CSR Archives

January 31, 2011

Wal-Mart Plays With Our Food

Every week, 140 million people — about the population of England and Germany combined — shop in a Wal-Mart store. Soon, all of these people will be eating healthier, and the environmental impact of their food will be lessened.

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That's because in recent months, the world's largest grocer (and company) has started to fundamentally change the food on its shelves. Wal-Mart's recent announcements continue a five-year campaign to green the supply chain, but they add in some interesting new twists as well. The entire agricultural sector, and everyone who, well, eats, will feel the ripples of these moves.

Some of Wal-Mart's initiatives increase profitability while hitting sustainability goals; for others, the societal benefits are real, but the business benefits are not as clear, at least on the surface.

Three initiatives in particular demonstrate a strategic focus on food sustainability.

(1) In October, Wal-Mart announced that it would double the amount of locally-sourced produce on its shelves. There's some legitimate debate about whether shortening distances alone really reduces the environmental footprint (a fascinating new study says that cutting back on meat is far more effective in lowering impact than buying local). But Wal-Mart says the initiative will reduce spoilage and increase shelf-life. Those changes, by reducing the total amount of food needed, will certainly reduce overall environmental impacts throughout the value chain.

As is the case with most of Wal-Mart's sustainability initiatives, this one fits the company's mission and strategy perfectly. It will reduce environmental impacts, but also reduce logistics and supply chain costs (in part because what's noticeably absent from this announcement is anything about increasing sales of organic food, which usually costs more). Wal-Mart can pass on these operating savings to customers, so it all fits nicely within the company's normal business model.

But some more recent announcements are not as clear-cut on the business side.

(2) Last week, Wal-Mart said it will both lower the prices of fruit and vegetables (saving customers $1 billion) and reduce the amount of saturated fat, sugar, and salt in its private label products. On the latter point, Wal-Mart was not the first to the table, with companies such as Kraft and Pepsi setting similar goals last year.

It's more of a stretch to fit this announcement neatly into a sustainable/profitable business framework. The sustainability benefits are real — on the green side, reducing ingredients like sugar should have sizable ripple effects up the supply chain in saved energy and water. The business benefits are in there also, but are fuzzier.

Improving health of course fits a social goal, but it also demonstrates caring for your customers, which can drive loyalty, sales, and brand value. It's also not purely cheeky to suggest that keeping your customers alive longer, and healthier, will help your bottom line.

(3) The third recent announcement falls much more clearly in the pure corporate social responsibility world. In a fascinating display of smart philanthropy, Wal-Mart is helping the hungry by helping food banks lower their energy bills. The company donated $2 million to 16 food banks to, in the company's words, "upgrade their lighting, refrigeration or heating and air conditioning with equipment that performs better, uses less energy and costs less to operate."

Wal-Mart estimates annual energy savings of $625,000, which will buy 300,000 more meals every year from now on. The $2 million donation is in reality dwarfed by Wal-Mart's own $2 billion of cash and in-kind donations to reduce hunger. But I hope that this extremely clever model of philanthropy — where you give a gift that keeps on giving — will take hold even more. Lowering the footprint and operating costs for non-profits is pure win-win.

In short, as is always the case, sustainability initiatives do not fit neatly into one box within a company. Are they for social good or to make money? The answer is, invariably, yes. Again, pressing its supply chain to do more, faster, is what Wal-Mart has always done, but in recent years the pressure has been focused on sustainability. All these food initiatives expand on that approach, but also show Wal-Mart "walking the walk" and finding opportunities for smart philanthropy to round out the story. It's a robust strategy for covering many angles on the sustainable food movement.

The benefits to all possible bottom lines are substantial. If Wal-Mart and the other companies in its supply chain succeed in reducing fat, sugar, and salt in food; improving access to food for the poor; and sourcing it locally and using less energy to do so, both the planet and its inhabitants will be healthier.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

April 10, 2011

Corporate Citizenship Should Include Paying Taxes

General Electric paid no taxes in 2010. Or at least that was the major takeaway from a recent bomb-dropping exposé in the New York Times. At a time of obsessions with federal fiscal austerity, this was a big story, and everyone was talking about it last week.

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I'll admit to having a visceral negative reaction, in part because GE is an important company that most people have high expectations for. So I wanted a bit of distance before composing some thoughts. I thought it would also be interesting to see GE's reaction and response before jumping to conclusions. But even after mulling it, I feel like the whole affair is not good for anyone — the country, the business world, or even GE itself.

Ok, so the facts are these. GE made $14 billion in profits in 2010, $5 billion in the U.S. Its tax bill in the U.S. will be negative $3.5 billion (as in getting money back). Is this legal? Of course it is. But the question on everyone's lips is whether a company can be a solid, contributing member of society and pay no taxes.

