Pundit’s Mailbag — Sustainability
In Bad Economic Times
Jim Prevor’s Perishable Pundit, October 21, 2008
I want to respond to your October 17 piece, Oil Price Decline Dampens Alternative-Energy Fervor, and, specifically, your comments on the recent decline in the price of oil and its potential impact on sustainability initiatives. You stated:
“…that great sucking sound you hear is sustainability going out the window. As the economy got softer, retailers started redefining sustainability to only focus on those initiatives that clearly generated a positive financial return — as opposed to those efforts pursued for environmental or social reasons. With oil prices down 50%, a lot of this so-called “low hanging fruit” is now hanging higher. So meaningful sustainability initiatives have become much rarer. Many are now just “green washing”.
While agreeing with many of your comments, I believe some added perspective is helpful. The key words in your statement that drew my attention were “as opposed to”… This represents what I believe is a false choice.
Many organizations have mistakenly taken the view that profitable business and sustainability efforts force them to make a choice — that environmental efforts will only add costs. While that is certainly true at those times in a free market where ‘externalities’ need to be addressed, there is significant financial and competitive advantage to pursuing many initiatives that create an environmental or social benefit. Identifying and pursuing changes in doing business that also create profit is a high priority for our generation of business leaders.
Any successful approach to this important issue embraces the hard work of integrating business profit and social good, altering how we approach business goals. I believe the most successful companies in our industry and beyond are learning how to do this. Thinking this way and being able to implement such efforts is rapidly turning into a strategic advantage.
I would also submit that any company that pursues significant environmental efforts that don’t save money or drive additional revenue will not be able to “sustain” those efforts. In short, sustainability efforts in the business community both support and have to be driven by long-term profitability.
Most of our current projects and initiatives within Four Seasons’ family of companies achieve both business and sustainability goals. In fact, as a produce distributor seeking to be a leader in this area, we have discovered far more of these exist than we can effectively pursue. Many times the limits we face are ones of creativity and time, not financial constraints.
While your point is valid that lower oil prices reduce the payback of efficiency or alternative energy projects, many quick payback projects exist even at lower energy prices. The results of implementing such projects have been significant. We have achieved more than a 25% reduction in electric costs in the past three years, and have realized significant savings on our disposal costs by reaching an 85% diversion rate on waste materials.
Also, through implementing appropriate technology and collaborating with our customers, we have improved truck efficiencies and routing — reducing our fleet miles to achieve over 10,000 gallons per month in fuel savings year to date.
We have accomplished this through a commitment to “implement innovative yet proven cost-saving methods to reduce our energy use, conserve resources, and improve the environment.” The keys to this strategy include:
- Regularly monitoring available methods, tools, technologies, and trends to identify potential improvement options.
- Joining partnerships and achieving certifications to drive continuous improvement in energy use and sustainability.
- Using environmental thinking and careful analysis to select energy and sustainability initiatives in order of financial feasibility and economic return.
- Implementing chosen projects through solution providers and suppliers who share our environmental commitment and core values.
- Sharing our efforts and results with customers, associates, and suppliers. Sharing information and benchmarking against others to learn what works best.
I would encourage you to visit our website for more information on these efforts at http://www.fsproduce.com/sustainability.aspx
I have also attached our company’s guiding document on “Energy & Sustainability Strategy” below.
— Nelson Longenecker
Vice President — Business Innovation
Four Seasons Produce, Inc.
We very much appreciate Nelson’s letter as it gives us an opportunity to get to the heart of the quandary that surrounds sustainability. We agree with Nelson that sustainability has to make financial sense; it is hardly sustainable for a business to go bankrupt or achieve sub-par returns and thus be unable to attract capital to grow and expand.
In fact this necessity to make financial sense is the crucial element that balances environmentalism and socially beneficial activities to create the sustainability whole.
Yet, having acknowledged this and written about it both here at the Pundit and many pieces elsewhere, such as this cover story in DELI BUSINESS, given dozens of talks on the subject from PMA to the Society of American Florists, we still find this a rather troubling definition of sustainability.
We, of course, laud the efforts that Four Seasons has made under this rubric. They are real accomplishments worthy of note and of praise.
Yet here is where we can’t quite define things in a way that is fully satisfying. Imagine that Nelson, with this incredibly positive attitude and a record of accomplishment, was brought in as a consultant to two separate organizations. Now imagine that the CEO of one organization was enamored of sustainability and excited to pursue such a program though, of course, considered financial feasibility an important aspect of sustainability. Imagine that the other CEO hated the very thought of sustainability and only wanted to pursue things that made good business sense.
