Category Archives: business case for sustainability

Unpacking Lex on solar power

Today’s FT has a short Lex column on solar power (subs). I think it’s worth unpacking what it has to say.

First, the good news. Solar is in the new because investment guru Warren Buffet has committed a further $2.5bn to the industry through his MidAmerican Energy Holdings. This is part of a wider trend, with shares in solar-panel makers rising on the back of increased demand from China and US tax credits surviving the fiscal cliff.

The better news is that Lex backs Buffet’s judgement that the solar industry is a good long-term investment.

But now the bad news. Lex points out that the  global industry is still dependent on subsidies, and those subsidies are subject to politics. Here in the UK the government unexpectedly cut the feed-in tariff, which caused an almighty kerfuffle – not so much because the industry should always have a subsidy but because the announcement seemingly came out of nowhere. Regulatory uncertainty hits companies and investors.

What Lex doesn’t mention is that the reliance on subsidies is a phase. New technologies go down a cost curve, where the first few are expensive but the price goes down as there is economies of scale (making lots is cheaper than making a few) and learning effects (what you learn from making the first means the second is easier). Most observers expect the price to continue to go down, McKinsey expect underlying costs to go down by 10% per year until 2020 (subs).  In some parts of the world solar has already reached grid-parity.

Lex says that the true cost of solar must also include that of storage capacity (for instance batteries). Now, I think that might be a little out of date, or rather, a little narrow. Certainly the intermittent nature of the energy means that solar is not sufficient by itself. But doesn’t mean that each solar assembly must have a battery. It means that any electricity system has to plan how to provide energy throughout the day and with varying weather. That might mean storage in batteries or fly wheels, it might mean a mix of energy sources, it might mean a smart grid where extra generation in one area compensates for a shortage in another. Most likely we have a mixture of storage, sources and smart grid.

Sometimes people imply that solar isn’t a good investment, so it will never be significant (Lex doesn’t). The best response to that point is airlines. A lousy investment – losing 20% of value since 1992 compared to 200% gain for the wider market – but clearly a vital part of the global economy. (Also, an argument for being careful in markets with large political risks.)  The difference here is as solar gets cheaper the politics will be less important, while the over-capacity will remain as long as governments keep wanting their flag carrier.

Finally, Lex points out that “a supply glut mean that most manufacturers will not return to profitability any time soon” and that short-haul investors are “in for an Icarus moment”.

So, long-term investors will be rewarded, and short-term investors punished. Why, is that an argument for investing for the long-term? What a good idea!


What can we learn from the fourth anniversary of M&S Plan A?

Marks and Spencers are making great progress on Plan A. What can learn from the fourth anniversary event last week? Marc Bolland is committed and wants Plan A to part of how M&S grow globally. The next phase will be about engaging the consumer and getting emotional traction. And, to get a return you must take risk.

Last Thursday 7 July I was one of 150 plus sustainability folk at the Plan A Progress Event. (Full disclosure: I was there because Forum for the Future works closely with M&S. This post contains insights based on what was said in public session.) All the way back in 2007 M&S launched Plan A “because there is no Plan B”. Originally there were 100 commitments, organised by 5 themes: Climate Change; Waste; Raw Materials; Fair Partner; Health. The headline targets were ambitious, being carbon neutral and no waste to landfill by 2012. When launched, M&S didn’t know how they would deliver 30 or so of the commitments, and thought it would cost £200m over 5 years. In 2010, Plan A was revised with more commitments and an ambition to be “the world’s most sustainable major retailers”.

The combination of broad range and ambition makes Plan A part of M&S’s brand positioning with customers “you can trust the quality and value of everything in our shops”. Many other supermarkets have a different positioning with customers – “everything you want is here” – and so tend to have a strategy based on ‘hero products’.

So, what did we learn at the progress event?

