22 Apr 2010

Harvard Business School Faculty on Business and the Environment


BOSTON — On the 40th anniversary of Earth Day, three Harvard Business School faculty members share their views on the sustainability-related challenges and opportunities facing today's business leaders.

Robert Eccles

Robert G. Eccles
Senior Lecturer of Business Administration and author of One Report: Integrated Reporting for a Sustainable Strategy

This article, titled,"The Annual Report as Sustainability's Secret Weapon", was originally published on Harvard Business Review's faculty blog on April 19, 2010.

Spring brings April showers, May flowers - and a flurry of annual reports. Mine have been arriving in the mail, and I am always interested to see what the companies I own stock in have to say about themselves in this ritualistic document filled with financial information, different types of narratives, and lots of pretty pictures.

The amount of detail and the level of complexity in the financial section have grown considerably in response to the increasing onslaught of accounting rules and regulations. What's more, since going green is now red hot, a growing number of companies - especially in Europe and Japan - are also starting to issue Corporate Social Responsibility (CSR) or Sustainability reports. Sometimes these are mailed with the annual report, but more often they have to be ordered separately or downloaded from the company's Web site. Unfortunately, the two reports rarely add up to something greater than the sum of their parts.

This is a huge problem. A sustainable society requires that all companies be committed to sustainable strategies. Increasing social expectations regarding a company's commitment to sustainability mean that firms that ignore this do so at their own risk. BMW Group has been a leader in recognizing this. Several years ago, it issued a Sustainable Value Report detailing energy consumed, water consumed, waste removed, and volatile organic compounds per vehicle produced. Scoring high in all these categories, BMW believes that its reputation as the world's "greenest" car company plays an important role in brand awareness and customer satisfaction, factors that contribute to revenue growth.

So how can shareholders and other stakeholders know if a company's commitment to a sustainable society is contributing to a sustainable strategy that will create value for shareholders over the long term? The answer lies in combining the annual and CSR/sustainability reports into something I call "One Report," which provides the essential information on a company's financial, environmental, social, and governance performance and shows the relationships between them. This kind of Integrated reporting also involves leveraging the Internet to provide more detailed information to all a company's stakeholders while also providing them with the opportunity to engage in a virtual dialogue on these matters.

Some major corporations are starting to take the lead in this effort, including United Technologies Corporation, Philips (the Dutch electronics and health care giant), the German chemical company BASF, and Danish pharmaceutical maker Novo Nordisk. At United Technologies, whose products include Carrier air conditioners, Otis elevators, and Pratt & Whitney aircraft engines, a recent integrated report focused on such nonfinancial metrics as lower fuel consumption and noise emissions in a new jet engine and a reduced carbon footprint and water consumption in the firm's factories. The juxtaposition of information on both operations and CSR symbolizes the company's commitment to more than just the bottom line and its belief that both sets of data have a significant impact on the long-term success and reputation of the company. In UT's view, CSR is both a reality and necessity, not an addendum.

Novo Nordisk presents stockholders and other stakeholders with a multidimensional Web site that enables visitors to create a customized version of their annual report, access in-depth information about sustainability practices, contact company officers, and even play interactive games showing the challenges and trade-offs the company faces in making difficult decisions.

Thanks to these kinds of One Report practices, these companies actually document their commitment to sustainability, make better decisions based on a broader collection of data, engage more deeply and effectively with all their stakeholders, and lower reputational risk through a high level of transparency.

Given the importance of sustainability, I think companies have an ethical obligation to practice integrated reporting, and investors have a similar obligation to demand it. In fact, I believe the SEC should make it a requirement. As we all try to come up with solutions to the problems of the planet, integrated reporting is one way to make sure that companies are part of the process.

Rebecca Henderson

Rebecca Henderson
Senator John Heinz Professor of Environmental Management and author of Accelerating Innovation in Energy: Lessons from Other Sectors

The environmental challenges we face are among the most important issues facing business.

If, as current scientific research suggests, it would be prudent to remove 80 percent of the carbon from the economy by 2050, it is critical to find effective ways to support far-reaching change in both products and processes across our entire economy.

My current research focuses on large organizations that are attempting to take advantage of sustainability in order to build new businesses or improve the efficiency of the work they are already doing. For, example I am helping a major U.S. utility look at the implications of possible carbon regulation and the way they structure their business. I'm working with a large consumer goods company to look at the implications of the environmental challenges we face in terms of innovation across their product lines. I also do a fair amount of work with a large IT company that sees enormous opportunities in energy monitoring, water monitoring, and waste monitoring.

In general, I work with large companies to respond to the challenges we face in flexible and creative ways. I also examine the strategic and organizational barriers that corporations face in making more efficient use of natural resources or deciding to invest in sustainable technologies.

There are four major barriers: The first is that companies are dubious about the technologies. The second is that they think their customers won't support the change because they are satisfied with the current product. The third is that they think it will negatively impact their revenue. And the fourth is they don't want to change the way the organization runs.

Once you understand the barriers, you can tackle each of them in turn. At the most simplistic level, you focus on addressing strategic questions such as: Why will this new technology meet customer needs, even if those needs aren't obvious right now? Why will it form the basis of new business models that will allow us to make money?

