There is a growing trend for big companies to use sustainable concepts as core business drivers

For decades, many companies have typically responded to sustainability challenges by pursuing incremental operational improvements. But we are beginning to see an interesting new trend – businesses using sustainability as a tactic for long-term offense, rather than just short-term defence.

Despite the uncertain economic outlook, leading international companies across diverse sectors are investing heavily in sustainable products and services. Others are making cross-industry partnerships to develop next generation products such as the elusive mass market electric car.

Some are even enhancing their business models through mergers and acquisitions that seek to address, and capitalise on, sustainability trends.

The big challenges

What is driving this marked shift in approach? In our view, it is not just a focus on marketing or corporate social responsibility or even the need to manage costs and improve efficiency. Instead, leading companies are demonstrating a growing belief that their future profit and growth will be tied to how effectively they respond to looming global challenges including resource scarcity, population growth, and climate change.

These challenges are very real. Feeding a global population of nine billion people in 2050 will require a doubling of present food supply, unless we find ways to boost farmers' production and reduce food waste.

Demand for freshwater is expected to grow by 25% in developing countries and 18% in the developed world by 2025. Meanwhile, the impacts of climate change are becoming more vivid – as exemplified by droughts in parts of the southern US and massive flooding in Bangkok.

For companies directly involved in agribusiness or that are dependent on a steady water supply, these resource trends are hitting uncomfortably close to home.

Business response

So how exactly are companies responding?

Investing in innovative and more resource efficient products is the most mature of the new strategies on display, and already paying off for first movers, such as:

• Procter & Gamble, the consumer goods giant, which generated $40bn from sales of a slew of self-defined “sustainable innovation products”, such as cold water laundry detergents, between July 2007 and June 2011 .
• Philips, the Dutch healthcare, lifestyle and lighting company,which already generates 30% of total revenues from green products, and is doubling R&D investment in such product innovation to €2bn by 2015.
• Kingfisher, the European home improvement group, whose revenue from independently verified eco products reached £1.1bn in 2010-11, representing 10.5% of its total retail sales.

Nor are these isolated examples. A host of household name companies, including GE, Kimberly Clark, Marks & Spencer, Nike and Ikea, are setting targets for developing new products and services that address sustainability needs while boosting profits.

Partnership progress

In other sectors, businesses are making a noticeable shift toward strategic collaboration in developing environmentally-friendly technologies.

Perhaps the best example is the rash of new partnerships in the fiercely competitive auto industry. Toyota and BMW Group recently announced joint research on next generation lithium-ion battery technologies and BMW will begin supplying “clean” diesel engines to Toyota in 2014. Clearly, these companies believe that the market return on developing breakthrough low carbon vehicles merits collaboration to speed their development.

Going one step further, companies such as Volvo and Daimler are making partnerships outside the industry on the design of cars and even engines, which were previously considered a core asset of auto companies alone.

Daimler and components giant Bosch are pursuing a 50-50 joint venture to develop traction motors for electric vehicles, and aim to produce a million electric motors by 2020. A rival Volvo-Siemens partnership also aims to speed the technical development of electric cars.

Finally, long-term sustainability trends are starting to influence the very heart of the financial system – mergers and acquisitions.

Companies looking for deals to enhance their business model are paying increasing attention to trends such as resource scarcity and growing food and energy needs. As a result, companies in several sectors are factoring sustainability and resource challenges into key decisions about their company’s future.

M+A concerns

2011 saw a flurry of acquisitions, for example, by conventional oil companies of US shale gas reserves. Chevron bought Atlas Energy; Statoil bought Brigham Exploration; and most recently Total announced a significant stake in Chesapeake Energy. Notwithstanding the growth opportunities the new reserves offer and the various controversies around shale gas, it’s clear that these acquisitions are also influenced by resource scarcity and by energy security benefits.

In the food and science industries, DuPont bought Danisco – a producer of food ingredients, enzymes and bio-based solutions – as it looks to a future with growing need for sustainable food and fuel. And water scarcity trends influenced sanitation supply company Ecolab’s $5.6bn acquisition of water treatment and process company Nalco.

It’s too early to declare that sustainability has become a central driving strategy among leading international companies, but clearly the ground is shifting. Sustainability watchers should keep a close eye on new products and collaborations responding to environmental trends, as well as the world of mergers and acquisitions.

Kirsty Jenkinson is director of the World Resources Institute’s markets and enterprise programme. Samantha Putt del Pino is co-director, business engagement in climate and technology, at WRI.

 

business strategy  CR Strategy