That's much less clear. After all, as I've long argued, responsible corporation, particularly one that is responsible with environmental resources, can create real value. GE has been a green leader for a number of years now with its ecomagination products and growth strategy through clean technology. And we always have to include the obligatory, but not insignificant, mention of providing jobs and livelihoods. We should also remember that this story is about income tax, not all taxes — I assume the company is still paying social security taxes on all employees (please tell me they are).

So what did GE have to say? The company's response to the clear implication of wrongdoing was not overwhelming. The perfunctory letter to the editor mainly says that GE Capital lost a bunch of money in previous years, so the losses carried forward. Verifying that point is really not easy, and the company didn't offer details.

I looked at GE's SEC filings and didn't see losses (please, someone educate us on this). The 10-K's show a run of profits — and positive return on equity — ranging from $11.0 to $22.2 billion over the last five fiscal years. On income taxes, the latest 10-K has this to say: "Income taxes (benefit) on consolidated earnings from continuing operations were 7.4% in 2010 compared with (11.5)% in 2009 and 5.6% in 2008." More numbers follow, but all are far lower than the statutory tax rate of 35%.

The morass of numbers and complicated logic involving foreign earnings is really the point here. GE, according to the Times, has dedicated some significant resources to legally gaming the system. The company employs 975 full time tax attorneys who have been told to spend half their time focusing on ways to reduce the companies tax bill (it was at this point that I wondered what 500 focused FTEs could accomplish on some more productive task, like inventing more ecomagination products). On top of this extensive internal tax law firm, GE spends $200 million on lobbying, much of which is dedicated to changing tax laws.

So let's look at the business logic here. GE has clearly seen the value in its socially-conscious programs, and the company has seen massive growth in its ecomagination portfolio to $18 billion in 2009 alone. Corporate social responsibility, the larger umbrella of environmental and social initiatives, also creates value, even if it's harder to put a number on. How your company is perceived on CSR issues affects sales, employee recruitment and retention, and brand value (I doubt that the coverage this tax story has driven is what GE is looking for).

But on a more tactical point, GE has a number of major business units that serve industries supported heavily by government spending: energy systems and the grid, transportation networks, and water systems to name a few. It's not silly to suggest that companies which need consistent and aggressive societal spending to thrive should consider it a good investment to pay into that system. I'm reminded of Henry Ford greatly increasing wages so that people could buy cars.

So there's a distinct possibility that tax strategies like GE's could destroy real brand and tangible business value and, given the fact that GE is not alone in this, impoverish the country.

But, to be blunt, it's also unfair.

As individuals, we all face taxes that we can't avoid in the form of the Alternative Minimum Tax. The landmark Citizens' United Supreme Court Case of 2010 continued a long tradition of giving companies the rights of citizens, in this case a form of free speech related to political donations. I could be convinced that "corporate personhood" is deserved, as long as it comes with accountability. A person with all rights and no responsibilities is basically a sociopath or, as one colleague joked, a teenager. It should be no different for a company.

GE is not a bad guy for doing what's in its charter and maximizing profits. Their actions are not illegal, or even immoral probably. But they are unfortunate at the least, and at the most, reduce the value of a great American company.

(This post first appeared at Harvard Business Online.)

January 22, 2012

A Vision of Real Corporate Leadership on Sustainability

[This piece appears on Sustainable Brands' site as part of a special monthlong focus on leadership. Chris Laszlo and I are guest editing. We have laid out a framework for true sustainability leadership to help shape the discussion. We each are also offering a deeper dive on one half of the two-by-two matrix we suggested. I'm focusing on the “external” side of leadership which focuses mainly on (a) how a company responds to global sustainability pressures and (b) how it does business in a way that’s visible to the outside world…its products, processes, relationships, and so on.]

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The basics of sustainability excellence are fairly well known by now: reduce your footprint, create products and services that help customers do the same, drive employee engagement, think value chain, track data and enable transparency, and on and on. But real leaders will go further and address the scale of the sustainability challenges we face by fundamentally remaking their companies. Here’s what I envision in a few key areas:

Science-Based Goals

Footprint reduction targets are important, but if the goals are not based on what scientists tell us – i.e., we need an 80% reduction in absolute greenhouse gas emissions – they’re not good enough. Sony and a few others have targeted zero impact by 2050. This level of commitment needs to become the norm, and then a few brave souls can go beyond reducing harm (even to zero) and set goals to build restorative enterprises.

