Energy: Green business

Corporates have realised that a more environmentally friendly agenda could do wonders for their bottom line.

by Emilie Filou, World Business
Last Updated: 23 Jul 2013

Last January, UK retailer Marks and Spencer (M&S) announced a major environmental overhaul of the company. The £200 million initiative aims, among other things, to make M&S carbon-neutral by 2012. The scheme is called 'Plan A' because, as chief executive Stuart Rose explained, "there is no plan B". In other words, carbon neutrality and zero landfill waste are non-negotiable business targets. Rarely before have businesses been so forceful about their green agenda. Yet M&S (see box) is not alone. Across the corporate world, an increasing number of companies will not take no for an answer any more: green means business and will be treated as such.

In the past 18 months, the debate on business and the environment has witnessed a dramatic U-turn from cynicism to proactive involvement. Tom Woollard, principal director at environmental consultancy ERM, who has worked on these issues for years, says that businesses' approach to green issues was always one of risk mitigation. "But recently there has been a real shift to the business opportunity side."

The Stern Review, by Nicholas Stern, former chief economist of the World Bank, published in October 2006, can claim some of the credit for this sea change. Daniel C Esty, co-author of Green to Gold: how smart companies use environmental strategy to innovate, create value and build competitive advantage (2006) and professor of environmental law and policy at Yale University, explains: "It changed the framework of the debate by asking the question: what would the cost of inaction be? The implications before were that the status quo was free. Stern changed that. He also made clear that the cost of action need not be extortionate."

In fact, as most businesses are finding out, there is definitely a business case for going green. Investment in reducing their environmental costs is a lucrative business, as BP has discovered: it has saved a massive $1.5 billion by improving efficiency and cutting emissions (for an initial investment of $20 million). Stakeholders, it turns out, also want to go green: Toyota can't make enough of its hybrid Prius; Sun Microsystems' low-energy server is its fastest selling product in its 25-year history; and GE has sold out of its wind turbines. "I think the fear of being left behind is what companies are really scared of," says Woollard.

So everyone's at it. From old economies to emerging markets, finance to utilities, B2B to B2C. Much of it is green hyperbole, but those companies determined to make a difference have come up with audacious - and often lucrative - plans. M&S' goal to be carbon-neutral by 2012 was received with scepticism. Unrealistic, said experts. But Esty argues that the 'no plan B' approach works. "You can produce innovation in a number of ways and it is often by being faced with challenges that you innovate. People rise up to these challenges."

What it takes is a willingness for corporates to look at their activities with a different lens and accept that they have to challenge the status quo. Understanding their footprint is the first step. Climate change and global warming may have stolen the show in recent months, but the green debate is far more wide-ranging than just greenhouse gas (GHG) emissions: water management, air pollution, natural resources management, sustainability and waste management are all urgent matters, and green corporate champions will have plans to tackle the entire spectrum.

One way to calculate a company's environmental impact is Life Cycle Analysis (LCA). An LCA looks at the entire supply chain (suppliers, raw materials, energy) of a product/service, its manufacturing process as well as its end fate (consumer use). It identifies which stage is the most resource-intensive or has the biggest environmental impact. "A lot of companies wrongly focus on manufacturing rather than on the use of their products. But an LCA can open up some interesting opportunities," says Woollard.

"In terms of energy efficiency, for instance, a supermarket chain could save 4%-5% of its electricity bill by turning the chillers and lights off. But by looking at its clothing range and altering the manufacture so that you can wash clothes at 30 degrees instead of 40, you realise that it is 4% of the country's electricity bill you're saving."

Banks and financiers have been quick to invest in green start-ups. Shareholders have demanded to know more about green credentials, and consumers have put their wallet where their mouth is. Peter O'Toole, head of public affairs at GE's Ecomagination initiative (see box), explains: "Some of our Ecomagination innovations were already on the drawing-board, but when we heard the interest from our customers, it gave us synchronicity and added value to the scheme. We went from evolution to revolution."

This has sparked a chain reaction: Ikea, for instance, employs a sourcing team of 70 people to check that suppliers comply with its environmental standards. Wal-Mart, which has successfully applied its zealous 'reduce cost' approach to energy efficiency across its sites, is now thinking about selling its expertise (turning its savings into revenue) and imposing similar energy requirements on its 30,000 suppliers.

There is plenty of expertise for companies to turn to, from NGOs to consultants, but Woollard says too many still resort to carbon offsetting - schemes that seek to reduce net emissions by absorbing GHG. Trees and grass planting are the most common options, although there are doubts over their efficiency and it is only a stop-gap solution.

Many businesses now share best practice tips on green ventures, from car-sharing schemes to computerised lighting systems to new research. Truman Seamans, director of the US-based Pew Center's Business Environmental Leadership Council (BELC), a group of corporations looking for solutions to climate change, says: "Take Boeing, for instance: it's not just using more composite materials and aluminium, it's also working with suppliers. It's about engineering and drawing-board stage co-operation."

