Foreword by L. Hunter Lovins(1)
Young
people often ask what gives me hope. Many things make
me hopeful, but the best answer, just now, is this
book: The Natural Advantage of Nations (NAON). The
team of young engineers, scientists and policy-makers
who bring this to you are representative of the young
people who are the future not only of Australia, but
also the world. It is particularly pleasing that this
book has emerged not from the US or Europe, but from
a Southern nation. The numerous examples given here
of profitable ways to improve the environment, human
well-being and the bottom line come not from the familiar
poster children of the sustainability movement, but
from communities across Australia and Asia. It proves
a belief that has grown in me for several years that
while the tipping point of environmental devastation
may be frighteningly close, the people with the commitment
to implement the solutions we already know can solve
the problems are also at hand. This book presents
a robust business case for sustainability. It cites
the sorts of examples that I am now teaching to my
MBA students at Presidio World College. Studying for
the first accredited MBA in Sustainable Management,
these students are reading material like Natural Capitalism
that gave rise to this book. NAON will be required
reading next semester.
Business as usual is not a safe place to
stay
Corporate
leadership desperately needs to internalize the
message of this book. Companies today reside on
the edge of a crumbling precipice. Beneath the feet
of the world’s major corporations, the edges
of the earth that they have taken for granted are
disintegrating. Farseeing business leaders realize
that change is inevitable and have identified a
realm of stability across the chasm. They know that
a migration strategy is necessary, but even these
business leaders are struggling to manage it. Less
innovative companies seek to shore up the ground
as it erodes and haven’t yet even realized
that they need an exit route. As NAON describes,
one example of the challenges that face every company
is how to limit its emissions of climate changing
gases like carbon dioxide.
In
March 2004, Reuters reported that:
The
world’s second largest re-insurer, Swiss Re,
warned that the costs of natural disasters, aggravated
by global warming, threatened to spiral out of control,
forcing the human race into a catastrophe of its
own making. In a report revealing how climate change
is rising on the corporate agenda, Swiss Re said
the economic costs of such disasters threatened
to double to $150 billion (82 billion pounds) a
year in 10 years, hitting insurers with $30–40
billion in claims, or the equivalent of one World
Trade Centre attack annually.(2)
Environmental
challenges are only part of the erosion. As NAON
describes, the whole basis of what makes a company
competitive is shifting. Companies are increasingly
realizing that shareholder value is not only created
by the physical product that they produce, their
cash profits, or next quarter’s share price,
but by ideas, reputation, brand equity and especially
by their ability to attract and retain the best
talent. These ‘intangibles’ are now
a greater component of businesses’ value than
the physical assets that used to be considered the
basis of core business value. Tom Peters in his
book Re-imagine! states:
We are in the midst of redefining our basic
ideas about what enterprise and organization and
even being human are – about how value is
created and how careers are pursued. Welcome to
a world where ‘value’ (damn near all
value!) is based on intangibles – not lumpy
objects, but weightless figments of the Economic
Imagination. We are in ‘a brawl with no
rules’. What can we do? Relish the Mess!
Enjoy the Fray!… We have entered an Age
of Talent. People (their creativity, their intellectual
capital, their entrepreneurial drive) is all there
is. Enterprises that master the market for talent
will do better than ever. But to attract and retain
the Awesome Talent, an organization must offer
up an Awesome Place to Work.(3)
The
penalty for failure? Over 40 per cent of the businesses
listed in the 1985 Fortune 500 are not in business
today. Companies like Enron and WorldCom that demonstrated
a lack of integrity risk the entirety of shareholder
value. In an Internet empowered world, a small group
of determined citizens can deligitimize any company.
Talk about a crumbling cliff.
Peter Drucker writing in The Economist stated: ‘In
the next society, the biggest challenge for the
large company – especially for the multinational
– may be its social legitimacy: its values,
its missions, its visions.’(4)
Business
leaders must manage all assets of a corporation
seamlessly, tangible and intangible, and do this
successfully in a time in which the legitimacy of
such institutions as large corporations is being
questioned. Many companies are finding that the
only way to do this is to begin finding their way
across the bridge to a more sustainable world.