Policy

While uncommon today, the basic level of performance on policy should be to make lobbying efforts consistent with core business strategy and public messaging (for example, are you proudly launching products that use less energy, yet lobbying hard against higher efficiency standards?). Real leaders go much further and lobby for stricter standards and aggressive action on climate. CEOs can demonstrate their external leadership by promoting this agenda with corporate peers and government leaders. Some companies are on track, committing to the recent “2 Degree Challenge Communiqué” or joining groups like BICEP (led by Ceres, Nike, and others) which demand strong climate policy action.

Product and Service Innovation

Reducing the customer’s footprint will need to be the core aim of all innovation efforts and all product lines (not just a sliver of the portfolio as it is today). Sustainability innovators will open up their creativity process, inviting customers and partners to offer innovative solutions (GE’s Ecomagination Challengeis a good example). Innovators will embrace disruption and heresy (which I’ve written about before) by helping customers use less of their products. For a glimpse of the future, see Unilever’s campaigns to get customers to reduce water use and Patagonia’s Common Threads, which offers a grand bargain: “We make useful gear that lasts a long time…You don’t buy what you don’t need.”

Valuation and Investments: Financial and Operational Metrics

Leaders such as P&G and GE have set aggressive revenue targets for their greener products. A few companies put a price on carbon for internal capital allocation decisions or, like DuPont and Owens Corning, set aside a percentage of capex for eco-efficiency investments. These actions help correct the inherent flaws of ROI decision-making by valuing sustainability more explicitly. The next step is fully incorporating intangible value – employee engagement, customer loyalty, brand value, and the like – as well as measuring and including all externalized costs in investment decisions. Two trendsetters, Puma and Dow, have begun this important journey.

Investor Relations

I believe that the relentless pursuit of short-term, quarterly profit goals to please Wall Street analysts is bad for companies – great enterprises very rarely seek profit alone – and certainly isn’t good for the planet. Like Unilever’s CEO Paul Polman, the real leaders will stop providing quarterly guidance and ask managers to focus on the real measures of success: making great products, serving customer needs, creating good jobs, and driving both cash flow and long-term profitability. The most sustainable companies will become “benefit companies” or “B Corps”, with a broader charter than just pursuing shareholder value. Seek greatness and sustainability, and the money will follow.

Resources Dedicated

Most companies give their sustainability execs woefully inadequate resources to do their stated jobs, let alone transform their companies. A truly committed organization will allocate resources equal to the challenge and will give the sustainability function real power. I suggest creating a “skunk works” team run by sustainability, along with perhaps corporate strategy and R&D, to question everything and challenge the core business model (e.g., What if the product were a service? What if we used no fossil fuels?). This is how companies can systematize heretical innovation.

Employee Engagement

Educating all employees on sustainability principles and creating green teams are good first steps. Tying all executive compensation directly, and substantially, to sustainability goals is even better. But real leaders should work to convince those hostile to change throughout the organization…or eliminate them. In the words of Jim Collins in Good to Great, “get the right people on (and off) the bus.” Leaders will also help employees pursue sustainability in their own lives and communities and provide an outlet for organizing campaigns, such as the awareness-raising “climate ride” conducted by apparel company Eileen Fisher. If the workplace is appropriate for United Way drives, why not for climate action?

In short, I’m imagining a very different kind of company. The overwhelming challenges we face demand profound shifts. Of course, much more than I’ve mentioned will need to change – on the social side of the equation for sure – so please let me know what you would add to my vision of true leadership.

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

February 6, 2012

Apple's Greatness, and Its Shame

Is there such a thing as too much profit? A disciple of Milton Friedman would say "never." The idea that companies should only maximize shareholder value has had a stranglehold on the business world for decades. It's time to rethink this assumption.

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A couple of weeks ago, Apple reported breathtaking earnings. In the fourth calendar quarter of 2011, Christmas shoppers snapped up 15 million iPads and 37 million iPhone 4Ss. The world's most innovative company brought in $46 billion in revenues, $13 billion in profit, and an eye-popping $17.5 billion in cash flow. Apple is the only company competing with, and now beating, Exxon for the title of "most profitable company ever."

Right when Apple's earnings came out, the New York Times also hit us with two powerful articles about Apple's supply chain that revealed some deeply troubling issues for the company's business model. The first, "How the U.S. Lost Out on iPhone Work," painted a dim picture of U.S. competitiveness by demonstrating what Chinese suppliers are willing to do to get Apple's business. But the second article, "In China, Human Costs are Built Into an iPad," shows us the enormous human cost of getting work for cheap. It's a horrifying picture of life at the now infamous Foxconn facilities.

Combine Apple's incredible earnings with the reality of life in its supply chain, and it's clear that the tech giant could afford to do much better by workers. It's not sustainable for any company to continue relying on people with such limited rights and life prospects.

