing their jobs. So, this is the main priority, and within these parameters they conduct business in the best way so that they are not ‘irresponsible’. But, if they could conduct business in an ethical and sustainable way that would not affect their two main obligations they would. After all the executives of companies live in the same global environment as their customers and are equally affected, after all they are also customers to many companies.

So the questions that follows is. How do you enable a Corporation to shift from not wanting to be irresponsible to wanting to be responsible? The shift to not wanting to be irresponsible was driven by external factors, the consumer, media and society at large and these will go some way to help the drive towards wanting to be responsible. Investors are starting to have an impact; they want to invest in companies that they feel are acting responsibly and conducting in what I like to call ‘Sustainable Business.’  They have the potential to enable the shift, but currently they are in the minority.

The real game changer will come internally within the company, which I alluded to in the introduction. Innovation in sustainability from within will enable a business to become responsible because when it is applied correctly sustainability has the potential to improve productivity, increase revenues and reduce overheads, only if it is implemented properly. Thus, not only making their products more appealing to consumer, but also making the company more attractive to investors.

 

To enable this shift to responsible to take place, a company will need to be fully open to innovation and new approaches to doing things. They will need to have a team of in house consultants or Sustainability Department, who have an understanding of technology, politics and economics, operations, finance, project management and communications. This is a very broad skill set, but for sustainability to be embedded in a company, and particularly if it is going to be responsible sustainability, it has to cover not only the supply chain and operations, but also how the company expands, may that be in one country or across the globe in multiple locations. How it communicates with stakeholders, both internally and externally and how technology can play a part not only in communication and energy saving, but also in how to drive down costs in the supply chain. It is an holistic approach that cannot be completed without all parts being involved, to use a cliché “it is greater than the sum of its parts.”

Corporate Governance and The Short Falls of Current CSR

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This paper looks Corporate Governance Structures and Corporate Social Responsibility (CSR).  BP will be used as a a case study, using the Deep Water Horizon Blow out in the Gulf of Mexico in April 2010 as an example of the shortcoming of CSR in this ever changing relationship between multinationals and their internal and external stakeholders and is by no means a direct criticism of BP. The paper will be broken into three parts, the first part will explain what Corporate Governance aims to achieve and describe the two predominant models used. The second part will look at which structure BP has in place and the third part will look at the wider responsibilities of CSR. 

Corporate Governance is the systems put in place to control and direct a Corporation.  (Cadbury Committee, 1992) It is concerned with managing the relationships between the management team, the board, shareholders and stakeholders. Its aim is to prevent any conflict of interest between the stakeholders in the company, with the focus being on the relationship between the shareholders, the principle, and the management team, the agent. Ensuring that people within the business can be held accountable. (Cadbury Committee, 1992) Corporate Governance tries to ensure that a company is controlled in a responsible and transparent way. With the aim of ensuring the future success of the organisation and instilling confidence in shareholders and capital market investors.

There are two dominant models, which are currently in use, both aim to provide the necessary mechanism, but vary slightly from one another, the first is the Rhineland model, which is a two-tier system. Consisting of a Supervisory Board that is made up of non- executive directors who represent the shareholders and employees and an Executive Board that is responsible for the day-to-day running of the company. The Supervisory Board is also responsible for hiring the members of the Executive Board and signing off any key decisions made by them.  (Hopt, 1997)

The second model is the Anglo American Model, which has one tier structure, consisting of one Board, which comprises of Executive from the company and Non- Executive Directors, who are nominated by the shareholders. There are more Non- Exec Directors on the Board and they chair key committees such as audit and compensation. The Chief Executive of the Company also holds the position of Chair of the Board, although, this is much more common in the United States than in the UK, where the Chair of the Board is a separate individual.  (Bowen, 2008)

The BP has adopted the Anglo- American Governance structure, as they are a UK registered company. They have single Board on which four members of the executive team including the CEO sit along with nine non- executive directors and the Chairman. As mentioned previously it is common in the UK for the CEO and Chairman to be separate individuals, as is the case with BP.  Along side the board the company has six committees, the Remuneration, Audit, the Safety, Ethics and Environmental Assurance Committee and finally the Chairman and the Nomination and Results Committees. There is a sixteen page document on the website, entitled ‘The Board Governance Principles’ that explains exactly what is expected from the Board and the Non-Executive Directors and since the Deep Water Horizon Disaster they now have the Gulf of Mexico Committee, which is tasked with managing the companies social responsibilities vis a vis the Oil leak in 2010. (BP, 2012)

As BP is one of the largest companies in the world it is expected that they would have a very robust Governance structure in place but prior to the oil spill in the Gulf of Mexico the companies record, particularly on health and safety was very disappointing and the question has to be asked. Did the Board properly oversee the management’s effort to embed a culture of safety? Driving the safety policies deep into the culture of the company. Even before the Gulf of Mexico, BP had serious high profile incidences, such as the Texas Refinery explosion in 2005, killing 13 workers, and the failures in Alaska. The inquiries that followed pointed to serious breaches in the health and safety management within the company. 