What’s wrong with where we are?
In
1995 Royal Dutch Shell came under worldwide criticism
for its complicity in the hanging of African activist
Ken Saro Wiwa and its proposals to scuttle the Brent
spar oil drill rig in the North Sea. The confrontation
escalated to the point that activists in Europe
firebombed Shell gas stations. In the words of the
New Statesman:
Shell
found itself forced rapidly to reassess its intentions.
Public identification with the campaign was threatening
to have a runaway impact on its competitive position
in the petrol forecourts of Europe. Better to cut
its losses, whatever the short-term loss of face.
At the 11th hour, on 20 June 1995, Shell backed
down. For Greenpeace it was an historic victory;
for the Prime Minister, John Major, who had put
the weight of the British government behind the
dumping plan, it was a humiliation.(5)
In 1997, Sir Mark Moody-Stuart took over the helm
of a battered Royal Dutch Shell group of companies
as Chair of the Managing Directors. Among his early
actions was the announcement of a commitment to
transform Shell into a more sustainable company.
This included creating a department of sustainability
in the company, public apologies and in 2000, the
release of a Shell Sustainability Report that admitted
to a variety of mistakes and committed Shell to
transparency and a transition to becoming a sustainable
company. Shell acknowledged mistakes and identified
needed areas for reform. It acceded to Greenpeace’s
demands and dismantled Brent Spar on land. It is
actively engaged in conversations with the local
tribespeople in Nigeria to try to reestablish the
company’s legitimacy and regain its franchise
to do business there. During Sir Mark’s reign,
Shell invested in a variety of renewable energy
and energy efficiency technologies. Shell Hydrogen
was founded. Its Chair Don Huberts remarked: ‘The
stoneage did not end because we ran out of stones,
the oil age will not end because we run out of oil
– hydrogen will be a better business to be
in’.
In an interview in the UK newspaper the Independent,
Sir Mark stated that:
Shell
was investing heavily in developing renewable sources
out of self-interest, ‘to be seen’ as
an energy company to be serving the needs of society
not damaging it. People want somebody to do something
about global warming, and we need to look at new
sources of energy. The role of energy companies
is changing from an enabler of mobility to the developer
of innovative, clean technologies, says Sir Mark
Moody-Stuart, and within that role there is a huge
and commercially viable scope for improvement.(6)
In 2000, Business Wire reported:
Responding to new, higher expectations of stakeholders,
Shell not only has implemented company-wide guidelines
for ethical behavior, but plans to invest millions
of dollars in programs and projects that reflect
the company’s commitment. In an article for
World Energy(R) magazine, Shell’s chairman,
Sir Mark Moody-Stuart, said, ‘Successful companies
will need to develop new approaches for addressing
key ethical, social and environment concerns, “but”
good intentions are meaningless without real action
to put ethical principles into practice’.
Shell plans investments of half a billion dollars
in commercial renewable energy resources and $30
million for the new Shell Foundation, which will
focus primarily on sustainable energy. Already,
20 projects to bring energy to poor communities
in developing nations have been announced.(7)
During Sir Mark’s tenure revenues rose and
Shell was hailed by many former critics as a company
that merited investment.
Fast forward to 2001. Sir Mark left Royal Dutch
Shell in the company’s usual rotation of Chairs.
He took a far larger role on the world stage, headlining
the World Summit on Sustainable Development (WSSD)
in Johannesburg, and assumed the Chair of Anglo-
American. Meanwhile, back at Shell his successor,
Phil Watts, began a quiet campaign to dismantle
Sir Mark’s commitments. Watts ordered the
removal of the section of the Shell website that
invited criticism. He oversaw a move to promote
exploration and extraction technologies in the American
West that would be extremely environmentally damaging.