Another good example of collaboration is BP and DuPont, whose joint work on a new fuel called butanol could lead to the next ethanol. Butanol has a much higher energy content than ethanol, lower GHG emissions and can be produced more easily since it relies on enzymes rather than distillation. "But the only way to launch the product on to the market was for DuPont to team up with a company that had the distribution network," says Seamans.

In the UK, the Corporate Leaders Group on Climate Change (CLG), part of the Prince of Wales' Business and the Environment Programme, has brought 20 multinational leaders together to work on the green corporate challenge. Ian Cheshire, CEO of DIY chain B&Q, says that being part of the CLG has given it a voice. "The CLG got us inside Number 10 (Downing Street). I think anyone in the group would have found it difficult to get this level of exposure individually," he says. "Everyone has something unique to bring. We can't compete with the R&D of some of the members, but we have the retail power to distribute an innovation when it becomes commercially viable."

In a bold move, Sun Microsystems - which is a member of the CLG - also decided to open-source its low-energy chip and make its intellectual property available. "We're already on iteration number two, so we're at least 18 months ahead," says Richard Barrington, head of public policy at Sun UK. "Also, we're of the opinion that innovation always happens elsewhere. We have brilliant people here, but there will be people out there who can make it even better."

Combining environmentally-aware behaviour and making or saving money is, of course, the ultimate goal. "We're not doing this out of the kindness of our hearts," says Barrington. "We're doing it because we can save or make money. So far we've always managed to tick either or both boxes."

But Esty warns that companies need to be realistic too. "There is too much of this win-win strategy; that's just wrong. Not every product pays off, not every marketing campaign will work. There are risks involved." Not least to business reputation. In this age of empowered consumers and whistle-blowers, companies would be ill-advised to make claims they cannot live up to.

Some companies will also find it harder to extract clear value from an environmental overhaul if their products can't easily be 'greened' (such as a TV programme, for example). Green, it should also be noted, will never be enough on its own; this is why so many electric and hybrid cars before Prius never made it past the experimental stage.

Barrington says that perhaps the only situation where they may not be able to capitalise on environmental change would be if regulation forced them to. However, most companies have upped their green game in anticipation of a change in the law, which they are wise to do since Seamans says that most of his members think US regulation is just around the corner.

Companies should be greener, but they should not miss the wood for the trees. Green is not the next business El Dorado; it is a business imperative.

Marks and Spencer

Marks and Spencer's Plan A (so-called because chief executive Stuart Rose, left, said there was no Plan B) is a comprehensive 100-point plan that seeks to revolutionise the way the retailer operates over the next five years. Yale's Daniel C Esty's research found that 'green' issues appealed to certain segments of the market: those with a high disposable income; young people; and women more than men. "Since M&S appeals to upper middle-class young women, it's a triple hit," he says. "It's going back to its roots with this initiative." M&S' targets for 2012 are to:

- Become carbon-neutral
- Send no waste to landfill
- Extend sustainable sourcing
- Set new standards in ethical trading
- Promote a healthier lifestyle

So will it work? Most impressive perhaps is the goal for carbon-neutrality. M&S plans to meet the challenge set by the Stern Review (reducing emissions by 80%) 40 years ahead of target. It says it will improve its energy efficiency by 25%, use renewable energy in its stores (including composting organic waste), increase local sourcing, minimise and label food that has been flown in, and use 50% bio-diesel in its lorries. Offsetting will be a last resort.

On the waste management front, packaging will be reduced by 25% and will be made from recycled or sustainable sources. No waste will be sent to landfills: all of it will be recycled, reused or used for energy generation. Customers will be encouraged not to use plastic bags, all of which will be made from recycled plastic.

All wood and fish will come from sustainable sources and all eggs, including those used in products, will be free range. Polyester will be made from recycled plastics rather than oil. Water use will be reduced by 20%.

M&S will share these best practices with its suppliers, and customers will be given tips and information through clear labelling and awareness campaigns. Interestingly, most of the difficulties the retailer might encounter are on the supply side. M&S is not the only company trying to switch to renewable sources of energy, and demand will exceed supply. Similarly, the pledge to offer more organic food might not fit with reports that organic production fell in 2005, despite a 30% increase in demand over the same period.

It is also worth pointing out that most M&S-related emissions actually come from its suppliers (about five times as much as the chain itself). How much of an impact M&S' programme will have on them is anyone's guess.

