German companies can be slow-moving, but when they decide to act, they are thorough and credible

Something strange is going on in the heart of Europe. The continent is mired in a debt crisis and unemployment is rising, reaching about 8.5% in Britain and a crippling 23% in Spain. But in Germany, Europe’s engine, the situation is very different.

Well-run Germany has consolidated its dominance of the European economy during the crisis. German unemployment in 2011 fell to its lowest level since unification in 1990, even while the country’s economically active population reached an all-time high. German exports grew by an amazing 11.4%, with the value of exports beating €1tn for the first time.

Some of the German companies behind this success are globalised brands, such as BMW, DaimlerChrysler and Siemens. But these are not necessarily the core of the German economic miracle. More significant are the so-called Mittelstand companies: the medium-sized manufacturers that work in often unglamorous business-to-business sectors, and whose products are exported the world over.

The economic contribution of the Mittelstand outweighs the global brands. Small and medium-sized companies are responsible for about 80% of employment, and numerically make up 98% of Germany’s exporting companies. The role of Mittelstand firms also affects the way corporate responsibility and sustainability are perceived.

Bernd Venohr, a professor of management at the Berlin School of Economics and Law, says Mittelstand companies have characteristics that lend themselves to a sustainable approach. Companies are commonly family-owned, often long-lived and, in about 70% of cases, are located in small towns or rural areas. They practise “a kind of ‘enlightened capitalism’,” Venohr says.

“The company is quite often the largest employer in its region. It reinvests in the region, to keep it attractive,” he says. The Mittelstand approach is “self-serving on the one hand, but very beneficial for all stakeholders as well. If you run your business for the long term and not for short-term profit, you treat employees, suppliers, customers and the community with a high degree of responsibility.”

The long-term thinking of Mittelstand companies extends to their supply chains outside Germany, Venohr says. “You will find a large number of very good examples of introducing German-type standards in foreign countries. For example, in India some German companies insure the parents of employees as well; it makes the employee stay longer at the company.”

Unexciting sustainability

Many German exporters produce relatively unexciting products such as machine parts, heating equipment, filters and temperature gauges. Because they sell to other businesses, they face less pressure than consumer-facing brands over their corporate behaviour and the sustainability of their products. German companies have had a reputation for being slower to embrace sustainability than their American or British counterparts.

But this is changing, says Hannes Partl of sustainability consultants PE International. Heaters and temperature gauges are exactly the type of product that regulators have in their sights as they attempt to legislate to reduce greenhouse gas emissions and encourage energy efficiency. “Many companies are far ahead of legislation,” Partl says.

Because of the German management style, and because many Mittelstand companies are family run with tightly controlled purse strings, it is legislation and financial considerations that drive sustainability. Partl says that if companies are “spending money, they want to spend it as well as possible”, with an eye to the returns over the long term. When German firms adopt sustainability, it is a business decision, and can go deeper than in other countries, where it can be more akin to a marketing decision.

Germany’s chemicals, automotive and electronics companies are particularly tuned in to sustainability, Partl says, because they are aware that their products are likely to attract ever more strict environmental regulations. Demand for advice on greener practices is growing “faster than the economy is growing on average”, Partl adds.

Environmental accounting

The German emphasis on the link between sustainability and the bottom line can perhaps be most clearly seen in the pioneering move by sports brand Puma to introduce environmental profit and loss (EP&L) accounting. This, according to Jochen Zeitz, executive chairman of Puma, is a recognition that “the traditional business model is outdated and does not take the most important asset, nature, into account”.

The EP&L, completed in late 2011, is a systematic attempt to put a price on the company’s environmental impact, covering the greenhouse gases it emits, the water it uses, and the waste and air pollution it generates. The 2010 cost was put at €145m, most of which (€137m) was caused by Puma’s supply chain rather than distribution and sales.

The cost has to be seen in the context of Puma’s 2010 net earnings of €202m. The company said the environmental cost “will not affect net earnings [but] will serve as an initial metric for the company when aiming to mitigate the footprint of Puma’s operations and all supply chain levels”.

However, placing a price on carbon and on environmental services, such as clean air and water, is seen by regulators as one way to encourage sustainability. Elements of Puma’s environmental balance sheet could start to transfer to its financial accounts. Preparing the EP&L could therefore be considered a far-sighted business move to evaluate likely future real costs, rather than just good PR.

Zeitz says the EP&L “allows managers and stakeholders to see the magnitude of [environmental] impacts and where in the supply chain they occur” and it will “improve specificity for risk management regarding environmental dependencies”.

The exercise has already led to surprises and identification of areas that could be tightened up. The “majority of the impact occurs farthest down the supply chain”, Zeitz says. “This lion’s share happens the moment we decide to use virgin raw materials like leather, cotton or rubber.” This means greater sustainability can be achieved through “alternative, recycled materials, and the choices our designers and developers make”.

