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Virtue’s reward?

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Financial Times: Virtue’s reward?

By Michael Skapinker
Published: April 28 2008 03:00 | Last updated: April 28 2008 03:00

In Unilever’s London headquarters, Gavin Neath, the consumer goods group’s head of sustainability, takes a plastic contraption out of its cardboard box and places it on a table. It looks like a small and semi-transparent version of the vending machines that dispense drinks to office workers.

The device is called a Pureit – and it is a drinks dispensing machine of sorts. Developed by Hindustan Unilever, the company’s Indian subsidiary, the Pureit provides drinking water from any source, however polluted, purifying it with a series of meshes, parasite and pesticide traps and a germ-killing battery kit, without the need for boiling and without the use of mains electricity.

The Pureit is an illustration of how multinationals are trying to get to grips with the notion of sustainability. In the US and western Europe, the priorities are reducing the amount of packaging, cutting fuel consumption and providing for consumers who want to be sure that their purchases have been produced in an ethical or environmentally friendly fashion.

April has been “Earth Month” at Wal-Mart, for instance. Customers can buy “eco-friendly” lightbulbs and detergents. They can also choose between organic, Fair Trade or Rainforest Alliance-certified coffee as part of their contribution, the US retailing giant says, to “sustainable agricultural practices that protect the environment, ecosystems and farm workers’ welfare”.

Yes, this is Wal-Mart, long-time prime target of environmentalists, fair-trade campaigners and union activists. Lee Scott, Wal-Mart’s chief executive, now sounds like the greens who for so long excoriated his company. Mr Scott says he wants Wal-Mart to move towards being powered entirely by renewable energy, to create no waste and to sell “products that sustain our resources and environment”.

Hau Lee, professor of operations, information and technology at Stanford business school, defines sustainability as “ensuring that we are using resources today that will not jeopardise the resources of tomorrow”. But sustainability goes further than that: companies are using their sustainability programmes to cut costs, develop innovative products and find new consumer markets.

For advocates of responsible business, sustainability is what they have been seeking for years – a way for companies to do good while at the same time improving profits and shareholder returns.

The attempt by companies to demonstrate that they are friends rather than foes of the public good has a long history and has gone through several changes. It began as philanthropy – funding schools, concert halls and art galleries. Activities then widened into what became called “corporate social responsibility” – the idea that companies should be accountable not just to their shareholders, but to a wider group of stakeholders including employees, suppliers, the local community and non-governmental organisations.

CSR has long attracted critics, most of them agreeing with the economist Milton Friedman, who said: “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.”

Advocates of CSR did not so much deny Friedman’s view as claim that their engagement with all their stakeholders was indeed in shareholders’ interest. CSR helped companies engage with their local communities, where both their customers and employees lived, helping to understand their needs. It also allowed companies to maintain their legitimacy – their “licence to operate”. In the long run, they said, this would benefit shareholders too. The difficulty with this view is that there is little research to support the idea that companies with CSR policies generate better returns for shareholders.

Another argument advanced by champions of CSR is that it is a form of risk management, a way of averting threats to the company’s reputation. Oft-cited examples include the Brent Spar affair in the mid-1990s, when Royal Dutch Shell suffered a public backlash over its plans to sink an oil platform at sea, and Monsanto’s failure to anticipate European consumers’ opposition to genetically modified food. CSR advocates say the companies could have avoided these problems had they established better links with campaigners and consumer groups.

CSR as a form of reputational risk management remains an important part of many companies’ strategies. In a speech at Stanford business school in February, Wal-Mart’s Mr Scott said that the company wanted not just to learn from the criticism it had suffered in the past, but to anticipate future “hot button” issues.

Sustainability, its advocates say, goes further than CSR. In his book Capitalism at the Crossroads: Aligning Business, Earth and Humanity , Stuart Hart of Cornell University’s Johnson School of Management says sustainability could mark the end of “the great trade-off illusion” – the notion, implicit in Friedman’s criticism of CSR, that “societal concerns could only be drags on business”.

In October 2005, Mr Scott set Wal-Mart on a new path with a speech entitled “21st Century Leadership”. He said he had come to realise that there were solid commercial as well as ethical reasons for paying attention to environmental problems. “There is a simple rule about the environment. If there is waste or pollution, someone along the line pays for it. For example, if our trucks are inefficient from a fuel standpoint, we’ll pay for that at the diesel pump. If the dumpsters behind our store fill up with trash, you can be assured that we paid someone to send that trash to us, and we will pay someone to take it away.”

