Thinking Green in a Blue Economy

A few weeks ago, I keynoted a conference of leaders from the Washington, D.C. metropolitan area — corporate executives, government officials, nonprofit leaders, and at least one university president. During the Q&A portion, one corporate VP asked how to weigh the implementation of environmental initiatives that don't have attractive returns on investments. "How can I justify putting money into things that don't make business sense?" she asked.

My answer: You probably shouldn't bother.

That seemed like common sense to me, but — as I learned later — it sent a minor ripple around the room. Could this green business evangelist possibly be suggesting that one needn't engage in green initiatives that don't make financial sense? "It was liberating," one of the audience members told me later. "I don't think we expected you to say that."

Their response caught me off guard, too. I hadn't fully appreciated how much some business people were grappling with the tyranny of going green. I've since probed a bit deeper and found more than a little guilt among some senior environmental managers who feel they're not doing enough, in part because they can't make the business case for doing more. The issue is perennial, but it takes on even greater import during turbulent economic times. It's not surprising that in the current climate, companies have a limited appetite for investing in environmental improvements that don't have a discernable and solid return.

Questions about how green business will fare amid the current turmoil have been coming up almost daily as I traverse from speech to meeting to conversations with friends, colleagues, and strangers in airports, and peruse the opining online. (I also queried the 5,000 or so members of GreenBiz.com's Green Business network on LinkedIn, which I'm finding to be a highly useful tool.) The question most frequently posed: How should we think about green in a blue economy? When times get tough, should we stay the course or alter it?

It's a question that is as curious as it is logical, as it seems to ask: How much "green" is worth it?

In the past, the answer was, "Only as much as we can afford." That was because most environmental departments were seen as costs to be minimized. During previous downturns, environmental managers were usually among the first to be tossed overboard in the name of cost-cutting (or, as the 1990s euphemism put it, "re-engineering"). In many ways, environmental managers — good, earnest people committed to improving their company's environmental performance — brought this on themselves by failing to demonstrate that they could add value, not just incur costs. As my friend Rob Shelton put it years ago, most environmental managers had more in common culturally with the EPA than the CFO. That is, they could geek out with the regulatory crowd about such things as biological oxygen demand or parts per million of noxious chemicals, but they couldn't talk with their own company's bean counters about how their good, green work was cutting costs, risks, and liabilities; improving quality; and reducing recruitment and training costs by improving employee retention. As such, corporate enviro folks dug their own professional graves.

Things have changed. Here are three ways they're different:

Commitments: Many of the current generation of environmental managers inside companies — including a few survivors of those earlier times — are no longer marginalized, increasingly viewed as key players. In many cases, their companies have made commitments to shareholders, customers, and stakeholders to reduce energy use, greenhouse gases, toxic emissions, and other forms of waste and pollution. And while it's possible that a dire recession or depression could lead companies to backslide on these commitments, they would do so at their own reputational peril, especially if their competitors didn't follow suit.

Cost-cutting: Even without commitments, most companies now recognize that well-executed environmental programs lead to reduced operating costs and improved efficiencies. The pressure to do both could accelerate during tough times, and environmental departments may find themselves with increased demands, if not concomitantly increased budgets and headcount.

Customers: In many respects, WMT is the new EPA. WMT, for the non-cognoscenti, is the stock-symbol shorthand for Wal-Mart, the biggest of a growing number of retailers and other business-to-business customers that are putting demands on suppliers, requiring that they take green measures seriously — not just by reducing emissions and waste but by bringing innovative and affordable green products to market.

None of this ensures that green is here to stay — after all, we're entering uncharted economic territory — and there are countervailing forces to consider. As long as credit remains tight, for example, companies will struggle to find the capital for these investments. Many promising clean-tech start-ups will be left to whither and die, unable to garner capital to execute their go-to-market strategies. Regulatory backtracking on expected carbon regulation in the name of economic recovery could defer corporate initiatives. To succeed, companies — and their environmental leaders — will need to be smarter than ever in picking and choosing projects, making sure to showcase economic "wins" whenever possible.