Well, at a basic level Plan A is being delivered. They have already achieved 95 commitments, are on-track with 77 and are behind on 7. (More detail in their How We Do Business report 2011.) The presentation from the Head of General Merchandise (I didn’t note his name – oops!) was particularly good. Some 70m items sold last year with at least on Plan A improvement. Increases in wool price because Australian farmers are now breeding sheep for meat for the Asian markets. The use of recycled materials decouples M&S from the volatility and risk of commodity market prices – a big thing as we enter a decade of increasingly constrained resources. Also, Plan A is added £70m to the bottom line last year (which is a bit less than 10% of underlying profits before tax), mainly through energy efficiency savings. So, lots of nuggets.

More fundamental for me was Marc Bolland. He became CEO in May 2010. He could easily have seen Plan A as Sir Stuart Rose’s thing and have quietly killed it. But he’s done the opposite (although he did joke that “Stuart did the plan, now I have to deliver it”). His presentation at the start mapped out his vision for M&S: an increasingly global multi-channel retailer that is trusted. He positioned Plan A as vital to that growth, especially in why consumers can trust M&S but there were also hints about Plan A creating a resilient supply chain. An audience question asked how could M&S take Plan A global when each market has quite different customer expectations. Bolland was clear that Plan A was part of going global, yes it would need to flex. But he saw it as an opportunity.

What he kept coming back to was the need to engage, especially with the consumer. He made it clear that there were a number of plans to get emotional traction with customers. So, I guess we can expect some ‘above the line’ advertising or marketing. As M&S raises its game, I guess others will have to follow.

The other thing we can learn from Plan A is that to get a return you must take risk. M&S launched Plan A without knowing all the answers, and thinking it would cost them. If they had waited until there were definitive answers and a proven business case, well, we’d still be waiting. Many of the companies I work tell me that they find the business case by trying stuff out, and also that the rewards are far greater than they had thought. This matches with MIT / BCG findings that the ’embracers’ seize advantage. This is a central difficulty for many sustainability change agents: how to get permission to do stuff when you can only prove the business case by doing stuff. For some thoughts on how to overcome this see the Better Decisions, Real Value toolkit.

Choice quotes from the Unilever Sustainable Living Plan launch

Unilever launched its Sustainable Living Plan yesterday. The London launch had some interesting quotes, especially from the CEO Paul Polman, which signal future directions for business and sustainability.

Yesterday I was at the London launch of the Unilever Sustainable Living Plan. It has rightly garnered lots of coverage (see the Google news search here, which has lots of coverage in Indian newspapers). Forum for the Future, where I work, has been involved in the plan. Personally I’ve had little involvement, but too much to comment on the plan directly here. Instead I thought I’d pull out a few quotes from London launch. I think you can get to a recording of the webcast here, but to be honest it’s not that clear.

“We cannot choose between [economic] growth and sustainability – we must have both” Paul Polman, CEO. The central feature of the plan is ‘decoupling’ – growing the revenues without growing the environmental impact. Economic growth is one of those polarizing issues in sustainability circles. Many deep-green environmentalists believe that growing economics require growing material throughput and energy use, and inevitably drive reduced environmental quality. Therefore, growth is a terrible thing. Conversely, mainstream opinion has been adamant that growing economies are needed to grow people’s welfare and keep them employed in jobs. Therefore, growth is a wonderful thing. The problem is that both opinions may be right. Tim Jackson calls this the ‘dilemma of growth’ in his work on Prosperity without Growth.

The plan puts Unilever in the vanguard of finding a way through the dilemma: growing welfare and economic value without growing environmental impact.

“Sustainable business must make money”, Jonathon Porritt, Forum for the Future. A point from the floor implied that the only true demonstration of sustainable motive was to lose money. I come across this a lot: to prove your motive is honest it must cost you. In the next breath, people wonder why there is no business case. Well, you’ve just pre-defined sustainability as a cost! This is the sort of double-bind that traps people.

