Should Companies Invest in Sustainability?

Yossi Sheffi* MIT Center for Transportation and Logistics, USA Submission: February 23, 2019; Published: March 15, 2019 *Corresponding author:

Yossi Sheffi, MIT Center for Transportation and Logistics, USA Short Communication

Three of the most revealing results of the research that led In April 2018, MIT Press published my book, Balancing to my book are that Green: When to Embrace Sustainability in Business (and When Not To). The book was a result of five years of primary research A. Companies cannot control most of their emissions even interviewing hundreds of executives in industry, government if they wanted to and NGOs. My original intent was to argue, as did others, that B. Most consumers are not willing either to pay more or business should take the lead because many governments are incur slight inconveniences in the name of sustainability, and paralyzed by discord and political calculus. Industry, I thought, being the source of most environmental impacts, can and should C. Jobs and economic development are more important lead the way (Figure 1). than sustainability.

1. It’s Outside the Four Walls

For almost every company, most of its environmental footprint of a company’s products is not in its own operations. Instead, it comes from either its upstream supply chain (the deep-tiered network of suppliers, sub-suppliers, sub-sub-suppliers, and so on) or from downstream in the use phase (when consumers

use and discard the product). Examples of use-phase impacts include exhaust emissions from automobiles; electricity-related emissions for consumer electronics; the footprint of making hot water when using laundry detergents, shampoos, and soaps; and many others. This is important to remember as one judges corporate claims of environmental achievements.

Every product is based on a bill-of-materials (BOM), specifying the components of the product, their sub-

Figure 1: Balancing Green: When to Embrace Sustainability in components, and their sub-sub-components. Some electronic Business (and When Not To). products have 15-20 echelons in their supply chain. Their intricate composition is based on materials and minerals that must be extracted from the earth, yet the companies making and Over five years and over 500 pages later, I now realize that selling the electronic product is not likely even to be aware of not only business is not taking the lead -it really should not do who the deep-tier suppliers are. While companies know who it. To understand this viewpoint, we have to think about what their “Tier 1” suppliers are - those are the suppliers they buy role industry plays in society. Vast supply chains span the globe from and pay -they typically don’t know who the suppliers of to deliver goods and services to humanity. Through advances in these suppliers are. Most suppliers regard the identities of their information and communications technology, companies have sub-suppliers are as a trade secret and a source of competitive lowered their costs and vastly enhanced their levels of service advantage. In addition, in some cases they fear that the so that more people can afford and enjoy more goods whenever manufacturer will bypass them and buy directly from their sub- and wherever they desire. These advances have enabled new supplier. Even if a manufacturer identifies a sub-supplier buried business models, such as electronic commerce and omni- deep in its supply chain, it has no leverage over it and therefore channel, allowing delivery of many products in a day or two or no ability to convince or pressure such a supplier to become even in hours, at affordable prices. more sustainable. The reason is that the manufacturer has no Civil Eng Res J 7(4): CERJ.MS.ID.555717 (2019) 0087 Civil Engineering Research Journal