But the problems — climate change, energy and water shortages, growing global competition for finite resources — aren't going away. The greening of business is hardly a "nice to do." It will endure.

What about all the recent articles heralding the bursting of the green business bubble? Most are referring to green-consumer purchases — organics, hybrids, solar panels, green cleaners, and other products viewed as upscale and, therefore, discretionary. Sales of these and other products will likely dip, if not swoon, a natural reaction to belt-tightening times.

But the hand-wringing is overblown. Example: Ad Age recently reported that "The green-marketing movement is taking a hit from the economy," citing a Duke University study that concluded that chief marketing officers "are placing less emphasis on cause-related and environmental issues. In fact, marketing that is 'beneficial for society' or that minimizes the impact on the environment ranked at the bottom of five priorities listed by respondents for the next 12 months."

Moreover, said the advertising trade journal, "some backers of sustainability efforts" are "soft-pedaling their efforts or girding for a time when such messages pack less punch." For example:

Wal-Mart Stores, which made sustainability a central feature of its communications strategy in recent years, is talking about it less often lately. An analysis of news stories on LexisNexis shows an average of 73 stories monthly featuring Wal-Mart and "sustainability" in the past year but only 37 in the past month. Environmental or sustainability themes had found their way into only 12 Wal-Mart press releases through Sept. 11 of this year (and none since June), compared with 29 during the same period last year.

But simply counting news stories is misleading. Behind the scenes, Wal-Mart is preparing to roll out an ambitious scorecard system that it hopes to implement to its 60,000 or so suppliers. The system, still be devised, will rate hundreds of thousands of products on a wide range of environmental criteria. It's just one of many companies that have developed ratings systems for suppliers and their products.

The Wal-Mart example is telling. As I've stated frequently (and cover extensively in my book), most green business activities take place out of public view, a vast assortment of both incremental and more dramatic changes that aren't obvious in finished products: less-embedded energy, water, materials, toxicity, carbon intensity, and all the rest. Companies are doing these things with little or no marketing fanfare, in part because these can be difficult stories to tell; they often amount to "doing less bad," an underwhelming marketing claim, to say the least. So, companies are happy to enjoy the financial rewards, foregoing the reputational ones. A dramatic drop in press releases is hardly an indicator of diminished activity.

At the end of the day, most green business activity is — or should be — about making companies, and economies, more resilient and competitive. That seems to me to be a recipe for success during good times and bad. Green can make sense when times are tough — and even because times are tough. As such, forecasts of the death, or dearth, of green business activity are greatly exaggerated.

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Comments

[Preston]

I like your point on financial versus reputational rewards. The risk of being called out as greenwashing or not doing enough, I think, could be too much for some companies. So rather than talk about what they're doing, it could be that they're just doing it (and reaping financial or other rewards). And, as you say, that doesn't mean the impetus to diminished green marketing is the economy -- it's image management.

Also, this may be overly obvious to many, but when the question of the green investments comes up, I can't help but think that value can be non-monetary. It's helpful to try to place a value on certain things, but there must be intangibles that just cannot be valued in money terms. If there are hard-to-value intangibles (say, for instance, goodwill, PR benefits, higher employee morale, etc.) it may not be wise to just give up on green investments that don't show a direct or positive payback. That is, supposing a company can still continue as an ongoing concern ...

