Sustainability is reshaping the competitive landscape in every industry and companies able to anticipate changes and innovate early are reaping the benefits of improved operating efficiency, new growth and a stronger license to operate.
Based on ERM’s interaction with clients, this article provides a snapshot of how companies can deliver:
- Cost reduction through a radical step change in resource efficiency.
- Growth through innovation by integrating sustainability into products and customer relationships.
- A stronger license to operate by engaging effectively with stakeholders.
The New Economy
“The New Economy”, we would argue, is an emerging business climate in which environmental and social constraints are presenting companies with new risks and opportunities.
The facts speak for themselves. With a projected 8 billion global population by 2025 and the growing demands of global consumption, environmental resources such as water and carbon will increasingly become constrained over the next 15 years. Different regions of the world are already experiencing serious resource depletion, the challenge for business being to become more resource efficient and to play a part in protecting and recycling scarce resources.
Existing pressure points
- Carbon: Governments around the world are starting to impose a cost on companies that emit greenhouse gases into the environment. In some industries, the cost of carbon is fundamentally altering the structure of business supply chains.
- Water: According to the OECD, 2.8 billion, or 44%, of the world’s population lives in areas of high water stress. Not surprisingly, water is rapidly rising up the political agenda while many companies have already experienced significant production downtime due to water shortages.
- Biodiversity decline: According to a survey by IUCN, half of the planet’s 5,487 mammal species are in decline, while a significant 21% of species are or may be at risk of extinction. NGOs and local communities which exist in fragile areas where industry seeks to expand operations are placing significant demands on corporations to act in a responsible manner and do no harm.
All of the above pressure points can impact on access to good quality air, water, soil, food and raw materials, and could lead to socio-political instabilities and to businesses having to run their operations at sub-optimal levels as well as delaying or even cancelling planned development.
So what are the solutions for business?
Below, we present three main ways for businesses to harness the challenges and generate real business value in The New Economy.
1. Cost reduction through radical/ step change resource efficiency:
Companies can become more resource efficient and add real business value by adopting an integrated approach, which combines process improvements with lasting behavior change in relevant parts of the business. In this way ERM helped a North American food and beverage company achieve cost reductions of over a million dollars a year through waste reduction and other resource efficiency measures.
In another example, ERM has worked with a European automotive manufacturer, putting together a resource efficiency program to achieve carbon and energy reduction savings of US$10 million by 2012 – with an average payback period of two to four years.
One ERM tool being used with clients in this area is QUEST (Quick Environmental Savings Technique) which combines a high impact, high pace response to client issues around resources, with rigorous diagnostic and implementation techniques to home in on what is possible. QUEST can also be used to bring together the leaders in an organization who are best placed to make change happen.
2. Growth through innovation by integrating sustainability into products and customers relationships
Consumer surveys in Europe and the US suggest that up to 25% of consumers regularly buy “Green Products” while another 30% keep a watching brief. While sustainable consumption is still an emerging trend, B2B green markets are starting to grow robustly as more companies develop and deliver their low carbon/ low water/ low waste targets.
Some companies have perceived the emerging trends and are already making new money out of them. For example:
- Philips generated 31% of total revenue sales from green products in 2009, reaching its target three years ahead of schedule.
- GE ecomagination portfolio has grown from 17 products to more than 80 products today. 2008 revenues reached $17billion, an increase of 21% over the previous year.
- Siemens increased in 2009 its revenue from Environmental Portfolio products by 11% to $28billion.
When applied rigorously, techniques such as Life Cycle Analysis (LCA) and Carbon Footprinting are proving a catalyst for innovation in a wide range of sectors. ERM, for example is working with the leading European food retailer to carbon footprint an expanding basket of own brand products as part of the company’s planned transition to become a less carbon intensive business. An LCA carried out for international oil products company helped shift industry debate and potentially saved the company several million dollars as well as helping to protect its existing market place.
By accumulating knowledge about product impacts and wider sustainability characteristics, companies have the ammunition to drive change and improve long term competitiveness, whether they are selling orange juice or supporting oil and gas exploration.
3. A strengthened license to operate by engaging effectively with stakeholders
More effective stakeholder engagement is another aspect of doing business in the New Economy. Increasingly, companies are looking at what kind of value can be gained or lost through the way they engage with stakeholders. In the case of a major oil and gas client, operating in some of the most challenging parts of the world, it was estimated that US$3billion of value was being eroded annually as a result of poor sustainability performance in the upstream business. What’s more, ERM estimated that 30% of these losses could be avoided through more effective engagement, both internally and externally. As a result of the project, the senior leadership team has implemented a number of structural changes to the way sustainability performance is managed throughout the global upstream business.
In our experience, early engagement – with regulators, customers, community groups and between different parts of a disparate project team – is a key component of a company’s license to operate. Engaging early will help to ensure that resources are accessed and managed cost effectively – as well as strengthening your license to operate.
In summary, we are advocating three key practical steps in order to compete in the New Economy:
- Recognize and value the implications of resource constraints across the value chain;
- Innovate and deploy bolder business-led sustainability initiatives in relation to your products and customer relationships; and
- Engage early, effectively and consistently as part of your license to operate.