He fired Anita Burke, the prior head of Shell’s
sustainability operations in The Hague. These acts
enabled BP to eclipse Shell in the seriousness of
its commitments to transition to renewables and
environmentally responsible behaviour. Shell also
began making efforts to regain its operations in
Oginiland in Nigeria, eliciting a return of tribal
activism.
Three years later, it turns out that Watts cooked
the books. Despite his rhetoric about sustainability,
Watts was really an old-line oil-man. A New York
Times story describes his enthusiasm about oil:
Arriving on stage in a spaceship and an astronaut
suit, Philip Watts, then the senior executive in
charge of exploration and production for the Royal
Dutch/Shell Group, glowed as he delivered a message
of optimism to a conference of 600 company executives
in June 1998. ‘I have seen the future and
it was great’, he declared. He was talking
about the success of a special management program
that had recently addressed a fundamental problem
of the company – that it was pumping oil and
gas out of the ground faster than it was finding
new supplies. Internal documents show, however,
that the program allowed Royal Dutch/Shell to increase
its oil and gas reserves not by discovering major
new sources, but by changing its accounting to add
reserves that it was not sure could ever be tapped.(8)
Not
everyone was enthusiastic about Watts’ manipulations.
The New York Times story went on to state that:
A July 2002 memorandum to the Royal Dutch/Shell
Group’s committee of managing directors from
Walter van de Vijver, the head of exploration and
production at the time. It indicates that the company’s
senior executives had concerns about shortfalls
in its proven reserves of oil and natural gas. Most
of the misstated reserves were recorded from 1997
to 2000, when Sir Philip was in charge of exploration
and production. Last year [2003] executives began
to grow increasingly concerned about the way the
company was accounting for its reserves, and they
commissioned a review that led to the revisions
made in January.(9)
In March 2004 Watts and the two other top managers
were forced to resign. The annual general meeting
of shareholders was held two months late because
of the turmoil. Shareholders were livid that managing
directors be absolved of responsibility for their
management for the year 2003, and that Watts was
paid a lump sum of over £1 million. Shell
stock took a pounding and various lawsuits are pending.
Is
a commitment to sustainability the hallmark of good
corporate governance and a guarantor of shareholder
value?
But
wait!? How can a company be committed to sustainable
behaviour and a transition to greater corporate
responsibility and at the same time be hiding vital
information that indicates the company’s core
business value from investors?
If
your business model is a transition away from oil
to a company that produces an array of energy products
and services, then falling reserves are less of
a worry. But if your mental model is to mine oil
until the day you die, it’s a serious problem.
Shell under Sir Mark’s management was undertaking
a strategic redefinition of its future. He understood
that to survive Shell had to capture the high ground
of brand equity. A Shell official chastened by the
Nigerian and Brent Spar disasters privately said,
‘We’re not so worried about regulation,
because through the World Trade Organization we
can get round anything we don’t like. But
we’re absolutely terrified of the way these
citizen networks can instantly delegitimize our
company and destroy our franchise. It’s terribly
difficult to get all our people worldwide to appreciate
the risks of this new accountability’. Shell’s
then Vice President of sustainability Tom Delfgauuw
stated that the challenges Shell had faced were
‘the best thing that ever happened to us,
first because we’ve come out of it much stronger
as a company and second because it accelerated a
great many needed corporate developments’.(10)
The issue is management integrity: integrity of vision,
and integrity of performance. Sir Mark captained Shell’s
essential turning of the corner, its embarkation across
a 50- year bridge away from the business that had
built the company to its future. Phil Watts, perhaps
lacking that integrity, tried to turn back, and fell
into the abyss, wreaking havoc on shareholder value.
Watts’s return to Shell’s former direction,
forced him to hide from investors the news that this
about face was bad business for a variety of reasons.
From a purely capitalist point of view, either strategy
can be viable. This book argues, however, that business-as-usual
is no longer a safe bet, and that only a sustainability
strategy can protect shareholder value in the long
run. It argues that even the most doctrinaire capitalists
should reassess their assumptions about whether what
is happening to the environment, how external stakeholders
perceive their company, and how a company’s
definition of its responsibility to the rest of the
world affects its own employees should become a core
part of their planning for the future. My belief is
that companies that realize the seriousness of these
challenges, and commit to a transition to more sustainable
behaviour and that deliver on that commitment, will
be the companies that succeed in the coming decades.