But is it fair to pick on Apple? Yes, to some degree, since other companies with deep connections to China have done better on working conditions (a Times source name checks HP, Intel, and Nike for example). In the spirit of being balanced, a few points: (1) even with a few good actors, worker treatment is a systemic challenge common to electronics, apparel, and any other sector with complex, worldwide supply chains; (2) Apple has put some effort into improving supplier conditionsand CEO Tim Cook replied last week to the concerns; (3) Consumers also take on some responsibility-we should be demanding more transparency and information about how our products are made (I'm targeting myself here as well since I'm typing this on a MacBook Pro).

But Apple too should be doing far more.

We'll only fix the problem if the largest, most profitable, and most powerful brands demand better treatment for all people who work on a product. The most damning quotes in the Timespiece come from former Apple execs: "Noncompliance is tolerated...If we meant business, core violations would disappear" and "Suppliers would change everything tomorrow if Apple told them they didn't have another choice."

So am I suggesting companies pursue unprofitable paths? Hardly. These labor challenges are complicated, but any argument that it would be too expensive to pay people better and give them much better working conditions is absurd.

Some reasonable estimates from The Atlantic place the cost of materials (of a mid-level 32GB $600 iPad) at about $325. Labor is a whopping $10. If we assume, very conservatively, that iPhone assembly costs the same, then in the fourth quarter, Apple spent about $500 million assembling iPhones and iPads.

Let's imagine that Apple tripled expense on assembly to ensure better pay and worker treatment. The total additional cost: $1 billion The cost of an iPad or iPhone would go up $20 or — and here's a radical thought — Apple would make a little bit less money. I'm not remotely saying Apple shouldn't be profitable.

But would anybody in their right mind be disappointed with $16.5 billion in quarterly cash flow instead of $17.5 billion?

Am I making a complex issue too simple? To check my thinking, I spoke with a former Nike exec with deep experience in supply chains and China. Here's his view:

"Someone needs to break the cycle...why not Nike — or Apple? I don't see that as an oversimplification at all. The current "low cost" business model is not really low cost. Isn't one purpose of business to create the prosperity needed to increase the number of consumers capable of buying the goods we make? In fact, I would argue that what Apple is doing now is against the best interests of the shareholders...I've never heard a lucid explanation of what I'm missing."

This is about what we value in the world. Consider IKEA, one of the most sustainability-minded large companies in the world. The Swedish furniture giant has its own challenges (some history of labor issues as well and concerns about the sustainability of its short-lived products, for example), but the company has stated clearly that it's about "low prices...but not at any price."

Why is that a radical idea? I refuse the notion that maintaining a moral compass is anti-business, anti-competitive, or naïve in some way. Smart, innovative, lean companies can make plenty of money and do the right thing. And, frankly, since companies have an awful lot of the rights of humans, they should share some of the moral responsibility as well.

Our system of competition yields amazing results — incredible technological innovation provided in massive quantities very quickly. But these marvels often rely on very real human costs. The whole system has some deep flaws that we must fix.

Apple prides itself on changing the game. So just imagine a world where the company applied its staggering innovation and design skills to create the iSupplyChain or iWorkingConditions. Everyone, including this fan of Apple products, would be a lot iHappier.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

March 20, 2012

Corporate Sustainability Efforts -- Feast or Famine?

Is corporate sustainability on the wane or growing more important to top executives? At the beginning of the year, two big-picture reports on the state of green business painted divergent pictures.

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In GreenBiz's annual review of 20 indicators of "how business is doing" on green, we learn that 6 of those indicators are on a downward trend. But in the report "Sustainability Nears a Tipping Point," MIT and BCG prove their point with a fast-rising graph of companies that recently put sustainability "on the management agenda."

While they seem at odds, both views are right — companies are no longer ignoring sustainability; most big companies now have someone focused on it, at least in part. That's why execs can honestly tell MIT that it's on their agenda. But with sustainability often siloed into just one person or department in each organization, it's hardly a surprise that, at the same time, we're seeing some loss of momentum. Sustainability has moved from being a hot, new management trend to being just one more thing for execs to keep an eye on: for many it's become a check-box exercise..

This structural gap reveals the fundamental misunderstanding about what sustainability really means for organizations. I've seen it time and again in the companies that I work with or study. For them, sustainability is a thing to tackle, a functional area; it's a what, like marketing or product development.

But sustainability needs to be viewed as much more of a how concept, like quality or innovation. It's a way of operating that creates the most value when it's embedded throughout the organization.

Of course companies have distinct quality or R&D departments and professionals, but the most committed companies drive the thinking into every aspect of the business. This is the mindset that sustainability needs to engender throughout an organization. And as with quality, this isn't just about ethical or aspirational hopes — acting with sustainable values, for example, as covered well by many, including Dov Seidman in his book How.

