Going Green Can Be Good for the Bottom Line
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Operations Jan 4, 2016

Going Green Can Be Good for the Bottom Line

Sustainable operations and greater growth can go hand in hand.

sustainable operations and growth go hand in hand

Yevgenia Nayberg

Based on insights from

Özge İşlegen

These days, almost every company supports the idea of a greener planet. Most acknowledge the ethical case for building supply chains that conserve energy and cause less environmental damage.

At the Decem­ber 2015 Paris Cli­mate Con­fer­ence, near­ly every nation in the world announced their plans to cut domes­tic green­house gas emis­sions. In the com­ing years new nation­al cli­mate poli­cies will inevitably shift how busi­ness­es oper­ate. The soon­er com­pa­nies align their oper­a­tions with this trend, the bet­ter they will do at turn­ing the chal­lenge of grow­ing while reduc­ing emis­sions into a com­pet­i­tive advantage.

But accord­ing to Ozge Isle­gen, an assis­tant pro­fes­sor of man­age­r­i­al eco­nom­ics and deci­sion sci­ences at the Kel­logg School, there is increas­ing aware­ness that it also makes good busi­ness sense to design one’s oper­a­tions around social and envi­ron­men­tal sus­tain­abil­i­ty. With the ris­ing cost of raw mate­ri­als, shifts in stake­hold­er expec­ta­tions, increas­ing com­plex­i­ty of glob­al sup­ply chains, and new gov­ern­ment stan­dards (includ­ing the U.S.’s Clean Pow­er Plan and the U.N.’s com­mit­ments to fight cli­mate change), reduc­ing one’s impact on the envi­ron­ment is more than just a pub­lic ser­vice — it is becom­ing part of the val­ue proposition.

Every­one rec­og­nizes that this is the direc­tion we need to go,” Isle­gen says. Now it’s a mat­ter of mak­ing envi­ron­men­tal per­for­mance a part of cor­po­rate strat­e­gy. And we find that there actu­al­ly are strate­gic rea­sons to build sus­tain­able oper­a­tions. It might even give you an edge.”

Becom­ing an Indus­try Pioneer

There has always been at least one incen­tive for com­pa­nies to focus on envi­ron­men­tal per­for­mance: avoid­ing neg­a­tive pub­lic­i­ty. And with the explo­sion of social media, that incen­tive has only strength­ened. Any news of severe pol­lu­tion or lax envi­ron­men­tal stan­dards will spread instan­ta­neous­ly — and leave a mark. Volk­swa­gen found this out after design­ing engines to cheat on emis­sions tests in 11 mil­lion of its diesel cars. The com­pa­ny is now reel­ing from cus­tomer anger, prod­uct recalls, and plum­met­ing shares, not to men­tion fines worth bil­lions of dollars.

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At the same time, busi­ness lead­ers are learn­ing that clean oper­a­tions and high­er growth can go hand in hand. Now that cus­tomers, investors, activists, and even a company’s own employ­ees are voic­ing con­cerns about envi­ron­men­tal impact, a green­er record does more than sim­ply guard against pub­lic-rela­tions dis­as­ters. It can bol­ster a firm’s reputation.

Com­pa­nies that improve their envi­ron­men­tal per­for­mance need not sur­ren­der com­pet­i­tive advantage.

Even in cas­es where a sus­tain­able oper­a­tions strat­e­gy dri­ves up costs, the advan­tages that come with a good rep­u­ta­tion can go a long way towards off­set­ting those costs. Becom­ing an indus­try pio­neer, for exam­ple, can strength­en a firm’s appeal among poten­tial cus­tomers and part­ners, and grant that firm a promi­nent voice in glob­al civ­il soci­ety — all of which ulti­mate­ly serves the busi­ness. The out­door appar­el com­pa­ny Patag­o­nia is one such indus­try leader. In 2010, Patag­o­nia helped found the Sus­tain­able Appar­el Coali­tion, an alliance of 30 com­pa­nies from the cloth­ing and footwear industries.

Com­pa­nies that improve their envi­ron­men­tal per­for­mance need not sur­ren­der com­pet­i­tive advan­tage,” Isle­gen says.

Keep­ing Up with Regulation

Beyond con­cerns about rep­u­ta­tion, there is also much to be gained by stay­ing ahead of reg­u­la­tions. With so many peo­ple pay­ing atten­tion, and with gov­ern­ments feel­ing the need to act, more reg­u­la­tions are sure to come,” Isle­gen says. From an oper­a­tions per­spec­tive, it helps to be prepared.”