commercial relationship with such a supplier. Furthermore, the the least expensive products regardless of its environmental sub-supplier may not even know that its own product ends up characteristics. Furthermore, consumers are not willing to used by the manufacturer. tolerate lower product performance or less convenience. When McKinsey, the management consulting company, surveyed The issue with use-phase environmental impact can be 1,000 consumers in Europe and the US, it found that less than even more difficult. For some products it is simply a new design 10 percent of consumers said they were willing to pay a 25 with no behavioral change required. A more energy-efficient percent higher price for green goods. Realistically, such surveys refrigerator or computer might be identical in performance and overestimate the impact of eco-labels: Survey participants tend operating instructions to the less-efficient model it has replaced; to respond the way they think the survey creator wants them it simply uses less energy (yet it may cost more). Others, such to respond, or they may want to appear progressive and caring. as a cold-water detergent, might involve some modest change Data from actual product sales experiments, in contrast, show to an otherwise familiar practice. Finally, some changes, such lower premiums for sustainability labels and sometimes no as electric vehicles, might demand both behavior changes (e.g., premium. British researchers, using an ordinary least squares learning to manage the range of the vehicle and find charging model based on dozens of indicator variables, found the premium stations), as well as concomitant consumer investments (e.g., for Fair Trade coffee already on the market to be only 11 percent. installing charging facilities at home). A New England study of 26 grocery stores found that eco-labels In addition to designing products for efficient downstream had mixed effects on sales and price premiums. usage, companies may have to influence and educate consumers When a Fair-Trade label was added to two previously on the benefits and efficacy of new, environmentally responsible unlabeled coffee varieties (one selling for $10.99 and the other products, and how to use the product in a sustainable fashion. $11.99 per pound), sales volumes of both increased by about For example, dry shampoo110 is a specially formulated spray or 10 percent. When the prices of both coffees were raised by $1 powder that absorbs excess oil from the hair and scalp, allowing per pound, sales volumes of the higher priced coffee remained for a longer period between wet hair washes. Unilever claims elevated, whereas sales of the lower-priced coffee dropped by that it can replace a wet wash 60 percent of the time. Consumers, about 30 percent. This result suggests that wealthier consumers apparently, do not believe the product has the same efficacy, may be willing to pay a premium for sustainable products, while value, or appeal; dry shampoo accounts for only 3 percent of the more frugal consumers might use sustainability attributes only global market. as a tiebreaker among equally priced products, rather than an Because of such difficulties, companies focus on their own inducement to pay more. Finally, in an on-going study by the MIT operations and report on their efforts in glossy brochures and Center for Transportation and Logistics, consumers were simply triumphant press releases. For example, Coca Cola tout the observed while making buying choices between clearly-marked reduction in their water use. It reduced its water consumption in sustainable products (soaps, detergents, paper products, etc.) its own operations from 2.7 liter of water per liter of beverage to and regular products in several Boston area supermarkets. Early 1.96 Liter per liter of product. Meanwhile, the sugar beet farmers results show that only four percent of consumers choose the deep in its European supply chain that supply the company sustainable products. guzzle 28 liters of water per liter of Coke. And, while McDonald’s These and other observations of actual behavior (rather is working to scrap the use of plastic straws in its restaurants than questionnaires) suggests that the majority of consumers - an inconsequential initiative -- it keeps serving beef, despite in developed countries refuse to pay more for sustainable the fact that cattle is responsible for about 10 percent of all products. The situation is even more alarming because for the global GHG emissions, mainly through its emission of methane, vast majority of consumers in developing markets, sustainable a greenhouse gas 28 times more potent than carbon dioxide in products are a “luxury good.” In other words, if they will attain its impact on global warming. The point of this section is that in the standard of living of Western consumers, including air most cases companies cannot really have a significant impact on conditioning, concrete buildings, and automobiles, no amount of sustainability because they have no control and little influence sustainability initiatives by consumers and companies will bring over their deep tier suppliers or customers. Consequently, most a reduction in the rate of carbon emissions growth. do what they can within their own operations, but are not putting it in the context of their actual supply chain-wide environmental Finally, for readers who think they are willing to pay more Sayimpacts. vs. Pay. or be somewhat inconvenienced in the name of sustainability, I pose the following questions:

i. how many of you or your fellow consumers refuse In many polls and surveys, consumers claim they want more to purchase items from Amazon (or other e-commerce sites) sustainable products and are willing to pay more to for them. But because of the wasteful item packaging which ends up in retail data shows that very few actually do. Faced with a choice landfills? at the supermarket shelf, the vast majority of consumers choose

How to cite this article: Yossi S. Should Companies Invest in Sustainability?. Civil Eng Res J. 2019; 7(4): 555717. 0088 DOI: 10.19080/CERJ.2019.07.555717. Civil Engineering Research Journal