Corporate commitment to and followthrough on sustainability
will come to be the hallmark of corporate integrity
and management capacity. The investment community
will see the absence of such a commitment, or any
backsliding on one, as a real red flag.
Building a bridge to tomorrow
Milton Friedman once queried, ‘If businessmen
do have a social responsibility other than making
maximum profits for stockholders, how are they to
know what it is?’ The leading companies, some
of them profiled in this book, are showing how to
construct a bridge across the gulf that now confronts
us all, from business-as-usual to the greater profitability,
lowered risk, enhanced brand equity, and stronger
shareholder value that sustainability can confer.
No business, even an imperiled one, will embark
on a course of action that would compromise profitability.
But as companies shift their behaviour, taking the
first steps across the bridge, they are also realizing
that this can make them more profitable. They are
realizing that they live in a very different world
from the one in which Milton Freedman wrote.
In April 2000, British Petroleum announced a commitment
to reduce its carbon
emissions 10 per cent below its 1990 levels by 2010.
It only took it two years to achieve this. Doing it
is now saving them US$650 million. The results, and
the thinking that led to the commitment in the first
place also convinced BP to announce a rebranding to
‘Beyond Petroleum’, and to regular corporate
announcements that its efforts to become a more sustainable
company are ‘a start’. BP sees that it
cannot remain on the cliff’s edge. It has begun
to build a bridge to the other side. Rodney Chase,
Deputy Group Chief Executive of BP recently stated
that even if BP’s climate abatement programme
cost them money, it would be worth doing because it
makes them the sort of company that the best talent
wants to work for.
Nike was attacked by social activists because it
had erroneously thought that it could draw the boundary
within which it had to concern itself with social
responsibility at its American plant gates. This
forced them to seriously consider eliminating the
‘Swoosh’, its multi-billion dollar brand
symbol, when citizen’s groups protested the
labour practices in the companies overseas from
which Nike purchased its products. In response,
Nike recommitted itself to sustainability, implementing
third party verification of its human rights policies,
undertaking a major effort to increase its environmental
performance and hiring the sustainability consulting
group, The Natural Step, to guide its efforts.
A 2004
survey of some of the world’s leading CEOs,
undertaken by the World Economic Forum at Davos,
found that the responding leaders feel that corporate
reputation is now a more important measure of success
than stock market performance, profitability and
return on investment. Only the quality of products
and services edged out reputation as the leading
measure of corporate success. Fifty-nine per cent
of the respondents estimated that corporate brand
or reputation represents more than 40 per cent of
a company’s market capitalization. Perhaps
it should not come as a surprise that essentially
all of the world’s top 150 companies now have
a sustainability officer at the vice president level
or higher.(11)
Whole organizations such as the World Business Council
for Sustainable Development now exist to help their
members, including 160 other major corporations,
capture such opportunities. In the book, Walking
the Talk, WBCSD’s prime movers, the CEOs of
DuPont, Anova and Royal Dutch Shell, state:
Sustainability’s
business case is strengthened by the ways in which
thinking of sustainable human progress encourages
us toward innovation. It offers business opportunity,
and it pushes companies toward thinking about more
‘sustaining’ forms of energy, agriculture,
construction, mobility, and forestry. The relatively
straightforward concept of eco-efficiency has already
encouraged some companies to make radical shifts
from sales to selling nothing at all – and
being cleaner and more profitable in the process…
Taking eco-efficiency and environment seriously
can, and should, lead to strategic corporate innovation…
By capitalizing on these assets a company stands
to gain customer success, brand strength, first
mover advantage, motivated employees and potentially
more profits.(12)
Former
IBM executive, Bob Willard, was one of the first
to quantify the business case for behaving more
socially and environmentally responsibly. He listed
seven categories in which a commitment to greater
sustainability will enhance doing business. These
include: easier hiring of the best talent, higher
retention of top talent, higher employee productivity,
reduced expenses in manufacturing, reduced expenses
at commercial sites, increased revenue/market share,
reduced risk and easier financing.(13)
Of these, perhaps the most significant first step
that companies can take is to
increase the efficiency with which they use resources.