Wal-Mart launched a slew of initiatives. It persuaded a toy supplier to reduce the amount of packaging it used. Not only could it then tell customers that they were buying a greener product; it could cut the cost of selling it. With so much of the packaging eliminated, Wal-Mart could use fewer freight containers to transport the toys. It fitted its trailer trucks with wind skirts, reducing air resistance and therefore fuel use. It replaced the twin wheels on the rear axle with a single wheel, once again reducing fuel consumption.

For Wal-Mart suppliers such as Unilever, Mr Scott’s speech and subsequent actions chimed with many of the resource and cost issues they had been wrestling with. The world’s biggest retailer was now ready to address waste and energy use. “They then followed through with a rigour and thoroughness that only Wal-Mart can,” says Mr Neath. He recalls that when he was a Unilever brand manager in the late 1970s, the company introduced a concentrated version of its washing powder in a miniature container. Supermarket customers preferred the bigger one. When in 2005 Wal-Mart, as part of its new sustainability drive, asked Unilever whether it could produce a concentrated detergent that would wash just as many loads as a normal container, Unilever said it could.

This time, there was plenty of retailer support: Wal-Mart placed the concentrated detergent at eye level on its shelves and gave staff incentives to shift it. It then asked its other suppliers to produce concentrated detergent too. From next month, Wal-Mart will sell only concentrated washing powder. The transport costs of the smaller containers are, of course, lower.

Matt Kistler, Wal-Mart’s senior vice-president for sustainability, says satisfying consumer demand for Fair Trade coffee, where the growers are guaranteed a certain price, has also forced the company to innovate to contain costs. The coffee is now roasted in the country of origin rather than in the US, which reduces its shipping weight.

With rising energy and food prices, the need for such cost-cutting is intensifying, but the companies supporting sustainability – and they cover a wide range, from other retailers such as Tesco and Marks and Spencer to energy companies such as Shell and BP, which publish sustainability reports – say that the benefits go beyond these savings. Looking at what can be recycled is helping them come up with new products. Mr Kistler says Wal-Mart, for example, now sells gardening mulch made from recycled tyres.

Not everyone is impressed by these companies’ sustainability drives. In a report last September, Wal-Mart Watch, a campaigning organisation supported by groups including the National Council of Women’s Organisations and the Sierra Club, America’s oldest environmental organisation – gave the company credit for its work on environmental initiatives. But it said: “If Wal-Mart continues to add stores at its current growth rate, its new stores alone will use significantly more energy than any of its energy-saving measures will save.”

It added that Wal-Mart’s out-of-town stores had “contributed heavily to the more than 40 per cent increase in the amount of vehicle miles American households travel for shopping purposes since 1990”.

Last week, Greenpeace demonstrators, some dressed as orang-utans, climbed on to balconies at Unilever’s London headquarters and other company sites to protest at the alleged destruction of Indonesia’s rainforests for palm oil. Unilever says it has led efforts to promote the responsible use of palm oil but that the needs of India and China, and the use of the oil as a feedstock for biofuels, mean that demand has “exploded”. Sustainable use of palm oil “is not an easy process and is taking longer than we would all like”.

Water appears more promising. A study by Unilever on how clothes are washed in India revealed that far more water was used in rinsing than in the washing itself. The result was Surf Excel, an “easy rinse” detergent. Its study of how to provide India with clean drinking water resulted in the production of Pureit.

In developing the market for Pureit, Hindustan Unilever had to come up with a product capable of competing with the usual method of purifying water for drinking – boiling it. The cost of boiling water means that one rupee buys 2.5 litres. For those who can afford bottled water, one rupee buys 0.3 litres. The up-front cost of a Pureit is Rs1,800 ($45, £23, €28), while the germ-killing battery has to be replaced at a cost of Rs300 after producing 1,500 litres of purified water. One rupee buys 3.5 litres of Pureit water, including the initial cost.

Companies say that focusing on sustainability also helps them develop new markets. The potential market for a low-cost machine providing drinkable water is huge, and not just in India. “China has appalling water problems,” Mr Neath points out.

As the Unilever palm oil statement indicates, matching business needs with the protection of the environment is still going to leave even the most committed businesses with tough choices – and their environmental enemies are not about to disappear. But with products such as Pureit, sustainability may finally provide a better match between responsible corporate behaviour and shareholder value.

Copyright The Financial Times Limited 2008

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