ii. How many Amazon consumers consolidate their their reaction. “We invite Levi Strauss, The Gap, and the affiliates purchases and order only once every week or two in order to (as well as any other American/international company currently save on transportation and packaging? marketing their products in Canada that does not want to accept our ‘dirty’ money) to NO LONGER do business on Canadian soil. iii. Finally, how many of Amazon consumers forego the By all means, purchase your oil from regimes that provide NO free two days (or two hours in many cities) delivery in favor of human rights or environmental stewardship. Don’t let the door longer deliveries, even in the face of “$1 off” from Amazon? The hit your ‘behind’ on the way out,” said a reader commenting on answer to all these questions is very few! the story. A nonprofit called Alberta Enterprise Group (AEG) The moral of these observations is that companies should not launched a counter-boycott campaign on Facebook, urging invest heavily in environmental initiatives until their customers Canadians to boycott the boycotters of Alberta’s oil. will be willing to pay for these investments by preferring Faced with heightened media coverage, some companies, sustainable products. The last part of this paper argues what who apparently did not consent to their inclusion in the Peoplecompanies vs. can Planet and should do. ForestEthics list, clarified their position. Levi Strauss, The Gap, and Timberland criticized ForestEthics for including them on Companies provide not only goods and services, but also the NGO’s anti-oil sands list. “We do not take a position opposing jobs. Agriculture, mining, transportation, manufacturing, or supporting any fuel or energy source from any country or warehousing, distribution, retailing, and the many other geography,” said a Levi Strauss spokesperson. The morale of businesses involved in global supply chains provide jobs for this story is that environmental slogans such as “Profits vs. people across the world. When environmentalists or regulatory Planet” are missing the mark. In reality, it is people vs. people, agencies threaten these jobs, the response can be fast and or some people vs. other people. On one side are people who furious. Consider the case of the oil sands of Alberta, Canada. wish to prevent or reverse the effects of climate change and Alberta, Canada, has the world’s third-largest reserves of oil, pollution to ensure a better environment for themselves and behind only Saudi Arabia and Venezuela. But those 166 billion future generations. On the other side are people who wish to barrels of viscous crude oil lie locked in sandy formations that have affordable goods and services as well as jobs to ensure a make extraction difficult and environmentally impactful. This better economy and living standards for themselves and future results in open pit mines that scar the land where shallow layers generations. And while both sides vilify each other, both sides are of black oil sands can be dredged. To extract deeply buried oil “right.” Only such recognition can lead to reasonable solutions sands, miners burn large quantities of natural gas to generate which do not reduce standards of living while moving towards a steam that is injected into the ground to mobilize the thick gooey So,more What sustainable Should environment. Business Do? bituminous deposits. The process consumes significantly more of energy and water than does extraction of more liquid crude Many countries have enacted a slew of regulations aimed reserves. “The most destructive project on Earth” is what the at curbing carbon emissions. On September 17, 2015, German NGO Environmental Defence Canada, called these oil sands fields. Chancellor Angela Merkel was pictured with top Volkswagen In 2010, the NGO ForestEthics launched a campaign against US officials at the opening of the Frankfurt auto show. The next day brand-name retailers and consumer goods companies, pressuring the US EPA issued a notice of violation to VW over emissions them to boycott fossil fuels derived from Canadian oil sands. cheating; the company’s market value dropped 45 percent in ForestEthics started publishing a growing list of companies that short order. By 2017, the scandal spread to include all the big seemed to have agreed to its demands. The list included green German automakers. In the ensuing weeks, Daimler, VW, Porsche, companies such as Patagonia, Seventh Generation, and Whole BMW, and Audi were found to have manipulated nitrogen- Foods, as well as more mainstream companies, including Levi oxide emissions from some of their diesel cars and issued mass Strauss, The Gap, and FedEx (apparently without many of these recalls. On the heels of the scandal, many German publications companies’ knowledge or consent). uncovered the cozy relationships between the industry and the In rebuttal, the Alberta government published facts about German government. These range from ignoring bogus emission the large economic benefits and modest environmental impacts testing, to the revolving door between government officials, of the industry, which provided 30 percent of the GDP of the lobbyists, and industry executives. Not only were the German province. Most importantly, the industry is the number one car companies colluding to weaken pollution standards, the employer of indigenous (First Nations) people. They also government was there to help. Germany’s Chancellor Angela pointed out that the industry mines only 1.3 percent of Alberta’s Merkel lobbied the EU to relax emissions standards, and her boreal forest; recycles 80-95 percent of the water used; has government threatened other European countries with economic reduced emissions by 26 percent since 1990; and that miners sanctions if they would not vote for relaxing regulatory oversight had already planted 12 million seedlings as part of required land by the EU on the German auto industry. reclamation efforts. The Canadian people were less measured in

How to cite this article: Yossi S. Should Companies Invest in Sustainability?. Civil Eng Res J. 2019; 7(4): 555717. 0089 DOI: 10.19080/CERJ.2019.07.555717. Civil Engineering Research Journal

