The Business Times, Thursday, June 24, 2010
Sustainability can boost profits
OVERVIEW
BUSINESSES are facing increasing global pressure to pur-
sue sustainable growth by managing stakeholders’ inter-
ests and the social, environmental and economic impact
of their products, services, processes and other activities
to achieve both financial and sustainable success. In fact
businesses can turn this into an opportunity to boost their
bottom line.
In a Business Times-Nanyang Business School Round-
table discussion series, senior professors at Nanyang
Technological University’s Nanyang Business School
(NBS) and a visiting professor at the school who is a global
authority on the subject, examine how businesses can pro-
mote sustainability and suggest some ways of integrating
it into their operations to achieve a better bottom line.
Narendra Aggarwal: Businesses have competing pressures
to produce profits and to be good corporate citizens by
promoting sustainability. How well do managers under-
stand that these are inter-linked?
Marc Epstein: Today’s managers understand that making
profits and being good corporate citizens are linked as
this evolved over the last two to three decades in global
businesses. But while they understand that these are
linked, their challenge is how to actually implement it in
their organisations.
While there is a strong desire on their part to be good
corporate citizens, their incentives are aligned typically
around revenue and profit goals. So the challenge for
most large companies is to think about how they can en-
courage managers to push sustainable growth while si-
multaneously producing profits for the firm.
Gillian Yeo: Companies need to have a sustainable busi-
ness to be able to give back to society in a meaningful way.
To say that they want to do good and give back to society
may not be good enough. Toyota developed a hybrid car.
Ford gave over US$100 million to the Breast Cancer Foun-
dation. Both are faced with a lot of challenging issues of
sustainability as automobile manufacturers. If Ford had
integrated the desire to give back to society by producing
cars that are less harmful to the environment, it would
still have been able to move forward with its business
proposition and still used its money to give back to socie-
ty.
Businesses should not just make profit. When they pro-
fit to the extreme at the expense of polluting the environ-
ment and at the expense of not meeting the needs of socie-
ty and not being ethical, then that is not right. While this is
a complicated issue, they should be able to draw the line
in trying to maximise profit and being sustainable and so-
cially responsible at the same time.
Josephine Lang: Managers want to take socially responsi-
ble actions but the problem is that there are different inter-
pretations of what doing good entails. While doing good is
necessarily being ethical too, it has a lot to do with one’s
intrinsic values. Then there is accountability. I am good if
I am doing good and am accountable for the consequenc-
es of my actions. For example, if I polluted the environ-
ment and I paid to take care of it, I can say that I am doing
good.
So there are various ways to look at doing good but cer-
tain aspects of doing good may not square with producing
profits. Perhaps we need a framework to actually help ana-
lyse which aspects are really needed to do good, which as-
pects of our actions are driven by good values and which
aspects are needed for us to be accountable for our ac-
tions.
Prof Epstein: Businesses should do things that are good for
the environment and be concerned about social values.
They should also recognise that another impact of pollu-
tion and social performance is that these may have a fu-
ture impact on their bottom line as they may have to clean
it up and may face a reputational effect. As we bring in the
long term effect of these external factors, we find that it
does cause us to be more socially and environmentally re-
sponsible because we do think about the effect on our
long-term profitability.
Sometimes, companies that don’t perform very well for
society try to be philanthropic to compensate. But this has
not been successful. The biggest impact companies have
is in their primary products and services. It is their core
mainstream mainline business that they need to focus on.
By doing other things, it doesn’t necessarily compensate
for their bad actions. So I suggest that the company first
focus on what is the basic product and service they do and
do that well for both the company and society, and then
they can think about what they want to do about philan-
thropy. But philanthropy is not the centre of corporate sus-
tainability. The core of corporate sustainability is really
around the company’s products and services.
Chung Lai Hong: In the long term, obviously, the managers
see that link to be good corporate citizens, doing all those
things around society and environment that would lead to
good financial outcomes especially when it is consistent
with their business model, enhances their branding, en-
hances how their customers, suppliers and how everyone
sees them so that it is a consistent picture. So organisa-
tions know that by doing good, by being good corporate
citizens, they will build on these intangible assets that
they are fully aware are essential for them to be sustaina-
ble in the long run.
While the profit pressure is there in the short term, we
are increasingly seeing examples of companies saying
that this need not be a problem. It need not be a conflict, it
can be complementary in some cases and the challenge is
to be able to do that. Promoting sustainability can be a
strategic issue as stakeholders (eg customers, employees)
begin to focus more on the environment and social issues.
In the past, the strategic issue may have been competitive
factors of quality or innovativeness. So, in many ways,
what we are doing is still the same, we just have to think
of it from a different angle.
Prof Yeo: I think, at the end of the day, companies want to
build goodwill. They want to build trust both with the com-
munity and with various stakeholders. So the employees
trust them because they are a good employer. The share-
holders trust them because they are able to generate good
returns. The union and the government trust them. The
potential employee would come to work in the organisa-
tion because it has a good brand name. The reputation
and branding is critical at the end of the day. It is all inter-
related in this sense.
Prof Epstein: A new challenge is that sometimes it is diffi-
cult to foresee what the social environmental costs are.
Take the case of nutrition and obesity. One of the challen-
ges for companies is to try to make predictions to assess
what the impact is or might be, and make adjustments.