What would Nelson propose that each organization do differently in light of these different values?
Here we hit an iron law. Every single thing that is proposed is either expected to be profitable and earn an adequate return on investment or not expected to.
If it is expected to earn a good return, then both of our hypothetical CEOs will want to pursue the project — regardless of their attitudes towards sustainability. If the projects will lose money or earn inadequate returns, both of our CEOs will reject the projects.
Yet if both a CEO who believes deeply in sustainability and one who hates the thought will do the exact same thing, in what sense can we say that sustainability is an intellectually coherent concept?
One way to look at it is to argue that sustainability is about avoiding inadvertent activities and waste and that the focus is really on that word “inadvertent” — so sustainability is really a kind of business management system that makes an organization periodically assess things so it doesn’t work on automatic pilot.
This is appealing but doesn’t really answer our critique. Either it is an adequately profitable venture to periodically reassess one’s operation looking for inefficiencies and possible improvements — or it is not. If it is, then, once again, both our sustainability-loving and our sustainability-hating CEOs will want to pursue the process. If it is not profitable, neither will want to pursue it.
We’ve been working on this a long time and the best we can do to square the circle is to define two key ways our CEOs might differ:
- Time Horizon
Many times executives impose artificial time horizons. For example, frequently when a private equity group buys a company it intends to exit in a set period of time, say, five years. Very frequently they are not interested in any expenditure which will not pay off within five years. As they get closer to their exit point, the private equity folks may lose interest in investments that won’t pay off in even less time.
We would maintain that such short-term focus, certainly when motivated by an exit strategy, is inherently non-sustainable. If Nelson can walk in and make the case that installing solar panels on the roof will provide a return on investment that meets the corporate hurdle rate, then refusing to do so because of one’s extraneous issues is not a sustainable attitude.
Of course even this is a tricky wicket. If the CEO is opposing even profitable spending — say replacing light bulbs with energy-efficient ones that will pay off in 12 months — because the company has a note payment due in six months and will go bankrupt if it doesn’t pay down the note, one could argue that sustainability requires that the company focus on the task at hand. Maybe, however, there is an argument that a company under such stress simply can’t be sustainable.
- Reputational Capital
Perhaps the biggest distinction we have observed in how organizations consider sustainability is the way different organizations perceive the value of reputational capital.
Whether a given activity is adequately profitable for a business is not always easy to judge. To use a small and simple example… if a local retailer decides to sponsor a little league team, a strict analysis of known facts will say this is an expense that generates no return and, as such, a loser.
Yet a different management team will claim that the sponsoring of a local little league team is actually profitable because it will produce many reputational advantages that will ultimately pay off in hard cash. These can be direct — the parents of the children on the team are more likely to shop our store. They can also be indirect — the City Council will like us better and be more likely to approve our request for a variance to expand the store if we have a reputation for giving back to the community.
Looked at in this light, the difference between our two hypothetical CEOs is that when presented with equal ROIs as figured by accounting, one CEO accepts those numbers while the other is more inclined, when the investments have social or environmental implications, to add a value related to this reputational capital. It functions as a kind of “fudge factor” that enables sustainability-minded CEOs to lean in that direction.
We don’t have the numbers but when, for example, Tesco decided to open in America, it built the largest rooftop solar array in the country on the top of its El Segundo, California, headquarters. We suspect the ROI was at best marginal but somebody decided that doing this would help frame the way Tesco was perceived in America and that this “perception” could be the source of good returns. Put another way the reputational bonus boosted the ROI to acceptable levels.
There is no doubt that reputational capital — having the reputation as a good employer, supplier, customer, and neighbor — can be beneficial to a company. The problem is that each specific decision is very much in doubt.
Will sponsoring this particular Little League team right now help boost business? Did Tesco’s solar array help it with zoning authorities, customers, vendors? There is no easy or definitive answer so our bet is that sustainability efforts depend on excellent executive teams.
It is easy to use reputational capital as a justification for anything; however the best business leaders will know how to spend money on sustainability where it will realize a return for the business that the accountants will have trouble tracking.
So, properly deployed, sustainability makes companies more competitive and effective; done poorly sustainability efforts can weaken a company.
We thank Nelson Longenecker and Four Seasons Produce for sharing their efforts on this important subject and for giving us a kick-off to discuss such a vital industry issue.