July 1, 2013 — Ten years ago, few of the world’s largest companies made investments in sustainability, mentioned their greenhouse gas emissions to shareholders or had employees with the word sustainability in their job titles. Today, half are publishing sustainability reports and making progress on reducing greenhouse gas emissions, and chief sustainability officer has become an important and well-regarded profession.

More and more, companies are realizing sustainability issues are business and economic issues, and business leaders are accountable for outcomes, whether meeting greenhouse gas reduction targets, managing wastewater or curtailing human rights violations in the supply chain. “Companies are designed to come up with solutions and to sell the services and products,” says Andrea Moffat, vice president of the corporate program at Ceres, a Boston-based nonprofit that works with business leaders on sustainability. “Sustainability challenges like climate, human rights [and] water scarcity are becoming very mainstream, so they are looking to be part of how to drive business success through coming up with solutions. This is the exciting part of shifting to a 21st century sustainable global economy.”

In business, executive management sets company strategy by addressing risks and driving competitive advantage. Sustainability issues are part of both. Climate change and water scarcity, for example, add significant risks to the world’s leading companies, whether through extreme weather events or supply chain management. The top tier at companies is also where investment decisions are made that impact operating costs. Issues such as pursuing energy efficiency and renewable energy to save money and achieve other benefits are influencing these decisions now more than ever. Sustainable investments for business growth are even being made, such as Google’s venture fund to invest in clean technology development, Moffat says.

Of Procter & Gamble’s 140 manufacturing sites, 45 are zero waste, meaning nothing leaves the plants to go to landfills. Of the material that enters the factories, 96 percent of it leaves in products.

Sustainability issues can still be a hard sell at the board level, but they are slowly becoming a core component of doing business. And companies leading the way on sustainability issues all seem to have one thing in common: They integrate the financial, social and environmental risks and opportunities around sustainability as they would any other aspect of their business — that is, without special treatment.

Added Value

When Procter & Gamble’s former CEO Bob McDonald took the reins of the consumer products giant in 2009, he was under pressure from rising commodity prices and slow growth in some developed markets. Still, sustainability ranked high for building profitability because the company had begun to put a price on waste and on greenhouse gas emissions attributable to products, from production to use by consumers. The company developed an environmental vision: power its manufacturing plants with 100 percent renewable energy, use 100 percent renewable materials in its products, send no waste to landfills and design products that are better for the environment. All of those have added value to the company, McDonald says, and added to the bottom line. Incorporating these goals into the company’s annual $2 billion research-and-development budget as it would any other priority, McDonald says, has driven innovation toward sustainability.

Of P&G’s 140 manufacturing sites, 45 are zero waste, meaning nothing leaves the plants to go to landfills. Of the material that enters the factories, 96 percent of it leaves in products. Another 3 percent is recycled, and 1 percent is reused. For instance, scraps from diaper manufacturing are used to make parking barriers, and roof tiles are made from paper refuse that is a by-product from other manufacturing. Eliminating waste has resulted in $1 billion per year in savings.

What’s P&G’s secret? All company leaders are involved in sustainability decisions, says Len Sauers, vice president for global sustainability, and there is a directive that sustainability be a part of everybody’s job.

Sauers doesn’t get a free pass on initiatives he brings to the table, however. When he sought to replace a foam-based product packaging with a renewable material, he sat down with the finance folks to explain why it made sense to switch to something that was 20 cents more per pound. “You have to go in there with a business case as to why you want to make that change,” he says. “As a sustainability person, I want the company to move from a petroleum product to renewables because renewables use less greenhouse gas emissions in their production.” That reasoning doesn’t necessarily fly on its own, though. Sauers also has to put numbers on business risk and brand value, something finance people understand. “Renewable materials can give you more flexibility in materials supply,” he says. “It can be renewable materials that a consumer is responsive to and [that] drive a purchase decision. It can … build brand equity. There is a whole host of reasons.” 