“Soap is the most cost-effective health intervention. Governments don’t get people to use it; marketing does.” Oliver Morgan, London School of Hygiene and Tropical Health. The launch made a lot of Unilever’s heritage bringing soap, and therefore hygiene, to the masses in late Victorian England. This quote reminded me again that some of the best development ‘interventions’ are small things that we take for granted. Also, as much as I think health is a public good which is best delivered by public bodies, these basics are best done through the market. Can anyone say they don’t want Unilever to make a profit from encouraging people to wash their hands?

“We must attract the right investors. If you buy into our approach to long-term value creation… then invest in us. If not, I respect you as a human being, but don’t invest in us.” Paul Polman, CEO. If only more companies took this approach. There is a big investor case here to match long-term value creation with long-term liabilities like pensions. If Unilever can convince the big funds then they will have done the world a massive service.

“[Achieving these goals…] is a business model that you develop over time.” Paul Polman, CEO. Two years ago only one person I know was saying ‘business model’ with respect to sustainability (hello Sally Uren, Deputy CEO, Forum for the Future). Yesterday Paul said it at least 5 times. I think companies are reaching the limits of what can be done through product or service innovation. They need to innovate the fundamentals of how they create and capture value, which means innovating business models.

There were several other themes – the need to enrol stakeholders in collaboration; Unilever saying they didn’t have all the answers; questioning from the audience whether Unilever can really deliver these ambitions – but these are the quotes that stuck with me.

The challenges of answering “Does CSR matter?”

Good luck to a new research alliance looking at whether CSR can deliver competitiveness, jobs and environmental protection for EU policy makers. They’ll need it – their research has big challenges of definition and causation.

Yesterday I spent a day at the first stakeholder roundtable of the CSR IMPACT research project. The alliance of 16 universities and research institutions across the EU has 3 years to answer a simple question: does CSR matter? Or, as they put it:

  • what benefits and impacts does CSR actually bring beyond company borders to the economy and society at large?
  • How can managers, policy makers and stakeholders better measure and evaluate its impacts?
  • What does this mean for smart mixes of public policies and corporate strategy?

All of which is very laudable. Throughout the day I was struck by the immense challenges of definition and causation they face.

1. what is CSR? They chosen to use the European Commission definition, sensibly given they are the intended audience for policy recommendations. See if you can spot the problem with it:

the voluntary contribution of business to competitiveness, social cohesion, and environmental stewardship.

Well, the problems are legion. As Nobel prize-wining economist Amartya Sen says in The Argumentative Indian, ‘within the limits of feasibility and reasonable returns, there are substantial choices to be made.’ Isn’t very nearly everything a company does voluntary? Even with compliance, there many be many ways of complying with the law.

The researchers have tried to overcome this by creating a conceptual framework that proposes a combined definition and  causation: sustainability trends drive a CSR response (eg a motivation to do something about climate change), which drives a CSR strategy (“let’s do this”), which drives CSR performance in the firm (reduced carbon emissions, reduced costs), which in turn drives CSR impact on the rest of society (environmental protection).

But the problem of separating the voluntary CSR response from the involuntary response remains. You could take a narrow reading: the CSR strategy has to be called a CSR strategy at the time. But then you would miss out on lots of responses to sustainability trends that happen in the mainstream of the business without ever being labelled CSR.

Or you could take a wide reading: the CSR strategy is truly all responses to sustainability trends.  Then you’ve just changed the definitional challenge to ‘what counts as a sustainability trend?’ It could be everything the company does in response to an external stimulus. That would make CSR into good management. Good to have that validation, but not good if you’re trying to identify the particular impact of CSR.

2. what is competitiveness? A few years ago I published a booklet on sustainability and competitiveness for the ICAEW, Europe’s largest accounting institute. In the research I discovered that there is no agreed meaning for competitiveness. It is applied liberally for companies, cities, regions and countries but is very nearly meaningless. If you don’t believe me look at this FT article by renowned economist John Kay.