No, I'm talking here about the more prosaic, everyday, tactical, blocking-and-tackling of business. Sustainability pressures force changes in how we build our supply chains, how we design and manufacture products, how we deliver services, how we create and execute our business models and strategies, how we develop financial metrics to measure success, how we attract and retain 21st-century, holistic thinkers, and on and on. So sustainability pressures, if acted on, drive us to create and build better products, design more efficient services, execute better, and hire the best. Those are goals that reach throughout the entire organizational structure, and they're actually enabled by sustainable thinking.

Given the scale of these goals — and the global challenges we all face — putting just one (or a few) people against the what of sustainability is a woefully inadequate response.Resource constraints and rising input prices; increasing demands from customers, employees, and consumers; the risks of severe business continuity disruptions from water, climate, or labor problems in the supply chain...the list of big pressures grows more complicated every day. And these issues require a full-court press from all aspects of operations.

It's become a mantra in the sustainability world that green needs to be a part of everyone's job. Of course that's true, since detecting risks and innovating around them will often fall to those closest to the ground (hint, that's rarely the c-suite). But most companies are missing a big step.

To conquer a how you need more than just a mantra. You need a significant investment of resources in time, top-leader focus, people, and money. You need people to ride herd and drive the agenda — to do the cross-cutting analyses such as lifecycle assessments, to track and get a handle on the many diverse and complex issues, to present a unified front to employees and external stakeholders, to question business models and find new, heretical ways to operate and serve customers...the list goes on.

There's no "ideal" structure for sustainability efforts, just as no two companies would tackle innovation the same way. Most large companies have now appointed a lead on sustainability, but have provided limited financial support and fewer human resources. There are exceptions: a few well-known sustainability leaders, such as Starbucks, Nike, and Coca-Cola employ central teams with specialists in areas like water, climate, and packaging, as well as reps spread out around the organization.

One of my clients, Kimberly-Clark, a much quieter sustainability leader, has a centralized team of 5 to 10 sustainability-only managers (and that's only part of the 50-plus central staff covering environmental, health &safety (EHS), OSHA, and, yes, quality). More importantly, Kimberly-Clark has another couple dozen professionals in dedicated sustainability roles (again, not EHS) embedded in business lines and geographic regions.

But even the leaders with robust organizations are rarely putting much money specifically into sustainability-driven innovation or disruptive changes that might dramatically reduce the value chain footprint of the company's products. Let's be honest: It's very hard to assess how much is "enough" when you're investing in a strategic priority. But it helps if the organization first defines it as a strategic priority. And given the ever-rising costs of under-reacting to sustainability pressures (such as direct costs from rising input prices, or business discontinuity risks from extreme weather), it's clear that companies should put a lot more people and money against an agenda as large, complicated, pressing — and let's not forget profitable — as sustainability.

Only with significant investment can we move down the path to sustainability integration and real, ongoing, full value creation. A robust network of sustainability professionals within a company — whether or not they sit in one "department" — may need to obsolete themselves over time. But until then, sustainability can't drive anything — it will just remain a nice side show.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter@GreenAdvantage)

May 1, 2012

Walmart's Shades of Gray

Many people love to attack Walmart — as the world's largest company it's an easy target. And although the retail giant's green efforts have done a lot to showcase the company's commitment to sustainability, sometimes Walmart gives its critics some legitimate ammo, like the recent revelations and allegations of corruption in its Mexican operations.

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As the New York Times recently reported, in the early 2000s, when Walmart de Mexico was building stores at a furious pace (making the country the company's second largest market), it was making illegal payments to get building permits and speed store expansion. The growth miracle was, it turns out, not so miraculous.

Of course this is not a good thing in and of itself. But where the story gets really troubling, if the accusations are true, is in how the company handled the matter. After its internal, FBI-trained watchdog group investigated the allegations — and made waves — the case was given back to the chief lawyer for the Mexican operations. This was, as the Times put it, "a remarkable choice since the same general counsel was alleged to have authorized bribes." It sure looks like something not flattering, and possibly illegal, was swept under the rug.

So what do the recent allegations mean for Walmart's sustainability efforts? On the one hand, nothing. In fact, the same week this story surfaced, the company released its 2012 Global Responsibility Report, an interesting juxtaposition to say the least. I've long been a fan and chronicler of the company's green efforts (full disclosure: I've spoken at multiple Walmart events, including a sustainability summit held by Walmart Mexico in 2010), and this report did not disappoint on that front.

Walmart listed some impressive accomplishments, from diverting 80% of waste from landfills, to doubling the amount of local food sold, to generating over 1 billion kilowatt-hours of renewable energy onsite (the second most of any corporation in the U.S.). These achievements, along with a 5-year record of pushing the sustainability agenda harder than almost any company, are real and demonstrate leadership in responsible business.

