Chris Farrell: Sustainability - The government takes a pass, and businesses point the way

From Wal-Mart to Dow Chemical to Silicon Valley and beyond, companies are embracing a new, core strategy.

"The New Frugality" by Chris Farrell

"The New Frugality" by Chris Farrell

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The politics of global climate change and sustainability seem paralyzed.

The international accord reached last month in Cancun, Mexico, was a modest achievement at best. The Obama administration has all but killed off its signature cap-and-trade legislative initiative.

The Republican majority in the U.S. House bodes ill for any ecological initiative from the 112th Congress. It appears that skepticism over sustainability reigns.

Problem is, for the skeptics -- business leaders didn't get the memo.

Business isn't waiting for politicians to act. Sustainability has moved from the tributaries of society into the mainstream of commerce.

CEOs "have a number of stakeholders that are pushing them in this direction," says B. Andrew Brown, partner and regulatory affairs department head at Dorsey & Whitney LLP. "Customers, investors, employees, even banks and insurance companies."

Management is learning that an embrace of sustainability is a rich strategy in an intensely competitive global economy. It offers another approach to risk management (just ask Mattel's management about the cost of recalling millions of toys manufactured in China and tainted with toxic lead paint).

It's also a way to lower costs and boost efficiency.

Take Wal-Mart, the controversial retail giant. Five years ago, then chief executive Lee Scott launched Sustainability 360 with three major goals: Using 100 percent renewable energy, creating zero waste and selling sustainable products.

With 2005 as its baseline, for instance, a Sustainability 360 goal was to hike fleet fuel efficiency by 25 percent by October 2008. It rose 38 percent instead, cutting greenhouse gas emissions by 200,000 tons a year and saving the firm more than $200 million a year.

That's real money, even for a behemoth like Wal-Mart.

Sustainability is a driver of innovation within companies like Dow Chemical and General Electric, creating new markets and profit centers. Silicon Valley entrepreneurs are betting big with an eye toward earning a payoff from clean-tech innovations.

Global investment in clean energy of all kinds rose from $46 billion in 2004 to $200 billion in 2010.

Shareholders increasingly approve of the strategy. From 2007 through 2009, assets in sustainable and socially responsible investing rose by more than 13 percent -- from $2.71 trillion to $3.07 trillion.

That compares with a 1 percent gain by the broader universe of professionally managed funds over the same time period, according to Social Investment Forum, an industry trade group.

Customers like it. So do employees.

It's striking that the steps companies are taking to pursue sustainability came about despite the worst global downturn since the 1930s and, in many parts of the world, a subpar recovery.

The UN Global Compact-Accenture CEO Study 2010 reported that 81 percent of surveyed CEOs say that sustainability was fully embedded into the strategy and operations of their companies, up from 50 percent in 2007.

"There are multiple reasons why more businesses are embracing sustainability as a core strategy," says Daniel Esty, professor of environmental law and policy at Yale University.

To be sure, many companies with green initiatives fall far short of their stated goals. One division may market a firm's sustainable ethic while other divisions ignore it.

Green-wash and green-hype are all too common. Sustainability is too often a website pledge and a paper-recycling bin for employees.

BP is a sobering warning. The petroleum giant ranked high on lists of sustainable companies. It plowed billions into alternative energy.

Yet systemic mistakes eventually led to the explosion aboard the Deepwater Horizon offshore rig, a human tragedy for the workers on the platform and an ecological disaster for the affected coastlines in Florida, Louisiana, Alabama, Mississippi and Texas.

It's critical to hold companies to their word. But focus too much on public relations fluff and grievous disasters and you'll miss a fundamental transformation going on in corporate behavior.

The embrace of sustainability is reminiscent of the information technology revolution of the 1980s and 1990s. Companies started investing in personal computers, plopping them down on desks.

It was the thing to do.

The business press highlighted companies that reaped profits from information technology efficiencies. Yet in many cases the examples were the same -- Wal-Mart, General Electric and USAA.

By the 1980s, Nobel laureate Robert Solow quipped, "We see computers everywhere except in the productivity statistics."

Economic transformations take time. Innovative companies first figured out how to tap the potential of desktop computing power to improve their profits and market share.

The technologies and knowledge gradually spread to big and small firms, and by the 1990s, America's productivity revival was real and in the numbers.

Information technology is what Esty calls a corporate megatrend, a catchphrase popularized by futurist John Naisbett. Sustainability is also a megatrend.

"Megatrends require businesses to adapt and innovate or be swept aside," wrote Esty and David Lubin, cofounder of the Palladium Group, in the May 2010 Harvard Business Review. "What this all adds up to is that managers can no longer afford to ignore sustainability as a central factor in their companies' long-term competitiveness."

It isn't just companies. Alliances are being formed between governments, nonprofit organizations and businesses. Colleges and universities have made major investments in clean energy.

Take the decade-long, ambitious initiatives at the University of Minnesota, Morris. A 1-million-square-foot campus with about 2,000 people has several ongoing green initiatives.

Wind power supplies up to 60 percent of the school's electricity demands. Administrators think it reasonable to assume that over the next several years wind and biomass will supply 70 percent of the university's electricity and 80 percent of heating and cooling.

"These alternative energy resources will directly help keep tuition costs down," says Lowell Rasmussen, vice chancellor at the university. "What we want to do is demonstrate to the 1,800 or so students on the campus what it's like to live in a sustainable community."

The pressure to confront global climate change won't go away. Scientists continue to make vital progress in our understanding of the phenomenon.

Washington may be paralyzed by the climate-change deniers, but companies and citizens aren't sitting around doing nothing. They're filling the void until Washington wakes up.

Chris Farrell is economics editor of "Marketplace Money," American Public Media's nationally syndicated personal finance program. He's the author of "The New Frugality: How to Consume Less, Save More and Live Better," now in paperback.

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"The New Frugality" by Chris Farrell