In the immediate aftermath of the Gulf of Mexico disaster it was becoming clear that those in charge of the rig had cut corners in health and safety to get the rig operational. This illustrates that the management team within the business had not learned lessons from the previous incidents and had not implemented the correct safety policies within the organisation.  Following on from this, what was the Executive Board doing, where was the oversight from the non-executive directors, ensuring correct procedures where followed and implemented into the organisation.  All of this points to systemic issues within company, from the top right through to the operational management. The Governance was clearly inadequate and not providing the correct oversight, the Board were not doing their duty to the rights and interests of the shareholders and stakeholders and the value of the stock reduced by over 50%, dividend payments were stopped and the company has had to pay out on the region of $20 billion in compensation (Heineman, 2010) 

The Gulf of Mexico disaster also raises interesting questions about what is CSR and who are the stakeholders? It was not only the employees and shareholders who were affected by the disaster, more importantly the local communities in the immediate Gulf area were far more affected. So where does a company’s CSR end and what responsibilities does BP have to these stakeholders? Clearly the US authorities decided that they had a large responsibility. The disaster has had an impact on the area that will last for years to come, both environmentally and socially.  

This illustrates that CSR must now cast its net wider to take into account their social responsibility to the wider stakeholders affected by the decisions that the companies make.  Clearly, the current Anglo- American model, as can be seen in the case of BP, has been inadequate in Governing the company to ensure that it runs its business interests in the correct manner, both to its shareholders and all stakeholders. But, by adopting the supervisory board from the Rhineland model, would this add the necessary oversight and new perspective needed? This would certainly go some way to correctly the problem, as it would take the employees views into account more and give shareholders more influence. Although, it still leaves out the external stakeholders (wider society) whose interests will need to be taken into account. How this role would be implemented would need to be considered by the company and the Government, although there would be a serious risk of over legislating Corporations in this area, which is not something that should happen, as interference from the State can slow down a company.

What companies need to do is to find a way whereby they can incorporate the needs the of external stakeholders into there Governance structure and thus provide a more holistic CSR. In the case of BP this would not have only given them a wide perspective, but it would have also saved their shareholders $20 billion. This case illustrates why companies need to develop a better CSR, or as I said in the introduction a sustainable business strategy, which highlights the elements that need to be understood, who are the stakeholders both internal and external, how important are they to the business? The Government and policy, health and safety, and what role technology can play. It is worth mentioning at this point that these factors do not apply to every sector of  industry, the commodities sector, i.e. Oil and Gas and mining are probably the sectors that need the most robust and holisitc CSR policies, this does not mean that other sectors should not follow suit.

Appendix

BP.com Governance Principles 2011

((Hopt, Klaus J., "The German Two-Tier Board (Aufsichtsrat), A German View on Corporate Governance" in Hopt, Klaus J. and Wymeersch, Eddy (eds), Comparative Corporate Governance: Essays and Materials, de Gruyter, Berlin & New York, 1997,

Bowen, William G, The Board Book: An Insider's Guide for Directors and Trustees, W.W. Norton & Company, New York & London, 2008

Heineman, B. 2010 http://www.businessweek.com/managing/content/jul2010/ca20100727_717276.htm
 

The Cadbury Committee, 1992

Introduction To Sustainability Inc.

This blog will survey the Corporation's sustainability role in modern society. Looking at where Corporations Social Responsibility (CSR) came from and how it is evolving to stay in touch with a more complex and inter- connected society. Where the consumer is now interested not only in the price and quality of a product, but how the Corporation operates both ethically and environmentally, as a type of corporate citizen. 

CSR was born out of Corporate Governance in the 1960's and 70's, where companies implemented policies and structures to ensure that they operated in compliance with the law, ethically and within international norms. Originally, it was concerned with keeping in check how executive managers operated, looking after the interests of "stakeholders", i.e. employees and investors (shareholders). Then, in 1984 with the publishing of an influential book Strategic management: a stakeholder approach, by R. Edward Freeman, 'stakeholders also included the external, i.e. customers, the environment and communities and any other in the public sphere that come into contact with the Corporation, thus giving rise to modern understanding of Corporate Social Responsibility.  It is a guide that Corporations can follow, to illustrate to their customers what they are willing to uphold. 

CSR certainly has its critics, with some stating that it can have a detrimental effect on the profits of the Corporation and detracts from the economics role of business. Others state that it is simply window dressing to pre-empt any government regulation that may come in and finally, that it is simply PR to make a company seem 'in-touch'. 

This is a very simplified overview of history and development of Corporate Social Responsibility and it is not my aim to look backwards adn diver into this further. My aim with this blog is to unpack with the aid of examples of best practise from corporations and academics how CSR will evolve in the future, what it will encompass and illustrating this with examples of what some forward thinking companies are doing now. Also, I will be looking at incidences that have occurred that highlight why CSR  is now good business.  But, first a little about myself, I have spent a number of years working for the UK Government on Sustainability and I have an Undergraduate Degree in Planning with a specialisation in Environmental Planning, I also have a Master’s Degree in International Politics and I have recently completed an MBA, which saw me studying across 3 continents, the UK, China and the USA where my specialisation was Development Economics, Innovation and Strategy. 

My previous work experience and qualification should help to clarify that I am not looking at CSR from the perspective of an 'Eco Warrior or Tree Hugger', no offense intended. But, rather I intend to explain how CSR is evolving into what I would call 'Sustainable Business Practice'. That encompasses the innovation of the Corporations business model to generate more revenues; it views assets such as buildings and computers to name but two, from a new perspective that can also impact the bottom line. It should also include an understanding of, and incorporation of government policy, politics and culture, particularly in light of the emerging markets cross the the globe. Finally an understanding of technology and the advancements being made in sustainable technologies will be essential in this new business structure. 

Effectively, it will become a new holistic and strategic way of doing business in the 21st Century, where Business will measure their performance across the 'Triple Bottom line': People, Profit, Planet, which is something that is now coming into existence. What is needed though is an education that this is a viable and revenue generating way to do business and not some crazy marketeers branding project, but that is another story!