SUSTAINABILITY SPELLS PROFITABILITY

“In an interconnected, 21st-century global economy, social and environmental problems that arise from almost anywhere threaten the ability of people and businesses everywhere to flourish — no person, business or country is immune.”
— Joel Harmon, Institute for Sustainable Enterprise

Joel Harmon, professor of management at Fairleigh Dickinson University and research director for the Institute for Sustainable Enterprise (ISE), warns, “In an interconnected, 21st-century global economy, social and environmental problems that arise from almost anywhere threaten the ability of people and businesses everywhere to flourish — no person, business or country is immune.”

One business sector that has had to answer the call of social responsibility since the days of apartheid and widespread demand to divest business interests from South Africa is the financial industry. Socially responsible investment funds, those in which companies are screened by fund managers along socially responsible criteria, such as environmentalism, community outreach and the positive or negative impact of a company’s products, are becoming more complex, yet increasingly in demand. Says William Russell, ISE research associate, “The specific measurements investment firms may look at include: Is the corporation in good shape financially? Is it environmentally efficient? How large is its carbon footprint? Is the corporation a good community citizen? And does management value ethics and diversity?”

Assets of mutual funds that are designed to invest in companies meeting social responsibility criteria have swelled, and institutions with trillions of dollars in assets — including charitable trusts and government pension funds in Europe and states such as California — pledge to weigh sustainability factors in investment decisions.

Jean Frijns, chief investment officer of ABP Netherlands (the largest pension fund in the world), said, “There is a growing body of evidence that companies which manage environmental, social and governance risks most effectively tend to deliver better risk-adjusted financial performance than their industry peers. Moreover, all three of these sets of issues are likely to have an even greater impact on companies’ competitiveness and financial performance in the future.”

A CLASSIC CASE

The connection between profits and social considerations is not new. For instance, Nestlé suffered great losses during huge international protests concerning its marketing of infant formula. Protesters claimed that the company contributed to a rise in infant mortality and health problems in undeveloped nations, where users of the company’s powdered baby formulas were not given adequate instruction in product use and either fed their children overly diluted formula or formula mixed using contaminated water.

Widespread publicity led the Infant Formula Action Coalition (INFACT) to launch a boycott of Nestlé products in Minneapolis, Minn., in 1977. The boycott soon spread throughout the United States and to Australia, Canada, New Zealand and Europe. In 1981, the U.N. World Health Organization established the International Code of the Marketing of Breast Milk Substitutes, which put restrictions on advertising these products and shifted the emphasis onto health care providers as the primary source of information on infant feeding. The code has been approved by numerous nations around the globe.

Many European universities, college and schools still uphold a ban against the sale of Nestlé products on their campuses.

Today, in this age of instant communication, negative actions by a company can rapidly ruin its reputation. Georg Kell, who heads the U.N. Global Compact, said at an ISE-sponsored presentation at FDU’s College at Florham, “In an increasingly interconnected world, social, environmental and governance issues are no longer just ‘soft’ business concerns but are increasingly becoming material for long-term viability … because helping to build social and environment[al] pillars makes the global marketplace stronger.”

 

“You can’t ignore the impact your company has on the community and environment.”
— Patrick Cescau, Unilever

LEADING BY EXAMPLE

According to Patrick Cescau, group CEO of Unilever, there is an “increasing awareness within business itself that many of the big social and environmental challenges of our age, once seen as obstacles to progress, have become opportunities for innovation and business development.” He noted that “developing and emerging markets will be the main source of growth for many multinational companies in the years to come [it already counts for 40 percent of Unilever’s sales and most of its growth], and those that make a positive contribution to economic development and poverty reduction in these countries will be better placed to grow than those that do not.” He went on to say, “You can’t ignore the impact your company has on the community and environment. CEOs used to frame thoughts like these in the context of moral responsibility, but now, it’s also about growth and innovation. In the future, it will be the only way to do business.”

Cescau and his company have made significant efforts in meeting both social and environmental challenges: from operating a free community laundry in a São Paulo, Brazil, slum and helping tomato growers convert to eco-friendly “drip” irrigation to funding a floating hospital that offers free medical care in Bangladesh (a nation with just 20 doctors for every 10,000 people) and helping thousands of women in remote Indian villages start microenterprises.

The company discloses how much hazardous waste and carbon dioxide its factories release worldwide. In September, the Carbon Disclosure Project, a coalition of more than 315 global investors, named Unilever as “Best in Class” in its climate change disclosure.

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