The Eco-Business Market Advantage

By Peter Dauvergne & Jane Lister

“When sustainability burst onto the scene it was in the responsibility category, something that a company should do because it was the right thing to do. But now it is equally about saving money.”1

Worldwide, firms are looking for new ways to lower costs so as to stay competitive in a volatile global economy. For big-brand companies, the drive for efficiency has intensified with the need to compete in markets dominated by high-volume, low-price buyers such as for example Walmart. By reducing waste and lowering the energy and input costs of each unit of production, eco-efficiency can generate savings and productivity to help keep prices low. Rather than a linear flow of resources from “cradle” (extraction) to “grave” (disposal), in theory eco-efficiency allows firms to reuse and recycle materials and products through circular closed-loop processes (cradle to cradle).

Eco-business is helping big-brand companies to reduce the environmental impacts of some of their products. In at least some cases, the energy and material use per product sold is declining; so is the toxicity and percentage of waste going into landfills. But “sustainability” is also helping the big brands to better compete to sell more. Eco-business frames the concept of sustainability around improved eco-efficiency, quality, and performance rather than around ecological constraints and limits. This is good for business, and big brands see this market advantage.

Eco-business programs focused on efficiency can be grouped into four areas:

• conserving energy and managing carbon
reducing and recycling materials and packaging
minimising water use
reducing toxics and waste

 

1. Energy and Carbon


Often a company’s initial eco-business efforts are directed toward conserving energy, as cost savings can be quickly realised from even basic upgrades to things like lighting, air conditioning, and office equipment. Even a minor change can generate recurring savings for a multinational company. Walmart reportedly saved $1 million a year by simply removing light bulbs from its soft drink machines for employees. Yahoo reduced the cost of air conditioning its buildings by two-thirds by opening some doors and recycling cool air from the outside.2 Big brands’ efforts to reduce energy use are now moving beyond just “picking the low-hanging fruit” of business opportunities. New policies and regulations, the threat of peak oil, fluctuating oil and gas prices, and the risks of climate change are encouraging moves toward greater efficiencies and product innovation, and are spurring some companies to implement broader energy-reduction and carbon-management programs.

Examples now abound of companies in all industries rolling out programs to improve their bottom lines through energy-efficiency and carbon-management investments. Procter & Gamble, Energizer Battery, Sony, Philips, and Motorola are also going beyond niche eco-markets to redesign some of their mainstream products; some of the designs are for such things as energy-efficient electric razors, solar-powered flashlights, wind-up radios, and solar-powered mobile phones. These firms are marketing some of these products (e.g. cold-water detergent) as “new” and energy conserving. Hasbro announced in 2011 that it would redesign its Easy-Bake toy oven, replacing the 100-watt light bulb with a more energy-conserving heat source. Many big-box retailers are participating in the Leadership in Energy and Environmental Design (LEED) green building program for retail and the special “volume program” for high-volume property developers. As of 2008, Best Buy has been committed to building only LEED-certified stores. Among many new features, the retrofitted retail spaces include LED (light-emitting diode) lights, integrated smart-grid meters, and alternative heating sources. Big-brand companies are also beginning to invest and experiment in renewable energy alternatives such as solar, wind, and geothermal. IKEA is installing solar panels and wind turbines to help meet the electricity needs of its European stores. So far, IKEA claims that it is meeting half of its needs through wind and solar power, on its way to 100 per cent reliance on renewable energy.

Other companies are aiming to improve the energy efficiency of their commercial fleets, with many expecting future rather than immediate financial returns. There is no instant return on investment, Dennis Beal of FedEx explains. “Right now,” he says, “it’s strictly an investment in technology.”3  Some companies are therefore lagging. With the fourth-biggest commercial fleet in the United States, as of 2011 FedEx had converted just 2 per cent of its vehicles to alternative fuels. Despite a promise made in 2010 to switch to an all-electric fleet, FedEx’s main competitor, UPS, is similarly behind. But as of 2011 Best Buy had converted 52 per cent of its fleet to “flexible-fuel” vehicles (able to run on gasoline blends, including ethanol). That same year, Johnson & Johnson had 1,969 hybrid vehicles on the road (25 per cent of its fleet).4  Johnson & Johnson also was investing in new green infrastructure, such as charging stations for electric vehicles.

Coca-Cola reports that hybrid vehicles now cost about 40 per cent more than standard ones, but CEO John Brock sees them as eventually paying for themselves by reducing both fuel use and emissions by 35 per cent.