If you’re measuring a firm’s competitiveness, why not just measure its returns on investment or economic value add? If you’re measuring the competitiveness of a country why not just look at GDP growth? If you’re measuring the contribution of a firm to EU competitiveness, why not scratch your head a lot?

3. how prove causation? Finally, there is the challenge of causation. How can you prove that CSR has driven some aspect of corporate performance and that performance has created some direct impact and link that direct impact to a ‘meta-impact’ when your definitions of CSR and meta-impact are so fuzzy?

Obviously, the researchers are aware of these challenges. They may even overcome them. I’m struck that they will be reporting in March 2013. By then it will be 4 years since they first framed their research. An awful lot has happened in the last 4 years of CSR – not least, a shift to ‘sustainability’, not ‘responsibility’ (in my view).

As i say – good luck!

Stephen Green on Corporate Philanthropy: cynical conservative or careful radical?

At Monday night’s inaugural Pears lecture, HSBC Chair and UK government minister-in-waiting Stephen Green argued for a revitalised form of Corporate Philanthropy, where all companies asked themselves “how do we contribute to the common good?”. I came away not sure if he is a cynical conservative or careful radical.

The first day of November was also the first Pears Business School Partnership lecture at London Business School. The lecture was given by Stephen Green, chair of HSBC, lay preacher, author and soon-to-be UK Minister of State for Trade and Investment. He gave a subtle speech on how companies need to respond to shifts in their operating environment. I agreed with the shifts he described, but was troubled by how he framed how to respond.

Anyone who has to frame the business case for sustainability should pay attention to how he explained the shifts in operating environment following the financial crisis.

– Public opinion has changed, so companies need to acknowledge wider social needs and expectations.
– Global challenges have a radically different nature and vast scale, so no one stakeholder group can solve them alone
– The financial crisis exposed short-term thinking in boards and investors.

The implication behind the specifics is  that the context in which business makes money has changed. It is not a question of taking on responsibilities for moral reasons. He is arguing for an enlightened self-interest, where companies create a better future so they can be more successful. This confirms the notion of a leadership business case I developed as part of Better Decisions, Real Value – companies can lay the foundations for a sustainable business context by aligning the drivers of business success with the needs of society. In this way they can create more ‘win-wins’ where sustainability and profitability go hand in hand.

What I found strange was Green’s proposed response: we must create a new vision of corporate philanthropy. He wants business to expand move philanthropy beyond just giving to the favoured charity to a new mode of thought that considers “how the company contributes to the common good through its business model”. At various points he equated this with corporate sustainability, community investment, social investment and a few other buzzwords (so companies must “integrate community investment into the core business model”, whatever that means).

What troubled me was  making corporate philanthropy do all the work.  Why bother giving a well-worn phrase such a radically different mean from the one in current use? Yes, the original Greek meaning had something about a love of humanity for greater production. But that was a long time ago. Today’s mainstream business commentators would at the least be sceptical, especially ones who believe the business of business is business. Why bother using “philanthropy” when sustainability is coming to mean a lot of what he said?

My immediate reading was not generous. One critique of philanthropy is that it addresses the symptoms but not the cause. Indeed, the reason why some people and companies have such concentrations of resources and power is because of the status quo. Why should we expect them to change it? So, at first I concluded Green is cynical conservative: here’s is a banker and future minister appropriating just enough of the language of change to be convincing but doing so in a way that leaves the fundamentals untouched.

But on the way home I realised there is a second reading: careful radical. Let’s take a generous reading of his motivation. He knows business people are a sceptical bunch. The evidence of environmental crisis and failure of social systems just bounce off their cognitive frames. If he comes out with all guns blazing sustainability his peers will just put pigeon-hole him as ‘gone dotty’.

Could using corporate philanthropy be a wise and far-sighted attempt to use ambiguity to create longer-term change?