Part of being pre­pared means help­ing to estab­lish indus­try stan­dards. Coca-Cola, for exam­ple, has announced that it is work­ing with its sup­pli­ers to increase water-use effi­cien­cy. The chief sus­tain­abil­i­ty offi­cer of Tiffany’s recent­ly called for more account­abil­i­ty in glob­al min­ing oper­a­tions. At this year’s cli­mate-change con­fer­ence in Paris, sev­er­al com­pa­nies — includ­ing ship­ping giant UPS and Levi’s, the icon­ic cloth­ing com­pa­ny, vol­un­tar­i­ly pledged to reduce car­bon emis­sions from their oper­a­tions over the next five years.

Isle­gen sees such moves as being strate­gic as well as eth­i­cal. By coop­er­at­ing with NGOs and non­prof­it groups, com­pa­nies can learn to adapt ear­ly to shifts in stake­hold­er inter­ests, and put them­selves in a posi­tion to help cre­ate — rather than react to — new reg­u­la­tions. Take, for exam­ple, Intel’s recent social-sus­tain­abil­i­ty ini­tia­tive. The com­pa­ny helped cre­ate an indus­try-wide audit­ing pro­gram to trace the source of pre­cious met­als and ensure that none are extract­ed from mines con­trolled by armed groups. By work­ing togeth­er with a third par­ty, Intel is able to get a bet­ter look at its own sup­ply chain while stay­ing ahead of an issue that mat­ters to gov­ern­ments, human rights orga­ni­za­tions, and ordi­nary citizens.

Of course, being ful­ly trans­par­ent is not as straight­for­ward as it seems. Giv­en the com­plex­i­ty of glob­al sup­ply chains, it takes a high­ly coor­di­nat­ed effort to ensure that every supplier’s record is up to indus­try stan­dards. Isle­gen says this is part of tak­ing sus­tain­able oper­a­tions seriously.

Envi­ron­men­tal impact is not the eas­i­est thing to mea­sure,” she says, but the move towards greater trans­paren­cy is pos­i­tive. As this trend con­tin­ues, it might be the case that those [sup­ply-chain part­ners] who are will­ing to dis­close infor­ma­tion will be more like­ly to be select­ed by com­pa­nies.” Wal­mart, for exam­ple, has cre­at­ed its own sus­tain­abil­i­ty index in coop­er­a­tion with the Sus­tain­abil­i­ty Con­sor­tium, an inde­pen­dent orga­ni­za­tion, which makes it eas­i­er to find prod­ucts that were made through sus­tain­able operations.

In light of this chal­lenge, com­pa­nies might also recon­sid­er the way they deal with watch­dog groups and envi­ron­men­tal activists. You can learn a lot from these groups,” Isle­gen says, but only if you engage them. If you fail to engage them, you learn noth­ing, and they will even­tu­al­ly turn against you.”

A Com­pre­hen­sive View

Final­ly, there may be cer­tain parts of the busi­ness — or par­tic­u­lar mar­kets — where changes that lead to a lean­er, more effi­cient, or more reli­able sup­ply chain can also make for a more sus­tain­able sup­ply chain. That is why it is crit­i­cal to take a com­pre­hen­sive approach to envi­ron­men­tal per­for­mance, lean­ing heav­i­ly on new tech­nolo­gies and advances in data ana­lyt­ics to put every stage of the sup­ply chain under the sus­tain­abil­i­ty microscope.

When you mon­i­tor your sup­ply chains close­ly,” Isle­gen says, you some­times find that what may have seemed envi­ron­men­tal­ly friend­ly at one point in the sup­ply chain may not be when you look at its impact over­all,” she explains. But you also find opportunities.”

In oth­er words, the same insti­tu­tion­al vig­i­lance that guar­an­tees green­er oper­a­tions can also help com­pa­nies iden­ti­fy inef­fi­cien­cies in the sup­ply chain — and places where chang­ing how busi­ness is done can help both the envi­ron­ment and the bot­tom line.

For one, com­pa­nies can cer­tain­ly ben­e­fit from a more effi­cient and cost-effec­tive use of raw mate­ri­als — espe­cial­ly as prices rise. Anoth­er exam­ple: the rise of smart meters — a top­ic Isle­gen has recent­ly stud­ied — means that com­pa­nies are now bet­ter able to track and pre­dict cus­tomers’ ener­gy use. Util­i­ty com­pa­nies in mar­kets with the right gen­er­a­tor mix will be able to offer pric­ing incen­tives that both low­er the cost of gen­er­at­ing elec­tric­i­ty and increase cus­tomers’ reliance on green­er ener­gy sources — a true win – win.

These tools can help com­pa­nies learn how to be sus­tain­able and prof­itable at the same time,” Isle­gen says. For her, it is a mat­ter of lead­ers tak­ing the ini­tia­tive. The more sys­tem­at­ic com­pa­nies are in their own efforts to achieve sus­tain­able oper­a­tions, the bet­ter. It’s a shift that will have to hap­pen,” she says. So it’s worth invest­ing in now.”

About the Writer

Drew Calvert is a freelance writer based in Iowa City, Iowa.

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