Sustainability: Costly Inconvenience or New Business Paradigm

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Sustainability Costly Inconvenience or New
Business Paradigm?
Baruch College April 2, 2008
Daniel Mahler, PartnerNew York Office
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The challenge billions of people globally aspire
the western standard of living but resources are
limited
98
Today
Future, 20xx
7 bn.
100 (indexed)
7 bn. x
500

• Resource prices indicate that demand already
  exceeds supply
• Regardless of environmental impact developing
  countries strive to increase standard of living

10
20
80
98
90
80
20
Resources
People
Resources
People
Five planets
One planet
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The Sustainability Challenge is re-shaping the
environment for doing business
Key drivers of the sustainability challenge
Business threats

• Increasing resource prices from 20 to 100 per
  barrel oil in 5 years
• Global Warming premium pricing in of CO2 cost in
  energy prices
• Vulnerable supply chains 70 of iron ore in the
  hands of three global players
• Increased policy risk - Australia bans
  incandescent light bulbs- San Francisco bans
  plastic bags

and opportunities

• New markets 50 of Global GDP growth will come
  from developing markets
• Growth opportunity
• - UK demand for Fair Trade products growing over
  40/year
• - US demand for organic products up 20 for
  past 10 years- strong growth of final demand
  from developing countries
• Differentiation opportunity superior access to
  capital and talent for sustainability leaders

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In recent times, major companies have engaged in
a flurry of activities around Sustainability
Examples
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Sustainability is about creating competitive
advantage from aligning financial, social and
environmental goals
A.T. Kearneys Sustainability Framework
Definition of Sustainable Development
Economic Development Financial Performance
"For the business enterprise, sustainable
development means adopting business strategies
and activities that meet the needs of the
enterprise and its stakeholders today while
protecting, sustaining and enhancing the human
and natural resources that will be needed in the
future."1)
Growth vs. Environment
Efficiency vs. Social
Maximum BenefitFocus Area
Environmental Protection Environmental
Impact of Business
Activities
SocialWellbeing Enterprise Impact on Society
Environment Welfare
Creating a Competitive Advantage and a
sustainable shareholder return
1) Book Business Strategies for Sustainable
Development Leadership and Accountability
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CEOs and the Boardrooms are beginning to discover
sustainability as a top line opportunity
Does Your Company Have a Corporate Sustainability
Strategy?
Prominently Expressed Objectives for Corporate
Sustainability Strategy (1)
Total 100
Improve brand
Differentiate products
xx
Compliance
Risk Mgmt..
Efficiency
Retention
Cost
Notes (1) Multiple responses allowed
Source A.T. Kearney and Institute for Supply
Management TM (ISM) Sustainability Management
Survey, January 2007
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But sustainability is a challenge representing
opportunities and risks
Sustainability can be a
"Revenue Threat"
"Growth Platform"

• New Products (e.g., Hybrid, Solar,Organic)
• New Markets (e.g., Micro-Business model)
• Price Premium (e.g., green features)

• Declining relevance of current product portfolio
  (e.g., SUV)
• Boycott (e.g., Nike)
• Safety Disaster (e.g., Schering)

Revenue
AmplifierReputation
"Cost Peril"
"Efficiency Booster"

• Carbon Tax
• Exploding Commodity Costs
• Sustainability Administration
• Localization of Supply Chains

• Energy Efficiency (e.g., WalMart)
• Product Specification Optimization(e.g.,
  Packaging design, material usage)
• Value Chain Optimization (e.g.,
  manufacturing/network design, service levels)

Costs
Opportunity
Risk
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Latest research indicates that companies
excelling in all three dimensions command an
evaluation premium
Companies good in all three dimensions
.command a premium
.and outperform their peers more often
Shareholder Value Development (2003-2007)
Shareholder IncreaseGS Sustain vs. Industry
Peers(2003-2007)
GS Sustain Companieshigher
72
IndustryPeers higher
28
MSCI Index
GS SustainCompanies
Source Goldman Sachs, GS Sustain, May 2007,
includes 120 companies from Energy, Mining, Food
Beverage, Pharmaceutical Industry
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Understanding the longer term value challenge is
pivotal in developing a sustainability strategy
Company Sustainability Value Challenge
Illustrative
Sustainability Champion Path
Evaluation Premium
Growth Platform
Creation
EfficiencyBooster
2015
2010
2020
SVCSustainability Value Challenge
Shareholder/ Company Value
Protect Win
Sustainability Strategy
CostThreat
Destruction
RevenueThreat
Do-Nothing PathMaxium Value Destruction
Scenario
Source Goldman Sachs
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Conclusion Going Green.

• should be more than a PR effort repackaging
  existing efforts
• is more than fighting global warming -- the
  underlying issues are larger
• , if done correctly, is not another initiative
  
• . but the long term survival, health and fitness
  program of a company