Shifting to renewable energy leaves these large retail facilities far from a “sustainable operation.” Nonetheless, their adoption of “green energy” measures can potentially help to scale up new, more environmentally responsible technologies, introduce these innovations to wider markets, and demonstrate the commercial value of eco-efficiency. Most important to the retailers, however, such eco-business efforts are helping to strengthen their bottom line and market position.

 

2. Water Efficiency


Similar to carbon management, water management is not just an environmental issue, but also a business concern when considering future operational costs. Without mitigating action, meeting future global water demand will require infrastructure investments of as much as $200 billion a year between 2010 and 2030.5 More than 350 investors, with assets of US$43 trillion, have recently joined the Water Disclosure Project to increase corporate transparency on the financial costs of water-management risks.

Global water consumption has tripled over the last half-century, and by 2030 the demand is expected to exceed the supply by 40 per cent. Climate change and pollution are also threatening available fresh water. Globally, it takes roughly 80 litres of water to produce one dollar of industrial output. A ton of steel, for example, takes about 234,000 litres of water to produce, and an average car requires about 147,000 litres. It takes about 75 litres of water to produce a glass of beer, 120 litres for a glass of wine, 140 litres for a cup of coffee, 1,300 litres to grow a kilogram of barley, 2,700 litres for a cotton T-shirt, and 15,500 litres to produce a kilogram of beef. Coca-Cola’s daily water usage alone equals what a typical American city of 1.5 million people uses in a day.6  To produce silicon chips, Intel and Texas Instruments used 11 billion gallons of water in 2007, equal to the capacity of about 17,000 Olympic-size swimming pools.7

Coca-Cola’s daily water usage alone equals what a typical American city of 1.5 million people uses in a day.

Recognising the need to secure supplies and achieve greater water efficiency, Coca-Cola, PepsiCo, and Nestlé have been extending water goals, including claiming to aspire to one day become “water neutral” (which they define as putting as much water back into the global system as they are taking out). However, the promised environmental benefits are debatable. Efficient water use doesn’t mean less total use—just less use per unit of production. Slowing total production and consumption is not part of the equation. And although a company may claim “water neutrality” as calculated on a balance sheet, the environment may be no better off. Severe ecological impacts can arise from diverting and “replacing” water. Still, at least to a limited extent, big-brand companies are improving some of their water-management practices—for example, by implementing treatment systems to decrease water withdrawals and reduce costs, aiming to return wastewater to the watershed in at least as good a state as when it was withdrawn.

 

3. Materials and Packaging

Eco-business efforts to improve the efficiency of material use go hand in hand with an effort to save on energy and water costs. This includes reducing the input of materials that go into each product as well as using better or more appropriate materials to improve recyclability and reduce toxicity. As with energy efficiency, companies have been pursuing these efforts for many decades with many successful results. A pound of aluminium, for example, can now generate 60 per cent more cans than it did 35 years ago.8

For IKEA, cutting back on materials and packaging to lower costs is essential for competitiveness. IKEA furniture is designed to optimise the use of materials to keep prices low. Today, the company reports that it is concentrating even more on what it calls “smart packaging” to further reduce package size and save money on materials and freight. The eco-business strategy is straightforward: to reduce dependence on natural timber to reduce risks and save money. Again, even a tiny change in material efficiency can generate financial gains and decrease a product’s environmental footprint. Yet, as before, the real motivation here is business value.

“Lightweighting” strategies to downsize packaging through redesign, material reduction, and increasing recycled content are gaining greater business importance.

“Lightweighting” strategies to downsize packaging through redesign, material reduction, and increasing recycled content are gaining even greater business importance with rising commodity prices, growing concerns over greenhouse-gas emissions, the increasing cost of freight, and new packaging laws. Some big brands are also using “downsizing” as a strategy to disguise price increases—marketing smaller packages with less product inside as “greener,” thus increasing profit margins.

Soft drink companies face an especially difficult sustainability image challenge. Billions of branded drink containers continue to end up as litter in parks and roadsides, or to be dumped into landfills. To try to counter this, Coca-Cola is adopting eco-business to try to change perceptions of its packaging. Coca-Cola’s long-run aim is to make plastic bottles from 100 per cent renewable materials. Although not compostable, they will (like their other containers) be technically recyclable. In November 2009, Coca-Cola announced the global rollout of a new 100 per cent recyclable polyethylene terephthalate (PET) bio-plastic PlantBottle made from up to 30 per cent plant materials (e.g. sugarcane ethanol from Brazil). Much as there are concerns and uncertainties about the aggregate ecological impacts of other eco-business initiatives, there is much debate about the actual net environmental impact of the PlantBottle, particularly regarding the ecological consequences of the plant material sourcing. Nevertheless, big-brand companies are moving ahead quickly. Heinz has partnered with Coca-Cola to convert its ketchup bottle to plant material. And in 2011, PepsiCo developed the world’s first 100 per cent plant-based plastic PET bottle, made from switch grass, pine bark, and corn husks. The company “piloted” the bottle in 2012 with the stated aim of full-scale commercialisation.