There are a number of very large, importantand well-run organizations making significant commitments to sustainability. I would cite Walmart, Cisco, IBM, Unilever, Duke Energy, and Marks & Spencer as organizations on the leading edge. For example, Walmart is working to completely re-make its supply chain in order to be more sustainable. IBM has put an enormous amount of time and energy behind its "A Smarter Planet" initiative. AndUnilever's leadership team has announced publically that it plans to double the size of the company-a €40 billion multinational-without growing its environmental footprint.

I realize that not every company can make a commitment like Unilever's, but there are enormous opportunities for companies in tightening up processes. Many of the environmental challenges we face are a result of assuming that environmental goods and services like emissions, water, waste , or topsoil are free or cheap.

A few years ago, a manager at a large IT company said something to me that I've never forgotten."For many years we've optimized our business as if capital and labor are what is expensive and we've gotten very good at optimizing in those areas," he observed." What we need to learn to do now is optimize the use of energy and water. Since it's not something we've been focusing on very much, I suspect we'll see enormous progress."

That's my sense as well.

We need to transform the entire economy-the built environment, our agricultural systems, and how we deal with energy. It's a massive undertaking. It's going to touch nearly every aspect of our lives, and its going to be an incredible source of opportunity for entrepreneurial activity.

Richard H.K. Vietor

Richard H.K. Vietor
Paul Whiton Cherington Professor of Business Administration and author of Environmental Protection and the Social Responsibility of Firms

Forty years ago, before I went to graduate school, I was teaching high school history on Long Island. I considered myself an environmentalist even then, and so on that very first Earth Day in 1970, I rode to school on a bicycle. In case anyone missed the point, I also wore a gas mask.

To put this in some historical perspective, not all that long ago, environmentalism could be described as an underground movement. However, all that began to change in 1969 when 3 million gallons of crude oil spilled into the Santa Barbara Channel in California. The federal government reacted with the passage of the National Environmental Policy Act, which requires all projects licensed by the government to file an environmental impact statement. The Clean Air Act, a powerful law against air pollution, was passed in 1970, followed by other legislation that focused on water, strip mining, and hazardous waste. Today, Earth Day gets the universal attention it deserves from millions of people around the globe.

That said, the rallying cry that "green is good for business" is still not shouted in the halls of many corporations. Companies like Ben and Jerry's, Patagonia, and 3M can make money by going green. GE, with its "ecomagination" campaign, has created cleaner and more efficient jet engines and locomotives as well as desalinization and water treatment plants. And firms are also publishing annual "green reports" and feeling pressure from green investors to take steps that can cost them billions of dollars. But if you go to a coal company or most utilities or big railroads that carry coal, they will do what the government requires and leave it at that.

So, after today's celebration, there is much work to be done. In Massachusetts, there has been considerable controversy regarding the building of wind turbines on Cape Cod - a situation I describe in a case study I've written. But no matter what happens there, only about 1.9 percent of all our electric energy now comes from wind and solar. Our capabilities are growing, but not fast enough.

Nuclear power should be part of the answer, although these facilities are very expensive to build--$6-8 billion for a thousand megawatt plant-and the disposal of nuclear waste remains a huge stumbling block among voters. The United States has 101 nuclear plants already online but could use 50-70 more. All this underscores that fact that options come with complications. A gas tax increase would reduce U.S. fuel consumption. While Italians are paying the equivalent of $6.50 per gallon, we Bostonians are paying about $2.50. But try selling that argument to someone who has to drive over 70 miles to work each day. Meanwhile, the Copenhagen climate conference ended with no agreement, and the American Clean Energy and Security Act of 2009, proposed by Representatives Henry Waxman (D-CA) and Ed Markey (D-MA) to "achieve energy independence and reduce global warming" was recently defeated in the Senate.

At some point, however, more and more people and nations will have to conclude that improving the environment and protecting against climate change will require some sacrifices from all of us. If not, there are serious consequences ahead for future generations. For example, if the temperature goes up 2 1/2 degrees Celsius worldwide, the resulting heat wave will have devastating effects on people, animals, and crops as energy consumption skyrockets.

The 40th anniversary of Earth Day is, therefore, a time for both celebration and reflection. This is no time for self-centered decisions or short-term planning. The future of the planet actually does hang in the balance.

In addition, executive summaries and panelist presentation slides from the "Think Tank on Energy, the Environment, and Business: Leadership for Action in Time and at Scale" held at HBS from March 3-5, 2010 are now posted online.

About Harvard Business School

Founded in 1908 as part of Harvard University, Harvard Business School is located on a 40-acre campus in Boston. Its faculty of more than 250 offers full-time programs leading to the MBA and PhD degrees, as well as more than 175 Executive Education programs, and Harvard Business School Online, the School’s digital learning platform. For more than a century, faculty have drawn on their research, their experience in working with organizations worldwide, and their passion for teaching, to educate leaders who make a difference in the world. The School and its curriculum attract the boldest thinkers and the most collaborative learners who will go on to shape the practice of business and entrepreneurship around the globe.