So here's the rub with sustainability, corporate social responsibility, ethics, and anything else that's generally (if sometimes awkwardly) thrown together into the vast bucket of "good stuff": The measurable and legitimately good things a company does will not make up for what it does wrong. But nor will the bad cancel out the good — the good things are no less legitimate just because the company does some things its leaders should be ashamed of. The good practices are worth emulating regardless of the larger context.

The significant challenge of how to view, judge, and learn from the actions of a complex, messy thing called a "company" is nothing new. If an oil and gas company wages a multi-decade campaign to muddy climate science, but also funds next generation low-carbon fuels research and operates incredibly efficiently, is that original campaign any less immoral? Should other companies avoid the cost-saving, innovative, best practices of the bad actor? Of course not. When it comes to what we can learn or gain from a company's profitable and sustainable initiatives, the bad things don't really come to bear.

But when thinking about a company as a whole and that vague thing called a "brand," it's a different story — everything is related. Key stakeholders, such as customers, consumers, employees, and even the investors and markets, judge the value and values of a company and then decide if they want to interact with it. That judgment so far is pretty clear in this case. Even though one can never have too much faith in short-term market reactions, this one was serious: Walmart's stock dropped 5% when the story broke and, as of this writing, is down 8%, or $16 billion in market cap (while the Dow was flat).

I'm frankly surprised investors care — there's historically, and unfortunately, little downside for companies that engage in this kind of corruption in developing countries. But the immediate market reaction here is fascinating. It says to me that there's some recognition of real risk to the company in these practices: that the hit to the brand matters, or that people may not want to work for or buy from a company they can't trust.

There's some understanding that a company's value in the market is connected to its values (of which sustainability efforts can be a good indication). Just as it's not sustainable to over-consume natural resources, it's not sustainable to alienate key stakeholders through ethical lapses.

The totality of a company's actions does matter. We should demand consistent, ethical behavior and a real commitment to doing what's good for people, planet, and profit, which includes not compromising on ethics. We can expect more from companies we buy from and work with and for, especially the very large ones that show such promise and leadership.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter@GreenAdvantage)

May 14, 2012

Microsoft Taxes Itself

This week, Microsoft is announcing an unusual initiative that it hopes will change how the company operates: an internal fee on carbon.

Starting July 1st — the beginning of the company's fiscal year 2013 — the software giant will charge all of its 100-plus global offices and datacenters a fee for every ton of carbon they produce (mostly from plugging into the electric grid, so-called "indirect" emissions). The money collected will go to purchase Renewable Energy Certificates (RECs) and carbon offsets, allowing Microsoft to declare itself carbon neutral.

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Although carbon neutrality is a claim that's gotten less credible over the last few years, Microsoft seems well aware of the challenge and is handling it well. Here's the problem with asserting neutrality: it's hard to ensure that any carbon reductions you're paying for — from, say, capturing methane from a landfill or replacing inefficient cook stoves in Africa — would not have happened anyway (this is the problem of "additionality").

So to navigate this tricky terrain and make the most of its efforts, Microsoft is working with a handful of NGOs and a well-respected partner, Sterling Planet, which will buy the RECs and offsets.

Interestingly, however, carbon neutrality doesn't seem to be the real point of Microsoft's initiative. From my conversations with the company, I take away four major reasons they're doing this:

  1. Behavior change. Microsoft seems more interested in lowering overall carbon emissions and energy use, not just neutrality in and of itself. This focus on actual emissions and outcomes is the right way to go. The offsets become a tool, a last resort to be avoided, and both energy efficiency and using renewable energy (onsite or directly purchased) become the paths of least resistance and cost. As Rob Bernard, Microsoft's Chief Environmental Strategist says, "If you run one of our offices, and you choose to use carbon-based power, we'll charge you more for your energy." And this charge will, in theory, move managers to make greener choices. So the point of this fee, like all "taxes," is to change behavior, discouraging some pathways by making them less palatable.

  2. Accountability throughout the organization. Each division is going to own this issue. Let's say NGOs or customers are asking questions about what kind of energy Microsoft uses to power its datacenters. The executives running that facility, not just centrally located sustainability professionals, will be empowered to address any concerns, drive for greater efficiency, and choose greener power. Pricing carbon is an excellent way to raise awareness internally before the external pressure builds.

  3. Risk reduction. Bernard and his colleague who's running the program, TJ DiCaprio, have encouraged the organization to better understand its profound energy-related risks. As Microsoft takes on more of its customers' operations through cloud-based services, reliance on the utility grid creates real operational and price risk (from outages and volatile prices). Cloud service providers are increasingly proxies for utilities — they require 100% uptime, significant quantities of their own power, and predictable variable cost (which for renewables is nearly zero).