Still, big brands have many unrealised opportunities to pursue eco-business advantages. Much of what ends up in landfill is packaging. “We’re burning and landfilling 40 million tons of recyclable packaging materials estimated to be worth $15 to $23 billion every year,” Conrad MacKerron of the advocacy group As You Sow explained in a shareholder resolution statement to both Procter & Gamble and General Mills in April 2011 calling for greater extended producer responsibility.9

 

4. Waste and Toxics

Eco-business is linking energy-efficiency and material-efficiency initiatives with efforts to reduce waste and some toxics. Waste adds unnecessary costs for treatment or disposal without adding any product value, and in this sense trying to run a lean operation has always made good business sense. “Waste is cost to the corporation” explains Johnson & Johnson’s senior director of Worldwide Health and Safety Al Iannuzzi, “. . . and, of course, the less waste you send out of your gates, the less expensive it is to make your product.”10 Again, some of these eco-business efforts involve tiny changes that produce recurring savings. Walmart, for example, reports that it is now earning millions a year by collecting loose plastic (which in the past was discarded) and selling it back to manufacturers.

Many big-brand companies have been relying on the philosophy of lean manufacturing to reduce waste. Now, efforts are accelerating to lower the costs of waste disposal and reduce the need for raw material inputs. Dell offers free recycling of all computer equipment regardless of the manufacturer and is two-thirds of the way to meeting its goal of a billion pounds of diverted e-waste by 2014.

Some companies are also looking to improve the recyclability of brand products by more carefully vetting design, including reducing and eliminating some toxic components. Using a life-cycle approach, Nike has developed a tool it calls the “Considered Index” to evaluate the potential environmental impacts of new products (e.g., solvent use, waste, materials, and treatments) before they are commercialised. Procter & Gamble has eliminated polyvinylchloride (PVC) from most of its “clamshell” and “blister” packages. Mattel no longer sells vinyl plastic PVC toys. Estée Lauder, L’Oréal, and SC Johnson are working with suppliers to remove phthalates (hormone-disruptive substances that help fragrances last longer).

More and more big-brand companies are seeing eco-business as a way of improving efficiency, resource productivity, and profit margins as well as a way to stimulate innovation, increase quality, and enhance competitiveness. Nike’s popular Trash Talk basketball shoe, for example, costs less, supposedly looks cool, performs well, and is made entirely from waste from the factory floor. All of this is certainly good for public relations and brand reputation; and it is also helping Nike to develop new markets and increase sales. Trash Talk shoes sold out within hours of going on sale in 2008, and won “best in show” at the 2009 International Design Show.

Scaling Up Eco-Markets
Big brands have recognised the growth opportunity from producing and marketing eco-products. For one, they are buying up “ethical brands.” Unilever purchased Ben & Jerry’s in 2000. Clorox purchased Burt’s Bees in 2007. Colgate Palmolive acquired Tom’s of Maine in 2006. That same year, L’Oreal acquired the Body Shop. Cadbury Schweppes purchased Green & Black’s in 2005; Kraft Foods then took it over in 2010. But more significantly, big brands are now turning to eco-business to redesign and reposition aspects and components of their mainstream brands to capture new sales. They are adopting regulated labels like “organic,” as well as unregulated claims such as “green,” “natural,” “biodegradable,” or “sustainably produced”, to distinguish a branded product from the many otherwise similar competing items on the same retail shelf, and perhaps increase consumer interest and sales.

The rise of eco-business is expanding markets and shifting them toward further big-brand advantage. With the repositioning of mainstream brands as eco-products, the lines between a sustainable product versus a product with some sustainable attributes are blurring, and the boundaries of eco-markets are growing. Green labels no longer necessarily signal a carefully crafted, low-impact, specialty item. Nor do they necessarily represent an inferior product that has sacrificed performance for a smaller environmental footprint (like phosphate-free detergents that leave spots on clothes, recycled-content bags that rip, or LED lights that are too dim).

More significantly, big brands are now turning to eco-business to redesign and reposition aspects and components of their mainstream brands to capture new sales.