Even if he does have that intention, I’m afraid that I don’t like it. The Met Office publication on Informing Choices last years said we need to have a peak of global emissions in 2020 and 5% reduction each year to stand a 50:50 chance of avoiding dangerous climate change.

That’s a lot to do in a short time.  Using ambiguity for longer-term change is simply not enough.

What lessons can other companies draw from Jeff Immelt’s London Lecture?

Jeff Immelt has driven ecomagination forward at GE for 5 years. Other companies can learn the value of a big, strategic business case and more from his recent talk to the Cambridge Programme for Sustainability Leadership.

Last Thursday I was fortunate to see Jeff Immelt, CEO of GE, speak at Cambridge Programme for Sustainability Leadership‘s London Lecture. Ecomagination galvanised corporate sustainability when it was launched 5 year ago. Immelt had five lessons for his audience, which I will give in a second, but there were lessons other companies can draw.

A. Have a big, strategic business case for sustainability.

Immelt started by saying there are four pillars to a competitive country: education, finance for entrepreneurs, affordable health care and clean energy. Of course, GE is a big player in the last two (with healthymagination mirroring ecomagination). He also said that “clean energy is one of the biggest opportunities we will face in the coming decades”.

This is not a business case based on marginal cost efficiencies or slightly reduced reputation risk. This is a large, strategic case which says: our core capability is innovation, and our core assets are across the spectrum of energy intensive industries. Let’s go out of create the market, and drive our revenues, through long-term R&D commitments.

Ecomagination is part of how Immelt is reinventing GE.  When combined with healthymagination, he has re-directed the focus of R&D. He is also reinventing where it happens by turning to India and elsewhere in a something called ‘reverse innovation’ (requires subscription).

B. Rebrand the public debate to be about jobs, growth and energy security.

The way Immelt frames the business case above and his lessons below is about appealing to today’s political debates. During the speech he announced that GE were repatriating manufacturing for one area (my pen had run out, so I couldn’t write it down!). I’m willing to bet that those repatriated jobs hit GE’s profit a bit in the short-term. But the longer game is about retaining faith in globalisation. The Great Recession has brought to the surface fears about the impact of globalisation on jobs and incomes in developed countries. Those anxieties are one driver of things like the Tea Party. Protecting globalisation means addressing those anxieties.

He also asserted that shale gas was clean energy, a surprise to the former oil & gas executive I was sitting next to. The driver here is energy security. If GE can create a slightly less horrible extraction process (‘fracking’) then the US government and consumer will be very grateful, the Saudis and President Chavez of Venezuela less so.

C. Be prepared to go without government support or regulatory certainty

Because there won’t be any of substance. He was clear that government could be a catalyst, and that the major policy options on clean energy were well-known: carbon price; global standards on what counts as clean energy; government support from initial technology to commercialisation; and financing for infrastructure.  But he didn’t think it would happen any time soon in the US, and with the Republicans on track to win the mid-term elections who can blame him.

Here are the five lessons that Immelt had:

1. invest broad and deep in innovation. This is good advice at the start of getting into a field, when it is unclear which approaches will succeed . Of course, GE is a conglomerate which is based on a portfolio approach, so it will always do this. Other companies will need to look for more partners earlier to get the breadth they need. This approach also needs quick learning (fail early, and fail once) if you are to not waste resources and create baronies that simply endure.

2. sustainability engages the ‘extended enterprise’. He said that employees were enthused and customers and suppliers like it. This fits with what other companies tell me.

3. clean energy creates jobs and economic competitiveness. He said they had already created 50,000 jobs in their ecomagination supply chain. The next decade would see 10m US jobs for the transition to a low-carbon economy. Here is post-Great Recession public policy messaging.

4. Business alone cannot deliver a clean energy future. Long-term bets are too disconnected from short-term returns. They need stable and forthright public policy.

5. people disagree. And we need to reflect why they do, not simply be critical.