  4. Sales/Becoming the Vendor of Choice. The company knows that its customers are increasingly looking for providers that can offer reliable service at low cost — and low carbon emissions. Driving the organization to use more alternative energy helps land large customers concerned about their value-chain footprint.

So how will Microsoft make this initiative a reality? The execution plan has some interesting elements (see a pithy white paper on the full carbon neutrality plan here). The company will measure carbon footprint in different operational buckets such as plug load (electricity used) and business travel, and then offset each category "like for like" (i.e., buying RECs for electricity and offsets for travel). The fees will vary as well; for example, the company will charge employees for all air travel on a per-mile basis, which raises awareness at the individual level.

The program is smart, but I'm left with one major concern: Will the fees be high enough to change behavior? Right now, the market price of carbon is very low, so Microsoft is charging a small amount per ton. Even so, they will collect north of $10 million, which is enough to buy offsets. Over time, by my calculations, given the growth in cloud services the company is banking on, these carbon fees could rise to a more noticeable $50 million by 2020. But let's be honest, these numbers are clearly rounding errors to a company that netted $23 billion last year.

To be fair, as the behavioral psychology gurus (from books like Nudge) will tell you, sometimes just making people aware of a cost is enough to foment change. So the minor nudge here may be good enough. But in the longer run, the price on carbon needs to be more of a sledgehammer than a nudge. It should reflect the full cost to society of health impacts, national security risks, and price volatility, all of which add up to tens of dollars per ton or more.

Pricing carbon on your own, without a real market in place, is hard, which is why there are so few examples of companies doing it. Going back over a decade, BP put in place an internal carbon trading system that used a "shadow" price to encourage divisions to find the cheapest reduction opportunities (others like Shell have also used this tactic). But executives weren't charged real money. And more recently, athletic apparel company Puma (working with my colleagues at PwC and the UK's TruCost) produced an "environmental P&L" which measured the "real" cost of carbon and other environmental inputs like water. The company is exploring how to include the "price" in operations and give ownership to line managers; it currently says the metrics will "inform operational decisions."

So even with important experiments like these that have gone before, Microsoft's program is perhaps the first actual internal fee at this scale (my research isn't turning up anything exactly like this — please send me examples if you have them!). It's innovative and committed, but it also points to a massive global failure of leadership on climate policy. We should put a price on carbon across the entire economy. But as Bernard says, "While governments have an important role to play, we hope there's a benefit in us moving faster than the policy world."

He's absolutely right. Companies cannot wait for the government wheels to turn to price and manage carbon — the cost saving, risk reduction, and brand benefits of leading are too high.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter@GreenAdvantage)

June 18, 2012

Kaiser Permanente Links Climate Change to Health Care

Kaiser Permanente (KP), one of the largest health care providers in America, has a clear mission: improve health. In a surprising and welcome twist, KP is publicly recognizing that climate change threatens that mission. This health care leader is showing how an authentic, mission-driven connection to global issues can drive change.

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The topic of climate change has become so politicized, it's rare to hear company representatives and CEOs admit that they're taking a course of action specifically in response to a climate-related threat. But that's starting to change, even in sectors you might not think have a direct stake in climate change.

KP is not a minor player in a health care industry that accounts for 16% of U.S. GDP and 8% of greenhouse gas emissions. With $44 billion in revenues, KP runs hospitals, clinics and health plans, serving more than 9 million members in nine states (and Washington, DC). The "company" is technically a not-for-profit, but in my experience that matters little to medical device and pharma companies that experience KP as a very, very large customer with large demands.

The company has made increasing commitments to renewable energy as part of its aggressive greenhouse gas (GHG) reduction goals (30% by 2020). KP is buying both carbon offsets and significant onsite energy — 11 megawatts of solar and 4 megawatts of fuel cell generation, for example.

All of this is surprising since the health care sustainability agenda has mostly focused on supply chain issues, reducing exposure of patients and workers to toxic chemicals, green building, and general eco-efficiency. Why are they doing so much on renewable energy?

I spoke recently with Kathy Gerwig, KP's Environmental Stewardship Officer, to find out. I expected a more typical answer about achieving GHG reduction goals or doing the right thing. What I got instead was one of the most straightforward statements about the role of climate change in public health and in corporate strategy.

As Gerwig put it, "there's credible evidence of significant climate change that will impact our ability to provide quality health care."

She laid out four broad categories of the health effects:

  1. Severe weather: Hurricanes, wildfires, floods, and heat waves all injure and kill people. Hospitals — and all businesses for that matter — need to prepare for these extremes.