[Paul Baier]

Joel,

At Groom Energy, our main set of customers for renewable and energy efficiency work are corporations (Fortune 500 like EMC, GE, etc.), although we have a number of colleges/universities. After a bit of investment in some "eye candy" (i.e. CSR report, perhaps solar panel), all investment discussions are driven around ROI; poor ROI projects like solar should simply be acknowledged as "leadership" projects. A number of leading firms, like Cummings Engines, have added energy use as a consideration to their capital appropriations requests. This is powerful to change investment decisions, particularly if the firm uses realistic assumptions about increases in energy usage in next few years. Personally, I believe everyone should _stop_ using the word "Green" and "Sustainability" for corporations, and simply use the phrase Energy Reduction. Senior executives will invest in energy reductions in a recession, and the entire green/sustainability movement will be much better served if Corporations invest faster in ROI-based, energy saving projects

[Peter Totfalusi]

Well, I understand how larger companies with conventional products and services adjust their day to day activities towards a greener, more sustainable future in a tough economy, but what about small businesses , green retailers selling only earth friendly products, organic and all-natural product manufacturers,organic food retailers etc. These products cost much more to manufacture, especially if they are also socially conscious like Fair Trade certified. Price is probably the biggest challenge in the green industry, and in many cases I think that companies are doing a better job becoming more environmentally friendly, as you pointed it out in this article, then the average American family.
As the owner of an Eco-Boutique, Perfectlynaturalhome.com, I am optimistically concerned.

[KEN LANGDON]

RE THE COST OF GOING GREEN. THE BIG QUESTION HERE IS WHAT ARE THE FUTURE COSTS OF DOING NOTHING?I SUSPECT THEY WILL BE FAR MORE THAN WE EXPECT.
POSSIBILY DEVISTATING.THOSE EXTRA COSTS SAVED SHOULD BE ADDED TO THE PROFIT SIDE OF THE STATMENT.THE LONGER WE REFUSE TO FACE FACTS THE MORE THE EVENTUAL COSTS WILL BE COMPOUNDED.THE REWARDS OF DOING WHAT IS RIGHT NOW WILL BE REALIZED IN THE FUTURE MANY TIMES OVER.

[Mark W. McElroy]

Hi Joel:

My own view is that folks who speak in terms of the business case for sustainability have things exactly backwards. The more important questions is, what is the sustainability case for business? Indeed, if a business can't make that case across all three bottom lines, it shouldn't be in business. Being able to make that case on a continuing basis, then, is why businesses should invest in green, sustainability, etc., and society should hold them accountable for doing doing so - as it increasingly is.

Regards,

Mark

[Melissa]

Do you encourage companies to scrutinize ROI and cut waste/unnecessary expenses across the business and reduce these (e.g. 5 star hotels and meals, last-minute flight changes/scheduling, first class flights) to free up funds for CSR/sustainability and the business in general? It seems that such expenses fly under the radar while CSR/sustainability projects go under the microscope.

A few questions

Are the industry standard margins appropriate expectations for CSR/sustainability projects or the business as a whole -if the business can be expected to operate in a truly eco/social responsible way? If based on one bottom line, which was set assuming unlimited natural and human resource use without implications....how can most CSR/sustainability projects "make sense"...or cents?

Are there models out there to measure intangible gains/savings such as enhanced reputation or avoided risk? I.e., where is the balance sheet/accounting system for the triple bottom line?

What is an appropriate payback time and ROI? Should it differ for CSR/sustainability vs other projects?

[Mark W. McElroy]

Melissa:

You ask great questions. As for an accounting system for the triple bottom line, yes, we've developed one. It's called the quotients approach to sustainability measurement and reporting. All sustainability metrics reduce to the quotient of impacts on vital capitals relative to what such impacts ought to be in order to ensure human well-being. You'll find it described in detail on our website.

Mark

[hans from mokugift]

What do you do when you position a green service with solid ROI, but the prospects keep thinking of it in terms of helping their brand?

[Dennis Markatos-Soriano]

Great post-
When the economy is not growing rapidly, it gives us the opportunity to reflect on what kind of economic recovery we want... and cost cutting through efficiency can be the bridge in 2009 to wind and solar installations in 2010 that make our businesses and other institutions become leaders in the upcoming global sustainable energy revolution. I'm psyched to see that US emissions are poised to fall 2.5% in 2008 to the lowest level since the 1990s. (see www.setenergy.org for details, a site you may want to add to your blogroll).
Onwards to sustainability,
Dennis