The terms “sustainability and ESG (environmental, social and governance objectives)” have often been used interchangeably. Sustainability can be traced to the time when some people were trying to convince companies to cause less harm to the environment as well as to society. It is often associated with the “triple bottom line” concept of business reporting, that is, people, planet and profit.
ESG was initially used as a synonym for sustainability, where the “E” and “S” made reference respectively to the “planet” and “people” components. However, it was what the letter “G” stood for that captured the attention of boards and C-suites. Eventually, the financial community used it to evaluate business risks posed by environmental and social activities carried out by current and potential investee companies. Today, ESG has more or less matured to become a formalised programme with published methodologies and requirements.
Once you move past the semantics, it is important to keep in mind that the end goal is about fixing the current issues and going beyond to create better outcomes. To this extent, it is imperative that organisations examine their true purpose to embark on this journey and decide on how far they are prepared to travel.
Where’s the business case?
As organisations start the journey, the challenge will always be how to strike a balance between “doing well” (read: quarterly financial results) and “doing good” (long-term ESG objectives). No one has made a bolder statement than Paul Polman on this subject. In 2009, immediately after taking the helm at Unilever, Polman told analysts and investors that the multinational consumer goods company would stop providing guidance on quarterly earnings. That would have been regarded as a suicidal move for CEOs at that time, but Polman was quoted by the Financial Times as stating, “I figured I couldn’t be fired on my first day.” That was just the beginning of things to come at Unilever.
As part of its 2010 “Sustainable Living Plan”, Unilever pledged to move towards a goal of 100% sustainable sourcing. The Harvard Business School (HBS) case study, titled “Sustainable Tea at Unilever”, in particular discusses Unilever’s transformation of its €3.5 billion tea brand, Lipton. From tackling the more difficult parts of the supply chain to improving the livelihoods of tea farmers in Africa, the company was not even sure about how to market sustainable tea in developing markets like Turkey, India and Russia. In short, it did not have a business case to justify the huge upfront investments — a scenario which would have had most chief financial officers fall off their chairs. Unilever, nevertheless, just went ahead with the belief that it was just the right thing to do. Talk about a strong purpose!
Taking on the industry mafia!
While Unilever decided to tackle the external supply chain of its tea business, one man decided to go further to take on the entire industry. When Erik Osmundsen became CEO of Norsk Gjenvinning (NG), the largest waste management and recycling company in Norway, in 2012, he believed that the industry was ready for consolidation and open to an injection of professionalism. He also believed that there was a huge potential for recycling. Unfortunately, much to his dismay, he found that the industry was rife with corruption and resistant to change.
The HBS case study, titled “Turnaround at Norsk Gjenvinning”, discusses the exploits of Osmundsen. He initiated a programme to strengthen corporate governance, eliminate corruption and improve compliance. Almost half of the company’s top 70 line-managers resigned. The changes also strained relations with several competitors as well as the waste management industry association. In a conversation with the editors of the Harvard Business Review (HBR), Osmundsen confessed, “I wasn’t certain that reform was possible, and I wasn’t certain that I was the right person to lead the effort. We were coming up against everything from organised crime to angry employees to threats from a local criminal group.”
Nevertheless, he persevered. NG, according to market research firm Ipsos, is now recognised as Norway’s eleventh most reputable company, with a No 1 position on environment.
Don’t buy this jacket!
While Unilever and NG focused on the supply chain and the industry at large respectively, Patagonia, an American retailer of outdoor clothing, focused on discouraging its customers from buying more. Say what?
In 2011, the company took out a full-page ad in The New York Times showing its best-selling jacket with a banner that read: Don’t Buy This Jacket. According to the IMD case study, titled “Patagonia’s Sustainable Strategy”, the campaign was part of a 2005 initiative called the “Common Threads Recycling Program”, which aimed at reducing the number of products Patagonia customers purchased through a two-fold effort.
The first part was to encourage customers to fix damaged clothing, with the company publishing do-it-yourself repair guides. The second was to create a second-hand market for its garments that did not fit or that were no longer worn. Towards this objective, the company collaborated with eBay to develop a web storefront and an online marketplace.
Interestingly though, sales increased by approximately 30% in the nine months following the ad.
Perfection vs pragmatism
In the above examples, each company began with a purpose to do good and saw its initiatives take fruition. However, according to Harvard Business School professor Ranjay Gulati, one cannot expect perfection at all times when expecting to achieve the best long-term results for all stakeholders.
In his book, Deep Purpose, he shares the example of Gotham Greens, a fresh food company that builds and operates sustainable greenhouses in cities across America. Gotham Green’s fresh produce comes packaged in single-use plastics. You might ask how a company dedicated to reinventing farming, and priding itself on sustainable-grown food, can indulge in single-use plastics.
In fact, founder Viraj Puri and his team had researched alternatives and initially settled on packaging made of compostable fibre. Unfortunately, greens in fibre-based packaging last only a few days compared to two weeks or longer in plastic. When the company analysed the life cycle of food production, distribution and consumption, food waste was a major factor. Without the benefit of context, sceptics might question Gotham Greens’ commitment to its purpose and conclude that it favoured the fact of “doing well” instead of “doing good”. The company continues to stay abreast of new technologies, searching for more sustainable packaging.
There are many challenges in the journey towards a better future. What is key is for organisations to be clear about their purpose and be pragmatic in creating win-win solutions.
Sekar Shanmugam is the MD for ProfitAbility SE Asia and also an adjunct professor of Strategic Management at Unitar International University’s Graduate School