  2. Respiratory diseases: Air quality in general deeply affects health. This is, as Gerwig says, mainly about the short-term consequences of not dealing with burning fossil fuels and the changing climate.

  3. Infectious diseases: As the planet warms, bugs like mosquitos can survive and thrive further north, spreading diseases to new areas. According to the UN, previously untouched areas like the southern U.S. and Mexico will face malaria, yellow fever, and dengue by 2050.

  4. The "what we don't know" bucket: While the science is clear that climate change is a serious problem, we still don't know a lot about how it will play out (this is not the same as saying the science is so uncertain that we shouldn't do something). "What we know so far about the repercussions of climate change isn't good," Gerwig says, "such as water shortages and increased wars over resources, and all the health issues that go along with those."

KP is not laying low on the other areas of the health care sustainability agenda, with many impressive initiatives, such as its sector-leading supplier scorecard. But KP is demonstrating a larger view of the company's place in society and in the battle to salvage a healthy, stable climate.

We need all sectors to man the barricades and take positions. Setting a 30 percent absolute GHG reduction goal by 2020 is in line with what scientists tell us we need to do, and it's unusually aggressive. But integrating sustainability and climate change into the health care mission of the organization is the real story here, and its one that companies should emulate quickly.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter@GreenAdvantage)

October 10, 2012

How Walmart's Green Performance Reviews Could Change Retail for Good

Walmart's efforts to green its supply chain are about to get much more effective. Sustainability will now play a role in its merchants' performance reviews, which help determine pay raises and potential for future promotion. This is a big deal: these merchants are high-level managers responsible for multibillion-dollar buying decisions. They're the people who determine which products appear on the shelves of the world's largest retailer.

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Some quick background: Walmart deserves praise for its industry-leading sustainability successes, such as improving its fleet fuel efficiency by 69% and becoming the nation's leading commercial buyer of solar energy. The company's most important sustainability initiative — the pressure it puts on its 100,000 suppliers to improve their environmental performance — has changed how thousands of products are made, packaged and sold.

For the past five years, Walmart has built sturdy scaffolding around what could be a world-beating green supply chain, including:

  • Developing Sustainable Value Networks, which bring together major suppliers with cross-functional internal teams to tackle issues from packaging to waste to energy use.
  • Asking 100,000 suppliers to answer and provide data on 15 environmental impact questions.
  • Building the Sustainability Consortium (TSC) with many of the world's largest consumer products companies and big retail competitors. TSC created metrics to evaluate suppliers and their products on environmental and social performance, and Walmart has integrated these metrics into its own supplier Sustainability Index and scorecards.

But greening its supply chain has been a tough task. Suppliers have repeatedly voiced one critical and legitimate complaint: Walmart's merchants don't really take sustainability into account when they make buying decisions. This flaw in Walmart's green supply chain program has threatened to undermine the foundations of a highly-touted and important initiative.

In essence, the suppliers and other stakeholders have told the company, according to Walmart's Sustainability director Jeff Rice, "It's great to ask your suppliers questions, but it only matters if you do something with the information." In their view, the company has continued to choose the products it sells primarily on price.

But now, in addition to Walmart's long-standing, laser-like focus on cost, its merchants will have to consider sustainability in their buying decisions — or risk a weak performance review. And all because of a simple shift in incentives.

Jeff Rice gave me a great example of how this change is already working, in the form of how Walmart selects the personal computers it sells. Laptops use a lot of energy over their lifetime, and a big driver of energy use is the default setting on power management. These settings determine how fast (if at all) the computer goes to sleep or when the screen dims. Using the index scorecards I mentioned above, Walmart's laptop buyer identified energy use as the biggest determinant of the computer's total lifecycle footprint and emissions.

The buyer then discovered that only 30% of the laptops sold at Walmart ship with the advanced energy-saving settings in place. To compound the problem, the company's research shows that most consumers leave such settings at factory default. So the laptop buyer set a new goal for herself: to increase the percentage of laptops sold with the advanced power settings from 30% to 100% by this Christmas. This single product shift will reduce CO2 emissions by hundreds of thousands of metric tons and save customers money on their electric bills.

Rice told me that performance evaluations for buyers only include a handful of targets, and all are discussed thoroughly at annual reviews. Sustainability performance won't determine the entire evaluation, of course, but it's high profile enough that it should affect behavior.

Incentives matter and cultures shift over time. Hard-won operational changes like modifying performance reviews may not be sexy, but the results can be profound. And when it's the world's largest retailer changing its buying criteria, the ripples will likely be felt around the world.

(This post first appeared at Harvard Business Online

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter@GreenAdvantage)