Such ‘eco-efficiency can result in enormous
cost reductions, while improving the company’s
reputation, brand equity and reducing its environmental
footprint’. The book Factor Four and its successor,
Natural Capitalism, detail the massive savings possible
to companies that enhance their sustainability. For
example over a 12-year period, Dow’s Louisiana
plant was able to save enough energy implementing
worker-suggested savings measures to amount to an
addition of US$110 million each year to the bottom
line. Each measure also reduced
Dow’s carbon footprint. (14)
This book takes that work, updates it by four years
and presents an even more compelling case.
The challenge
for strategists is to create a culture in which
the journey across the bridge can unfold without
undue cost and disruption. It means confronting
such common business problems as how systematically
to create a culture and adopt a set of processes
that continually identify key intangibles for investment
(new ideas, reputation, opportunities) while keeping
an eye on tangibles (aligned customers = brand equity,
ecoefficiency = reduced costs, revenues = market
share = brand equity = reduced costs, etc.). How
do you assess new trends and determine which priorities
should rise to the top? And how do you ensure that
innovation and market leadership will emerge from
these investments?
This book
is an important plank that will enable business
leaders, elected officials, and citizen activists
together to construct the bridge across the chasm.
Natural Capitalism Inc
Eldorado Springs, Colorado
20 September 2004
Notes:
1
The thesis behind this Foreword is being developed
further into a publication now being prepared by
Hunter Lovins and her colleagues with TNEP.
2 Atkins, T. (2004) ‘Insurer
Warns of Global Warming Catastrophe’, Reuters,
3 March.
3 Peters, T. (2004) Re-imagine!
Business Excellence in a Disruptive Age, Dorling
Kindersley, New York; .
4 Drucker, P. (2001) ‘Will
the Corporation Survive?’ in A Survey of the
Near Future, The Economist, 3 November.
5 Grove-White, R. (1997) ‘Brent
Spar Rewrote the Rules: Shell Oil Co’s Decision
to Dispose the Brent Spar Oil Platform in the North
Sea’, New Statesman, 20 June.
6 www.solcomhouse.com/shell.htm.
7 Business Wire (2000) ‘Shell’s
Commitment to Ethics Includes Hundreds of Millions
in
Investment, According to Shell Chairman Sir Mark
Moody-Stuart, Appearing in World
Energy’, Business Wire, 31 October.
8 New York Times (2004) ‘At
Shell, New Accounting and Rosier Oil Outlook’,
New York Times, 12 March.
9 ibid.
10 Holliday, C.O., Schmidheiny.
S. and Watts, P. (2002) Walking the Talk: The Business
Case for Sustainable Development, World Business
Council for Sustainable Development/Greenleaf Publishing,
Sheffield, UK p21.
11 Pers comm., Professor Peter
Newman, Murdoch University, sustainability adviser
to the Premier of Western Australia, September 2003.
12 Holliday, C.O., Schmidheiny.
S. and Watts, P. (2002) Walking the Talk: The Business
Case for Sustainable Development, World Business
Council for Sustainable Development/Greenleaf Publishing,
Sheffield, UK p21.
13 Willard, B. (2002) The Sustainability
Advantage: Seven Business Case Benefits of a Triple
Bottom Line, New Society, Gabriola Island, Canada.
14 Hawken, P., Lovins, A. and Lovins,
L. H. (1999) Natural Capitalism: Creating the Next
Industrial Revolution, Earthscan, London p245. Both
Natural Capitalism and Factor Four (von Weizsäcker,
E., Lovins, A. and Lovins, L. H. (1997) Factor Four:
Doubling Wealth, Halving Resource Use, Earthscan,
London) document hundreds of such savings opportunities.
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