There are good reasons why Berlin stands by its car business risk-reduction initiatives. Sustainability initiatives companies. The industry employs over 750,000 people in can mitigate a variety of risks including: NGO attacks (leading Germany, has been a poster child for German engineering prowess to business disruptions); unfavorable media coverage (causing and dwarfs other sectors of the economy. The state of Lower reduced sales); investor actions (triggering changes in the board Saxony even holds a 20 percent stake in Volkswagen. The result and senior management); and disruptive government regulations is that the German government sees its role being to protect the (resulting in higher costs, direct business restrictions, and even industry from tough regulations and where regulations exist, to plant closures). help the industry evade them by, for example, allowing each car Unfortunately, unlike the case of insurable events such company to hire its own emission testing company. This paper, as natural disasters and accidents, risk managers have scant however, is not about how to cheat and circumvent regulations. reliable actuarial data for quantifying the likelihoods and Most companies comply with all regulations because it is the impact of NGO strikes, consumer preference changes, or adverse law. However, complying with regulations is not leadership. The regulatory changes. Even the possibility of physical damage from question is what companies beyond what should do is required environmental impacts involves speculative extrapolations. As a under penalty. Beyond compliance, companies should justify result, the few available insurance policies have limited scope certain sustainability initiatives based on the following three and high costs. Thus, companies are left to manage these risks criteria:4.1. Eco-efficiency: themselves using “just-in-case” or scenario-based justifications 4.2. Eco-risk management: it helps the business; for risk mitigation. Exposure to environmentally motivated actions by activists or the media is particularly acute for brand- 4.3. Eco-hedging: it mitigates certain risks; and name consumer-facing companies that rely on brand equity. it is a protection against certain changes Because consumers seldom perform their own due diligence, in the market. they rely on NGOs and the media, who know that readers will identify with stories about brands they know, leaving these These three criteria align economic and environmental companies vulnerable to NGOs’ antics and media campaigns. objectives.Eco-efficiency The decision by brand-sensitive companies to invest in eco- risk mitigation has a relative dimension: NGOs are more likely The easiest business case for sustainability involves to target environmental underperformers. NGO and media initiatives that are aligned with the corporate main profit environmental performance scorecards can give rated companies goals. The most common one is cost reduction, most of which some indication of their risks relative to their peers, which can is associated with reduction in energy and raw material influence a company’s materiality assessment (prioritizing consumption. Such reductions - whether changing to LED bulbs dimensions of sustainability) and eco-risk mitigation priorities. in the office, regulating truck speeds, or installing solar panels In essence, brand name companies want to avoid being the “nail - can all reduce a company’s energy bill and reduce its carbon that sticks up” for publicity-eager NGOs. Such analysis can provide footprint at the same time. It is straightforward to calculate ROI guidelines for minimum-required and maximum-reasonable for such projects and they can be justified in most cases based investment (assuming that eco-risk mitigation is the sole green on standard financial metrics. Most companies have harvested investment criterion). It is usually beneficial for companies to these changes which are, in the vast majority of cases, marginal, participate in and subscribe to industry standards for codes of but easy to justify. conduct. Such standards institutionalize performance metrics In 2006, Staples, the giant office supplies retailer, changed and reduce auditing process overhead. Such standards may the control software in its delivery trucks to limit their top satisfy corporate eco-risk goals in that the company can cite speed to 60mph. The result was that average gas mileage its compliance with standards to defend against criticism of its climbed from 8.5mpg to 10.4, a nearly 20 percent reduction in sustainabilityEco-hedging practices. fuel consumption. Changing the vehicle’s engine management software cost only $7 per truck. The change immediately paid Eco-hedging strategies focus on experimentation with green for itself in $3 million of fuel savings annually. Staples did not products. Such green products may have an existing market. For even suffer any lost driver productivity because the time lost to example, Paul Polman, CEO of Unilever said, “Our experience slower speeds was offset by fewer fuel stops, a finding confirmed is that brands whose purpose and products respond to that byEco-risk studies managementin Europe and Japan. demand- ‘sustainable living brands’-are delivering stronger and faster growth.” On the other hand, as Gregory Unruh, a professor Eco-risk mitigation initiatives are those activities that of Doing Good Values at George Mason University, suggested: explicitly aim to reduce the likelihood and magnitude of business “Green marketers have known this for a long time. Consumers disruptions caused by environmental issues. Thus, they can, in will consistently tell surveys that they are willing to pay more principle, be evaluated in the same way as insurance or other for socially and environmentally superior products. But when How to cite this article: Yossi S. Should Companies Invest in Sustainability?. Civil Eng Res J. 2019; 7(4): 555717. 0090 DOI: 10.19080/CERJ.2019.07.555717. Civil Engineering Research Journal