Another discovery has been that the greatest level of waste is generated in the manufacturing of Puma’s products, rather than in the supply or processing of raw materials. “We are already working closely with [our] manufacturers to implement more efficient production technologies for reducing waste, such as more efficient cutting and sewing technologies,” Zeitz says.

Tina Loeffelbein of Greenpeace Germany says EP&L is an “interesting initiative” but should be considered only a start. For example, “it only looks at water consumption, and doesn’t consider water quality” she says. “The textile industry is very water and chemical intensive, so water quality is of major concern.”

Opening up slowly

Puma’s approach is representative of the rigorous thinking of many German companies that are starting to view sustainability as directly related to the bottom line. The approach to environmental issues echoes the way German companies deal with other corporate responsibility questions, such as treatment of employees. Many German companies treat their workforces extremely well, because they have highly skilled employees and want to retain them, rather than repeatedly go through what in Germany is the expensive process of finding new recruits.

But there are shortcomings. Mittelstand companies do not report as openly as listed companies, and German listed companies can be less open than counterparts in other countries. The Carbon Disclosure Project (CDP) has started a project to encourage non-listed German companies to provide information about their greenhouse gas emissions and climate strategies, but it is slow going.

Susan Dreyer of CDP Germany says there are some transparent non-listed companies, such as C&A, Otto Group and REWE. But many “don’t want to disclose”. There is no investor pressure on the non-listed Mittelstand companies, and they have a natural inclination to keep corporate data to themselves.

Listed German firms, meanwhile, have a 49% carbon footprint disclosure rate, which compares unfavourably with the 69% average rate globally. “The thinking in Germany is a bit different,” Dreyer says. “The UK and US have such a different culture in terms of investor engagement.”

There is one structural issue in Germany that keeps the disclosure rate sluggish, Dreyer says. Whereas the buying of company shares in the UK is generally done by investment management companies, in Germany it is dominated by banks. The banks, which also provide banking services to companies, can be wary of being seen as too activist on behalf of investors, in case their banking relationships with clients are threatened.

Nevertheless companies are increasingly opening up, Dreyer says. The first Mittelstand companies have started to disclose their carbon plans to the CDP, in response to a pilot project that started at the end of 2011. “The interest is really increasing here,” Dreyer says.

Sustainable supermarket

REWE is a Cologne-headquartered multinational supermarket and travel group, resembling Britain’s Co-operative. REWE’s Marco Sandner says the group’s aim is “achieving long-term, profitable growth, ensuring a secure future for coming generations”. This means placing sustainability at the core of the business.

REWE is large – turnover of €53bn, and about 335,000 employees – and is able to use its weight to influence others in a positive way. On the WWF palm oil buyers’ scorecard, for example, REWE is the top German retailer. REWE also promotes ethical products through its Pro Planet sustainability label, which received a German Sustainability Prize in 2010.

Uniquely among German food retailers, REWE also publishes a pesticides status report. This, prepared by independent analysts, assesses pesticide residues in fruit and vegetables sold by REWE. It is a tool to encourage suppliers to put in place less environmentally damaging practices.

The third pesticides status report, published in September 2011, showed significant declines in pesticide residues since 2007, and evaluated the consequent reduction in chronic risk to health to be almost 50%.

Family values

Family control over many of Germany’s largest Mittelstand companies means that their approach to corporate responsibility reflects the values of the controlling family. One of Germany’s biggest privately held family firms is Otto Group, an umbrella for more than 120 companies. Its interests cover online shopping, mail order, financial services and logistics. Revenues were €11.4bn in the year to the end of February 2011.

Otto Group is supervised by a board chaired by Michael Otto, son of company founder Werner Otto. Werner, who died in November 2011, aged 102, started early on corporate responsibility, in particular on projects in the 1960s providing medical assistance to children. Werner seems to have been deeply influenced by his experience in the second world war, paying for the reconstruction of a number of destroyed buildings.

Andreas Streubig, Otto Group’s corporate responsibility manager, says the Otto family’s “attitude and personal commitment” are the firm’s ethical starting point. “Sustainability clearly needs a rather long-term perspective,” he says, adding that family companies might have an advantage in this respect.

Otto Group’s ethical approach is wide ranging. It is a member of, among others, the Business Social Compliance Initiative and the Sustainable Apparel Coalition. It has sustainability targets, including a commitment to cut its carbon footprint in half by 2020 compared with 2006-07. It intends to offer by 2013 a carbon-neutral mail order service through its Frankonia online brand, and is building up an ethical online shop, Ecorepublic, which only sells goods that meet minimum eco-standards.

According to Otto Group’s corporate responsibility report, the objective is to “future-proof” the company through sustainability. This involves “concrete and measurable targets,” which are monitored at board level, and “a broad proliferation of the idea of responsibility throughout the whole company,” Streubig says.



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