More companies reporting profitability from environmentally friendly practices

A look at Marks & Spencer’s 2012 annual report demonstrates the possibilities for innovation through environmental sustainability practices.

The London-based retailer is reporting financial benefits from environmentally conscious efforts in its stated goal to become the world’s most sustainable retailer. The environmentally friendly tactics the company describes in its annual report include:

• Becoming carbon neutral in January 2012 across its stores, offices, warehouses and delivery fleets in the UK and the Republic of Ireland.
• Achieving in 2012 its goal to send no waste to landfills from stores, offices, warehouses and construction activity.
• Improving fuel efficiency of its food delivery fleet by 28% and its general merchandise delivery feet by 30%.

“Our environmental and ethical plan not only makes us a more efficient business, it contributed a net benefit of £105 million [about $164 million] this year,” Marks & Spencer Chief Executive Marc Bolland said in the company’s annual report.

For years, companies have wrestled with the question of whether environmentally friendly business practices created enough financial value to justify investing in them. Those questions remain for many organisations as a fragile world economy demands prudent stewardship of company currency.

But a new report indicates that companies increasingly are discovering value in environmental sustainability, and they are changing their business practices to take advantage of it. In a survey of executives and managers conducted by the Boston Consulting Group and MIT Sloan Management Review magazine, 37% of executives and managers said environmentally conscious actions have added to their company’s profit. That’s up significantly from the 23% who reported profits from environmental sustainability practices in last year’s survey.

Another 31% this year said the effort neither added to nor subtracted from profit, while 22% thought such initiatives drained profit.

In addition, 48% of companies have changed their business models as a result of environmental sustainability opportunities, an increase of 20 percentage points over the previous year.

Business-model innovation is the crux of environmental sustainability profits, according to the report. Changes in mind-set, adjustments in processes, and collaboration with internal and external parties all play key roles in environmentally friendly innovations that generate profits, according to report co-author David Kiron, executive editor of MIT Sloan Management Review’s Big Ideas initiatives.

Despite the increased enthusiasm for environmentally conscious practices, considerable scepticism remains:

• Almost half (46%) of survey respondents find it difficult to quantify the intangible effects of environmental sustainability.
• More than one-third (37%) said environmental sustainability conflicts with other priorities.
• Environmental sustainability programmes are seen as a profit drain because of higher operational costs by 40% of respondents, and because of increased administrative costs by 33% of respondents.

Focus on savings, customers

But others are finding that environmentally conscious innovation can create cost savings on the bottom line. And they are finding that top-line increases can result from environmental sustainability measures because some consumers (particularly in Europe) are willing to pay more for goods and services provided by a company they perceive as being environmentally friendly.

A cost-savings element – energy scarcity and price volatility of energy – was rated the most critical environmentally conscious trend for companies in the survey. But 52% of companies that changed their business model for environmental sustainability-related purposes cited customer preference for sustainable goods and services as a factor. And 30% said customers’ willingness to pay more for environmentally friendly offerings helped drive the change.

Energy-efficient building

J.F. Brennan, a Wisconsin-based marine construction and environmental remediation company, hopes to attain the dual goals of saving costs and impressing clients as a result of its construction of an energy-efficient new office building that is scheduled to be completed March 31st.

The company does a lot of work for the US Environmental Protection Agency, so obtaining Leadership in Energy and Environmental Design (LEED) certification for the company’s headquarters could help J.F. Brennan’s image with an important client.

It also is expected to help the company save energy. A geothermal heating system was installed to heat and cool all three floors of the 30,000-square-foot building, with the potential for significant savings on heat during harsh Wisconsin winters.

The company also spent additional money on its windows to prevent heat loss and gain. Premium parking spaces were created for hybrid vehicles, and bike racks were installed to encourage employees to use pedal power to get to work.

“We feel we have positioned ourselves well for future cost increases in energy that are sure to come,” said Tom Kennedy, the company’s vice president and CFO.

Five key practices

Companies that are generating profits from environmental sustainability are using the following practices, as described in the report:

• Changing business models. Significant corporate change can result from these innovations, so management must consistently pay attention to environmental sustainability goals.
• Leading from the top and integrating the effort. Executives set goals and tie them to strategy, which is followed throughout the organisation.
• Measuring and tracking environmental sustainability goals and performance. Scorecards, key performance indicators and other integrated reporting tools help ensure that working groups follow through on the strategy.
• Understanding customers’ views of environmental sustainability. Customers are not always willing to pay more for sustainable products and services, and companies need to gauge that appetite.
• Collaborating beyond the boundaries of the organisation. Outside advisory groups, nongovernmental organisations and industry groups can help companies choose the right environmentally friendly initiatives.

Tying environmental sustainability strategy to key business drivers and problems is an important step toward profiting from these initiatives, according to Kiron. “You can’t understand the connection between [environmental] sustainability and profits unless you see it in relation to some kind of business problem,” he said.

North America trails

Environmental sustainability efforts and their results vary widely across regions, according to the survey.

European consumers are especially willing to pay extra for environmentally sound products and services. Companies in developing markets are more likely to change business models to boost environmental sustainability efforts, often because of resource scarcity issues, Kiron said.

North American companies have the lowest rate of business model innovation and the fewest innovators reporting profits with respect to environmental sustainability. US consumers are less willing than Europeans to pay more for environmentally friendly products, and US business leaders are more likely to reject climate change evidence, according to Kiron. “There’s not a lot of scepticism around that [elsewhere], as there is in the US,” he said.

Nonetheless, the survey shows that the percentage of companies that report financial benefits of sustainability measures are rising as J.F. Brennan’s heating costs appear poised to drop.

“During the last three months, the building has been very comfortable just using the geothermal system without incurring any natural gas usage and very little electricity to run the pumps,” Kennedy said.

In a cold winter in the midwestern United States, that can make a difference in a company’s bottom line.

—Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.