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Matter over money: sustainable companies

In today’s consumer environment, green credentials can weigh more heavily than financial ones. David Adams takes a look at companies that have been prepared to risk the bottom line in order to improve their sustainability.

To an environmentalist, the journey of their cause towards the political, social and economic mainstream seems agonisingly slow, but there is no doubt progress has been made. Most businesses now at least acknowledge a need to make their operations more environmentally sustainable. Many have taken significant steps to achieve this, driven in part by regulatory or legal requirements; in part by their customers; and in part by the opportunity to reduce operational costs through increased efficiency.

As Dominic Burbridge, associate director at the Carbon Trust, notes, in many larger and medium-sized businesses, sustainability teams were created during the past 10 or 20 years with a brief to identify possible cost-cutting measures, such as those related to energy use. “They were told, if you can bring in cost saving initiatives that will generate payback within three years – ideally to come out of opex, rather than capex, so you won’t have to ask the CFO for more money – then carry on,” says Burbridge. But these teams were often discouraged from being any more ambitious in terms of suggesting changes to the way the business operated.

Today, Burbridge thinks many businesses are being driven to consider hardening their commitment to sustainability, in part by regulatory changes such as the introduction of mandatory carbon reporting requirements; but also by the success of international initiatives like the Carbon Disclosure Project (CDP) and the Natural Capital Coalition, which have encouraged business to publicise the extent of their commitment to sustainability. Such initiatives have gradually acquired momentum. The number of organisations participating in the CDP has grown from a few hundred at its launch in 2003 to more than 7,000 today.

The Natural Capital Coalition, which is hosted by ICAEW, counts ARUP, Deloitte, Coca-Cola, Dow, EY, Grant Thornton, H&M, Kingfisher, KPMG, PwC, Skanska, Tata and Walmart among its members. Richard Spencer, head of sustainability at ICAEW, thinks the natural capital concept, which treats natural resources as finite and essential to sustaining all human activity, has helped persuade more business leaders to step up efforts to improve sustainability. “That language has made it comprehensible to business,” he says. “As soon as you do that, it becomes strategic. It becomes clear that the business success you have depends upon and is linked with the way you interact with nature and society. It takes nature from outside the business as an object of philanthropy to being inside the business as a strategic question.”

The practical result of this change, he suggests, is that organisations now see funding sustainability-related activity as an investment, not just a cost. Nonetheless, the view that a business acting in a more environmentally sustainable way will pay a high financial price for doing so still lingers. And sometimes that is the case. The Boston Tea Party (BTP) café was founded in Bristol in 1995 as a vegetarian and vegan eatery, keen to act in a socially and environmentally responsible way. The company now runs a chain with 22 outlets in locations across southern and western England. Brand director Anita Atkins says it was important to the business and its staff that this ethos was maintained when the company grew into a larger chain. “You don’t have to lose your soul because you’re successful,” she says. “We can prove you don’t have to compromise to grow.”

BTP applied this philosophy when switching to a completely green energy supplier. “We knew that was going to be more expensive, but we said we would commit to spending the same amount of money as before, reviewing how much energy we use and how we could use less,” says Atkins. But the most significant change, in terms of expense, was the decision taken by the business to ban all single use coffee cups from its cafés from the start of June 2018. Customers can now only use a reusable cup, drink in or pay a deposit on a cup that can be returned to any branch of BTP. In April 2019 BTP revealed that this change had cost the chain £250,000, representing a 25% fall in takeaway coffee sales, which had previously accounted for about 5% of turnover. It calculated that this change had stopped about 125,000 single use cups going to landfill and had raised £12,000 for local charities through saving 10p for every single use cup it would have bought otherwise.

“We knew it was going to hit us financially in the short term, but we knew it was the right thing to do from a commercial point of view,” says Atkins. “We’ve been very open about how much this has cost. If we’ve managed that change, hopefully we can inspire other businesses to come with us. “Since we made that change our overall business is right back up and we’re in a strong position. It’s paying off. Our customer buy-in is amazing. Our staff retention is the best it’s ever been: we’ve got a really capable, incredible, inspiring team who work for us. It was the right thing to do and the business is still going strong.” Much larger sums might have to be spent in the pursuit of sustainability improvements by different, larger businesses working in other sectors. One business that has been unafraid to invest in sustainable business practices is FM Conway, a family company founded in 1961, which provides highway and surfaces manufacture, construction, maintenance and consultancy services.

A commitment to recycling and reuse of materials has been a feature of the business for more than 30 years, motivated in part by the need to control costs. Since the current CEO, Michael Conway, started running the business in the mid-1980s this principle has been fundamental to the way the company works, according to FM Conway central services managing director Wendy Bates.