Competing for Emerging Markets

Big-brand companies are not only leveraging eco-business to appeal to consumers in the mature markets of Western Europe and North America; they are also employing eco-business strategies to gain access to rapidly emerging markets, notably China, India, and Brazil. By the year 2020, 60 per cent of the billion or so new members of the global middle class will be in emerging economies. It is not surprising that big brands are eager to capture opportunities in those economies.

Working alongside the global retail chains, big-brand manufacturers are setting aggressive sales targets in these new markets. Clorox plans to double its sales in Asia and Latin America within a decade. Eco-business is crucial for achieving this projected growth. As Accenture found in a 2012 survey of 250 global-business executives, 64 per cent reported that sustainability was essential to expanding their business into emerging economy markets, and 44 per cent reported that they were already finding it hard to meet the demand for green products in these markets.11

 

Choosing Environment and Profit

Big-brand companies are using eco-business to achieve competitive goals: to lower costs and improve margins, to enhance product quality, to increase sales, and to grow markets. One aim is to expand and compete for eco-markets. Yet even bigger goals of eco-business are to improve quality, enhance marketability, and compete within mainstream markets. The result is both bottom-line efficiency and savings and top-line innovation and growth. Xerox executives explain this well in a covering letter for the company’s 2009 Corporate Citizenship report: “Every one of our [sustainability] innovations ended up either saving us money or creating new markets and new revenue. We found, in other words, that we don’t have to choose between the environment and profit. We can do both.”12

Excerpted from ECO-BUSINESS:  A Big-Brand Takeover of Sustainability, by Peter Dauvergne and Jane Lister. Copyright © 2013 Massachusetts Institute of Technology. (www.mitpress.mit.edu)

About the Authors

Peter Dauvergne is Professor of International Relations and Director of the Liu Institute for Global Issues at the University of British Columbia, Canada. He is the author of the book The Shadows of Consumption (2008), which received the Gerald L. Young Book Award in Human Ecology.

Jane Lister is a Senior Research Fellow at the Liu Institute.  She is a sustainability governance scholar and former sustainability audit practitioner with PricewaterhouseCoopers.  She is the author of Corporate Social Responsibility and the State: International Approaches to Forest Co-regulation (2011).

References

1. Quoted in Sindya N. Bhanoo, “Those Earth-friendly Products? Turns out They’re Profit-friendly as Well,” New York Times, June 12, 2010.


2. The Walmart energy cost saving figure is from Michael Garry, “The Customer Drives IT Innovation at Wal-Mart,” Supermarket News, January 25, 2010. The Yahoo estimate is from Andrew Winston, “A Portfolio of Green Strategies,” at http://www.awarenessintoaction.com.


3. Quoted in Chris Brown, “Key Takeaways from the Green Fleet Conference,” Business Fleet, October 21, 2010.


4. Automotive Fleet, “Top 50 Green Commercial Fleets,” Automotive Fleet 500 50, no. 5, 2011, pp. 28–29.


5. 2030 Water Resources Group, Charting Our Water Future (McKinsey & Company, 2009), p. 8.


6. The data on increasing water demand are from the Carbon Dis- closure Project (CDP) Water Disclosure Project. For the statistics on water usage rates, see M. M. Mekonnen and A. Y. Hoekstra, The Green, Blue and Grey Water Footprint of Crops and Derived Crop Products, Value of Water Research Report Series No.47, UNESCO-IHE, 2010. The comparative statistic on Coca-Cola’s water usage is from Charles Fishman, The Big Thirst: The Secret Life and Turbulent Future of Water (Free Press, 2011), p. 120.


7. Ariela Abecassis, Jan Molina, and Aisha Tittle, A Review of Water-Related Opportunities and Threats (Marsh Canada, 2010), p. 2.


8. Makower, State of Green Business 2010, p. 55.


9. Quoted in “Shareholder Resolutions Ask Major Packaged Goods Companies to Adopt Extended Producer Responsibility,” As You Sow press release, April 28, 2011.


10. Quoted in Knut Haanaes et al., “Sustainability: The ‘Embracers’ Seize the Advantage,” MIT Sloan Management Review 52 (3) (spring 2011), p. 25.


11. Accenture, Long-Term Growth, Short-Term Differentiation and Profits from Sustainable Products and Services (2011), pp. 2, 9.


12. Ursula M. Burns and Anne M. Mulcahy, “Dear Stakeholders” letter, in Xerox’s 2009 Report on Global Citizenship.