A Seat at the Table

At Google, Rick Needham, director of energy and sustainability, says that when he talks with his chief financial officer, he doesn’t have to start by justifying sustainability investments. “The conversation is, ‘Why can’t we do more?’” Needham says. Google’s renewable energy portfolio is proof, he says, noting that the company has invested $1 billion of capital in 10 large-scale wind and solar energy projects totaling 2 gigawatts, enough to power 500,000 U.S. homes for a year. “We’re the only nonenergy company doing these investments,” he says.

Similarly, sustainability is no longer a foreign topic when it comes up with management at Autodesk, a San Rafael, Calif.-based 3-D design, engineering and entertainment software and services company. Sustainability has become easy to communicate, said Mark Hawkins, executive vice president and chief financial officer at Autodesk, at Fortune Brainstorm Green in Laguna Niguel, Calif., last April. “Let’s preserve things that are really precious. Let’s minimize waste. What is hard to wrap your head around on that one?”

“The key for chief sustainability officers to have a seat at the table is the ability to draw linkages between a company’s business priorities and its sustainability programs.” -Kevin Anton, head of sustainability at Alcoa

Aluminum manufacturer Alcoa defines sustainability as using value to build financial success, environmental excellence and social responsibility in partnership with all stakeholders. “The goal is to deliver net long-term benefits to our shareholders, employees, customers, suppliers and the communities in which they operate,” says Kevin Anton, head of sustainability at Alcoa.

“The key for chief sustainability officers to have a seat at the table is the ability to draw linkages between a company’s business priorities and its sustainability programs,” he says. “When developing our sustainability programs, we focus on exhausting all noncapital solutions before we turn our focus to capital investments. When we have to deploy capital, it is subject to the same investment hurdles as all capital projects.”

Jumping Hurdles

Hawkins says he hears about communication mistakes some sustainability officers make with management teams. The deal-breakers happen, he says, when proposals lack creativity. Sustainability, he said, should mimic other investments, such as mergers and acquisitions or brand investments, when being proposed to CFOs. “Management is expecting you to do your homework, speak the language of finance, expect you to do the same level of rigor and the same level of measurement that anyone else would do,” Hawkins says.

The time frame for return on investments can be a stumbling block, though, and sustainability officers sometimes have difficulty jumping this hurdle when approaching management. Andrea Moffat of Ceres agrees that sustainability investments should be scrutinized just like any other, but, she says, “Since we know that the policy environment does not always account for sustainability issues, such as no price on carbon in the U.S., allowing a longer time frame for a return on investment might be needed.”

While companies such as Alcoa, Autodesk, Google and P&G have fully embraced sustainability throughout investments and decision making, much of Standard and Poor’s 500 companies lag on such efforts, Moffat says. “I’d like to see more CFOs involved in sustainability,” she says.

One way to propel sustainability to the fore is to charge the board of directors and executive management with the oversight and accountability of their company’s sustainability, according to “The Road to 2020,” a 2012 report by Ceres and Sustainalytics, an independent research and analysis firm. And, as with any aspect of business, a good governance strategy puts a company in better position to manage risks and capitalize on opportunities when it comes to sustainability. Leaders such as P&G and Alcoa, where sustainability officers report directly to CFOs, are setting the bar. But Moffat says more CEOs and CFOs need to become educated and involved in the role of sustainability. In fact, she says sustainability should be part of their job mandate, with compensation tied to targets such as greenhouse gas reductions, environmental risk management and supply chain human rights issues.

While it’s encouraging that a small cluster of leading businesses are on the front line of sustainability practices, when it comes to broad corporate action, according to Moffat, “There’s no critical mass yet.” The good news is that many companies are moving in the right direction by making sustainability part of everyone’s job. If the investments these companies are making today continue to pay off, others are sure to follow. View Ensia homepage

 

UPDATED 07.03.13: This essay was originally published on 07.01.13 and listed Bob McDonald as the CEO of Procter & Gamble. The previous day, 06.30.13, McDonald retired from P&G. This post has now been updated to reflect this.