She cites the example of waste water generated in roadside gully cleaning being removed to use in other manufacturing processes, resulting in a reduction of water use by 50,000 litres per day. The company also runs a network of asphalt recycling plants in southern England, enabling it to reuse at least 98% of waste materials collected during asphalt replacement projects. The business seeks to move materials by rail or water instead of road whenever possible and has built a riverside jetty at its recycling plant in Kent. Bates says investing in measures to improve sustainability has become more important as a means of winning new business.

“We work with a large number of public bodies and it’s very important to them,” she says. Dexter Galvin, global director for corporations and supply chains at the CDP, sees a trend for larger organisations, including those in the public sector, to exert pressure on suppliers as an extremely important way to improve the sustainability of many businesses. He highlights the fact that the organisations disclosing environmental performance data to CDP include purchasing organisations able to command over $33trn-worth of procurement spend. Galvin notes that some larger businesses are now striking deals with financial services providers to help the business’s suppliers improve their environmental performance, thus improving the overall sustainability of their supply chains. For example, Walmart has formed a partnership with HSBC that allows its suppliers to access improved finance terms from the bank if the supplier can prove its sustainability profile is improving.

Another large company that has sought to improve environmental performance by improving the sustainability of its supply chain – thus helping it to win more business from its own clients – is 3M. European sustainability manager Romy Kenyon points out that 3M actually launched its first attempt to improve sustainability in the business, a campaign called Pollution Prevention Pays, back in 1975. Today, the company looks at the lifetime cost of items it uses, analysing the impact of materials and resources used in manufacturing, shipping and storage, and the eventual disposal of products and packaging.

Our new product development processes have sustainability built into them,” says Kenyon. “We have to ask: can we reduce the energy needed to make it? Can we make it last longer? Can we make it out of recycled materials? Can it be recycled? It’s also about looking at current products and how we can make them more sustainable. “I think the biggest driver for us probably right now is our customers,” she continues.

“They want to work with companies that can help them meet their sustainability goals. We hope to sell more and gain more market share because we’re doing things in the right way; and because customers trust us. If they want to reduce their carbon footprint we can show them how working with us will allow them to do that. “Our CEO talks about us now being a company with a purpose,” she continues. “You’ve got to make money for your shareholders, but you’ve got to do something good with the money you make.

“I think in nearly all companies now sustainability is coming to the top of the agenda. More legislation is coming, there will be taxes on manufacturers that use too much plastic or non-recyclable materials. Companies have to start thinking about this, otherwise it’ll just cost them more money and it will cost them in terms of what their customers think of them.”

“We need to consider what we’re doing as businesses,” says Boston Tea Party’s Atkins. “Climate change is not a made-up problem, it’s a fact, it’s here and it’s terrifying. The risk of doing nothing is much greater than the risk of short-term loss. We all have to do something. Businesses that don’t do anything will be left behind.”

Convincing the CFO

If an effort to make a business’s activities more environmentally sustainable will hurt the bottom line, what are the best arguments to convince a sceptical CFO? CDP’s Dexter Galvin points to the huge growth in interest among investors in environmentally friendly investments – the CDP has 525 investor members with $96trn of assets; and to the increased numbers of large businesses and other organisations looking to work with suppliers able to prove their credentials as a sustainable business.

“We’ve also seen environmental leadership being compatible with financial success,” he says. “Companies in our A List outperformed the market by 5.5%, on stocks, over the past five years.” Carbon Trust associate director Dominic Burbridge says that: “If you can start demonstrating that you can increase market share, that gets the CFO and the finance team excited.” Over the longer term it seems almost certain that environmental regulation will increase in most countries. Even in the US, currently led by a climate change sceptic, businesses are putting pressure on policymakers to tighten climate-related legislation, including putting a price on carbon.

“If you don’t have a handle on this as a business and then you find you’re getting hit by new regulations, that’s going to be a significant cost,” warns Galvin. ICAEW’s Richard Spencer suggests highlighting the extent to which every business relies on natural resources and how they may be affected by climate change-related risks including resource scarcity and extreme weather events. He draws attention to the findings of the World Economic Forum’s 2019 Global Risks Report, which lists environment and climate change-related risks. They include the failure of climate change mitigation and adaptation measures themselves, extreme weather events, natural disasters, water crises, biodiversity loss and ecosystem collapse, and man-made environmental disasters. “You’ve got to get business leaders to think about how the business needs to change in the face of continuing, escalating risk and resource scarcity,” says Spencer.

Originally published in Economia on 18 July 2019.