Tensie Whelan, director of the Center for Sustainable Business at New York University’s Stern School of Business, talks about the growing bottom-line case for sustainable practices.
Global Finance: Why has there been such a change in corporate attitudes toward environmental issues?
Tensie Whelan: Your supply chain is now transparent to everybody, and that was not the case when Milton Freidman was writing about this stuff. On top of that, approximately 80% of most companies’ value is now intangible; it’s in their reputation. When most of your value is in your reputation and in IP [intellectual property], you need to manage for that radical transparency, and your reputation and sustainability issues—social, as well as environmental—are a big part of that.
GF: What’s the impact of companies with governance programs?
Whelan: The financial case for sustainability is the high correlation between good environmental and social governance performance in a company and good stock performance, lower cost of capital and better operational performance. We don’t really know why, because companies are not tracking the ROI on their sustainability investments; although they do track operational efficiencies like energy savings.
But when you’re embedding sustainability and you have a significant greenhouse–gas emission commitment, that drives innovation because you’ve got to develop new processes, products and services. It drives risk reduction because you’re less dependent on a volatile commodity or because there’s less reputational risk. You also can drive employee engagement and retention.
Companies aren’t looking at this in its entirety and monetizing it, but we are working on the monetization so CFOs can begin to better account for, and make better decisions around, sustainability investments. For example, there are about 450 companies—big brands—that have made deforestation-free supply-chain commitments. They’ve not always been well implemented, partly because it’s complicated and partly because the business case isn’t clear.
GF: What happens when companies adopt sustainable practices?
Whelan: We looked at beef in Brazil and the commitments to deforestation-free and sustainable agriculture. Through the uptake, particularly of sustainable agriculture, ranchers saw a 2.3 times increase in productivity, a sevenfold increase in profitability, and the [proportion of] quality beef went from zero to 70%. Small ranchers saw their income go up millions, which was significant. And those benefits accrued up the supply chain. Slaughterhouses had less volatility in their supply and higher–quality supply. They had less reputational risk because of potential scandals like expired beef or deforestation concerns. We monetized sustainability benefits for the retailers buying the beef: McDonald’s and Carrefour. We’re testing this methodology in other industries now and have C-suite participation with VW, Ford, GM and Aston Martin.
GF: How do companies manage for short-term versus long-term?
Whelan: We believe companies need to manage for both. We focus on a broader array of stakeholders, knowing that shareholders actually benefit from a broader approach. We’re working with CECP, the CEO Force for Good. They have at least 100 active CEOs in the association, and they have a strategic investor initiative working with companies around bringing long-term planning to quarterly calls. We’re looking at what happens when companies embed the financial elements of sustainability into quarterly calls to acquaint analysts with issues relevant to sustainability for that company in terms of strategic planning. Then, these are built into products, processes and services. Rather than list that a company reduced its greenhouse gas emissions by X because of a strong climate–change policy, talk about a new product line aimed at solving this challenge that has brought in X amount of dollars. This is the approach we’re working on, because sustainability drives innovation.
GF: What can companies do to bring in a broader array of stakeholders other than shareholders?
Whelan: Investors are beginning to see that this a problem they need to address. With one in every five dollars now being invested in some form of environmental, social and governance (ESG) investing, they’re asking for stakeholder management as per ESG requirements. CEOs and CFOs recognize this in a world where they’re fighting over good talent and employees are absolutely a key stakeholder group. If you manage your affairs solely for shareholders at the expense of hiring and retaining good employees, ultimately shareholders will suffer. Managing for employees and customers is also managing for the shareholders.
GF: Is the current (Trump) administration a setback for sustainability initiatives?
Whelan: Companies are making these changes regardless of what’s happening in Washington. While some companies may take advantage of the next four years, international companies just cannot afford to go back on their sustainability commitments. Even in the US, people are holding brands accountable and are asking for brands to take positions in ways they have never done before.
GF: Are there countries and industries more resistant to sustainability initiatives?
Whelan: In many countries outside of Japan, North America, Europe, and somewhat increasingly in Latin America, there’s not a lot of interest in sustainability. If you’re a coffee importer and roaster in Russia, China or Africa, you’re not going to really care about these issues. In India, there’s a growing interest, but it is still relatively small. In the United States and Europe, there is some resistance as well. People think because it’ll cost more, it’s too much trouble, I already have my suppliers, I just don’t want to bother with this, or nobody’s going to notice.
Industries that are more consumer facing pay more attention because there’s more pressure. Those that are B2B tend to not care until they get pressure from clients. Cargill, for example, until six to seven years ago, was not interested in sustainability. But then Unilever, Mars and all their clients started to ask for sustainability norms. The B2C versus B2B is one area of difference.
The natural resource extraction industries have a much more challenging time figuring out how to do this responsibly. In many cases, depending on the geography, their license to operate is increasingly threatened when they don’t take care of sustainability issues, but companies are starting to pay more attention and adopt good practices. In Peru, for example, they couldn’t put in a pipeline because of local opposition – they’ve got to do a better job of taking care of these issues if they want to continue to exploit new areas of opportunity.
GF: How do companies deal with extreme weather events like floods, monsoons, earthquakes, hurricanes and fires?
Whelan: Companies are beginning to recognize that they need to plan for extreme weather for managing their manufacturing supply chains and distribution. For instance, in the US, one-third of GDP comes from states along the Gulf and Atlantic coastline, which has 72 of its ports, 27% of roads, and 9% of rail lines. With Katrina, almost all of the coffee coming in through New Orleans saw major disruption. Who would ever think that you wouldn’t be able to get you coffee into the country through your port?
There’s research saying abnormal weather — it doesn’t even have to be extreme — can disrupt the operations and financials for 70% of businesses worldwide. An article in the American Meteorological Society Journal said that they saw weather variations costing $630 billion a year for the US alone
However, there’s now sufficient data to begin tracking and understanding weather at a big data level. However, because this is all so recent, it is really over the last couple of years that companies are coming to grips with this issue. Most companies are yet to make major changes in how they source, distribute or manufacture based on extreme weather events.
GF: How do we manage for these weather events?
Whelan: This is a business opportunity. You can design and develop apps that use big data to help manage supply chain, manufacturing and production risks. Weather-related risk insurance vehicles can model themselves on energy and risk insurance. With big data, it’s possible to figure out how to charge for the same.
Also, you have to understand your own business. Where are your facilities located? What will you do if there is flooding? How are you planning for water management? If you expect floods, you would want to think about putting your equipment higher up and having green areas and permeable pavements around buildings rather than concrete. There is a whole series of things that one can consider to begin managing for such weather events.