they are alone in the shopping aisle and it’s just them and their This is particularly true in the face of the inability of government wallet, they rarely fork out more for ‘green.’” A 2014 study to provide significant market-based solutions, such as carbon by the European Food Information Council confirmed this by taxation or tough regulations. The 2018 “Yellow Vest” riots in concluding that although consumers understand sustainability, France, in response to a 2.5 percent suggested increase in gas this understanding does not yet translate into changes in food prices; the defeat of the carbon tax proposal in Washington State choices. Even though mainstream consumers were not buying in 2018; the repeal of carbon tax in Australia, demonstrate that green products in volume, surveys found that millennials (those people are not willing to pay more in the name of sustainability. individuals born in the 1980s and 1990s) may be more willing What companies are doing is what many governments are to pay for sustainable products than older consumers. Yet, doing. They “talk a good game” but not taking significant steps survey responses do not sales make. Until retailers’ sales data because consumers are not ready for such steps that might corroborate environmentalists’ survey data, companies may increase costs, upend business models, and reduce employment be reluctant to invest in large-scale changes or incur higher in existing industries and professions. Thus, companies should operating costs for environmentally sustainable products. take incremental steps, such as the ones outlined above. More importantly, they should present initiatives which they were But, as the famous physicist Niels Bohr is quoted as saying going to take anyway as environmental initiatives. “Prediction is very difficult, especially about the future.” Consequently, some companies are hedging their bets in the face In 2011, UPS, the supply chain behemoth, launched a new of uncertain shifts in future regulations and consumer behavior. service for consumers called My Choice. The digital tool alerts In 2008, Clorox launched Green Works—the first new product consumers when a package is coming and allows them to control line in two decades for the 95-year-old company. Green Works the timing and location of the delivery. While obviously beneficial included 17 green cleaning products designed with natural active for consumers as an added service, it also helps UPS reduce costs ingredients that compete with Clorox’s main line of cleaning (and environmental impacts). The reason is that UPS incurs products. Buoyed by a $25 million-a-year advertising push in significant costs in making redelivery attempts if the recipient 2008 and 2009, the Green Works product line sales brought is not home to sign for the delivery. Having the consumer specify in $58 million a year in 2009. However, its price premium and location and time for delivery reduces the problem significantly doubts about its efficacy caused sales to fall to just $32 million - packages are likely to be delivered on the first attempt and not in 2012. have to be redelivered (UPS attempts to deliver three times) or returned. The result is not only significant cost saving for UPS but Green Works may have been a money-losing proposition reduced carbon footprint owing to the elimination of multiple for Clorox, given the R&D costs, the marketing campaigns, the delivery attempts and sending the package back to the shipper. specialized supply chain involved, and the meager sales. For a Such an initiative, while clearly developed to improve customer company the size of Clorox, with $5.6 billion in annual sales, the service and reduce costs, can be presented to the media and Green Works product line can be considered “an experiment.” NGOs as an environmental sustainability initiative. This, among “What’s really exciting is that we’re building knowledge and other initiatives, can help the company avoid being the “nail that confidence within the rest of the company so that we can do sticks up” [1-27]. the same things with a lot of our other product lines,” said References Jessica Buttimer, director of marketing for Green Works. Such 1. corporate experiments allow the company to learn about the Hollender J, Breen B, Senge P (2010) The Responsibility Revolution: technology, the supplier eco-system, the distribution channels, 2. How the Next Generation of Businesses Will Win, Jossey-Bass. and the green consumer market. In that sense, such eco-hedging 3. 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How to cite this article: Yossi S. Should Companies Invest in Sustainability?. Civil Eng Res J. 2019; 7(4): 555717. 0091 DOI: 10.19080/CERJ.2019.07.555717. Civil Engineering Research Journal

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How to cite this article: Yossi S. Should Companies Invest in Sustainability?. Civil Eng Res J. 2019; 7(4): 555717. 0092 DOI: 10.19080/CERJ.2019.07.555717.