EDF Energy

French electricity company EDF Energy (headed by Vincent de Rivaz, which is part of French energy company EDF), long perceived as a dinosaur of the French socialist era, is experiencing a new dawn. Like many other utility companies, EDF has been feeling the heat about its role in climate change. "There is a recognition that our business model has to change. It's not sustainable," says Jim Butler, marketing strategy manager. "We cannot continue to operate in a world where the more energy we sell, the more pollution we make and the more money too. We need to break that cycle."

The solution has come in the form of a new business model based on service and energy efficiency. With energy price increases, customers began to express an interest in reducing their emissions and their bills. "There are two ways to reduce your bill: either you consume less or you pay less," says Pierre-Jean Lahourcade, energy efficiency manager. "We used to be very 'no frills'. We sold electricity and we sold it cheap. Now, we're selling top-notch services." EDF has pioneered an advanced energy efficiency service whereby it commits to lowering the energy consumption of its clients in return for higher energy prices.

After decades of monopoly in France, EDF has huge R&D facilities with over 3,000 engineers working on all aspects of the electricity market. Turning off the lights will make an appearance on the list of recommendations, but most of the advice will consist of tailor-made technical knowledge on how to improve the efficiency of onsite processes, be it for a bakery oven or a furnace boiler. After an initial analysis of electricity consumption and a survey of the site, EDF will draft a contract pledging a realistic reduction and adjusted price.

The difficulty, of course, is that this is a market where competition is plentiful and cheap. "We've raised the bar; what we offer gives us a competitive edge," says Lahourcade. EDF pioneered the programme in France in 2000 and now has 80 clients across Europe, with a loyalty rate of 97%. Some are now on their third iteration of the contract, proving that there is indeed a market for top-quality advice. "It gets harder after the initial gains to further energy efficiency. It requires more investments, but delivers longer-term benefits."

This is the main limitation of the contract: it is resource-hungry and suitable only for sites with consumptions of 10GWh (the size of a factory or a distribution centre). "It is very dependent on the quality of involvement," says Butler. "The company has to invest time and effort for meetings, site visits and briefing the MD; and be prepared to make the investments."

General Electric

In May 2005, GE spearheaded what has now become a green corporate revolution by launching Ecomagination. The scheme's scope and ambition astonished everyone, including some GE insiders. What the company promised was a complete revolution, inside and outside, by improving its processes and helping to improve those of its suppliers and customers.

Until then, GE's environmental credentials were not good: it had been dumping toxic chemicals in the Hudson river for decades and had refused to become involved in the cleaning operations put forward by the US Environmental Protection Agency, arguing it would just stir up the pollutants. But, after years of bitter fighting, GE gave in, realising that its reputation was at stake. "It's a turnaround story," says Yale's Daniel C Esty.

In a radical change of tack, CEO and chairman Jeff Immelt, above, decided instead to use green as GE's next strategic move. "Green is green," Immelt told his stakeholders, referring to the colour of the dollar note, at the unveiling of Ecomagination. Along with a drastic programme of emission control, Ecomagination sought to embed green into GE's everyday business. The main targets included:

- Cut GHG emissions to 1% below their level in 2004 by 2012
- Cut intensity of GHG emissions by 30% by 2008
- Double revenue from clean technology businesses to $20 billion
by 2010
- Double research spending on clean products from $700 million to
$1.5 billion by 2010

Peter O'Toole, head of public affairs at GE's Ecomagination initiative, says that it's doing reasonably well. "We closed 2006 with $11 billion for Ecomagination, so we're more than halfway on revenue, and we spent $1.2 billion on research." There are now 45 products in the Ecomagination portfolio (up from 17), ranging from hybrid locomotives to wind turbines and clean coal technologies.

Over the five years spent researching Ecomagination, Immelt organised 'dreaming sessions' to which he invited the CEOs of all his major clients and asked them what GE could do to help. "The products we make have a very long shelf-life, so we have to be a little visionary," explain O'Toole. "We had the CEOs of BA and Japan Airlines saying: 'We need more efficient and cleaner jet engines because of stringent regulations'." Many of these ideas inspired products in the Ecomagination portfolio.

Immelt also capitalised on his engineers' expertise. "He asked them for emission-cutting scenarios. We were given three options and he picked the toughest one. He knows we can do it and that if he sets the bar high enough and we hit it, it will have real meaning for the company," says O'Toole.

GE now has 4,000 projects working on reducing inefficiencies and emissions. Some business areas are doing better than others - energy and aviation have proved fertile grounds. "We've sold out of wind turbines and solar cells, and airlines are buying our new efficient engines at an incredible pace," says O'Toole.

But is all this revenue yielding profit? "We would not be investing in these technologies if we didn't make money," says O'Toole. "Jeff has always made it clear that this is not a hobby; it is a strategy." But recent reports about GE's poor 'quality of earnings' (low-margin expansion unlikely to spur significant growth) have cast doubts over the monetary powers of green. The company says it is only a temporary blip, resulting from its strategic reorientation. Time will tell.

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