And what we find is that though some people are sceptical
of these arguments about nutrition and obesity, others
take it seriously and believe that it is the next tobacco in
terms of impact. And thus if you are in an industry that
produces high sugar, high salt foods, you need to be
Panellists from NTU’s Nanyang Business School:
◆ Professor Gillian Yeo, Professor of Accounting and Interim Dean, Nanyang Business School (NBS)
◆ Dr Marc J Epstein, Visiting Professor, NBS & Distinguished Research Professor of Management, Jones
Graduate School of Business, Rice University in Texas, USA
◆ Dr Chung Lai Hong, Associate Professor of Accounting and Associate Dean, (MBA), NBS
◆ Dr Josephine Lang, Associate Professor of Strategy, Management & Organisation, NBS
Moderator and Writer: Narendra Aggarwal, Director, Public Affairs, NBS
‘While it is a complicated issue,
businesses should be able to draw
the line in trying to maximise
profit and being sustainable
and socially responsible
at the same time.’
– Prof Gillian Yeo
‘At the end of the day, it is the
incentives and pressures that
drive the behaviour of managers.’
– Assoc Prof Chung Lai Hong
aware of these issues and think about how you are going
to deal with them.
Large companies like Pepsi and Coke are looking seri-
ously at the impact of their products. They are looking at
sugary drinks and salted snacks and asking what impact
does that have. They look at it as a potential risk and as
potential opportunities to create new market segments
where they can make additional profits by producing
healthier foods. I think all the fast food businesses are do-
ing the same. Look at McDonald’s menu – they are trying
to make it healthier. They now give the consumer more
choices of healthier food so that one can go to McDonald’s
and not only order the high calorie foods.
Mr Aggarwal: Are managers rising to the new leadership
challenge for achieving sustainable business growth and
do they really know how to implement sustainability?
Prof Epstein: Managers increasingly want to do this but
this is more difficult than most other implementations be-
cause we are trying to implement two things simultaneous-
ly. In most other aspects of business, we know that our
goal is to make a profit. Even in innovation, we under-
stand that the intermediate challenge is to build new prod-
ucts, while the long-term challenge is to increase profita-
bility. Here, what we are trying to do is to think about cor-
porate citizenship and social environmental impacts on
the one hand and simultaneous trying to increase profits.
That can be done through innovation and creativity but it
takes effort.
If we let short-term interests dominate, it really puts
tremendous pressure on the managers to try to think
about how to balance both the social and financial per-
formance needs. Sometimes, we can achieve both simulta-
neously but sometimes that is really difficult, and so man-
agers sometimes struggle with how to implement this suc-
cessfully.
Assoc Prof Lang: Managers will rise to the challenge when
they see a business case, be it corporate social responsibil-
ity or whether it has to do with environmental challenges.
But for environmental challenges, it is more straightfor-
ward now as we have more case studies coming out and a
lot of governments are taking the lead in providing gui-
dance.
For instance, the Building and Construction Authori-
ty’s Green Mark awards have generated model examples
for other companies to follow. The next step would be to
incorporate it into regulations as buildings account for a
third of our energy consumption. The government has set
aside $100 million for promoting green buildings so it is
taking on a significant leadership role to encourage the
take-up of new technology.
Prof Yeo: Incentives to encourage socially desired out-
comes are helpful, but business managers need to rise be-
yond that. In the longer term, they would still need to be
BT-NBS ROUNDTABLE 19
‘While businesses understand that
making profits and being good
corporate citizens are linked,
their challenge is how
to actually implement it in
their organisations.’
– Prof Marc Epstein
‘Managers want to take socially
responsible actions but the
problem is that there are
different interpretations of what
doing good entails.’
– Assoc Prof Josephine Lang
on their own and innovate and push further on their own.
Hyflux is an example of a company that started with incen-
tives and has now taken its water purification technology
global by expanding to China and other countries, going
as far as the Middle East.
This is an example of a company which got start-up
help but then, at the end of the day, you have to rise above
it and that is where it pushes the innovation drive. In or-
der to be sustainable, it really pushes the innovation drive
and that is the part I think the government wants the busi-
nesses, especially the small and medium-sized busines-
ses, to develop and become global MNCs.
Assoc Prof Chung: In Singapore, a push from the govern-
ment could play an important role as our economy is very
small. I think the role of the government is key and if
groups such as Temasek, which has diversified interest in
various industries, were to set an example and go for sus-
tainable growth, they can show that this can be done, this
can be profitable, and make it easier for SMEs to follow.
Beyond government incentives, the ability of leader-
ship within corporations to implement sustainability has
to do with the way they are structured, the governance
and regulatory structure and pressure from civil society
groups like Greenpeace. For example, if managers are
subject to a lot of pressures from various stakeholder
groups demanding sustainability, that would push them
towards finding innovative solutions. So at the end of the
day, it is the incentives and pressures that drive the beha-
viour of managers.
Prof Epstein: In much of the world, there is not much by
way of incentives. There are some regulations, some
tougher than others, but I agree with Gillian that the big-
gest pushes for pro-profit companies is to think about how
they can do it themselves. This needs to be voluntary acti-
vities and I think we all agree here that as companies rea-
lise they need to balance being a good corporate citizen
and being profitable, they need to figure out ways to do
that through innovation and creativity.
What I found in my research and consultancy work is
that leading companies use this tension between trying to
balance social and financial performance as a source of
new ideas, creativity and innovation. They find ways to
overcome these challenges through this innovation and it
makes them work harder but this is the way to really
grow, come up with new solutions, and increase profitabil-
ity.
Mr Aggarwal: Are there some good examples of compa-
nies showing concern for the environment and being so-
cially responsible from which others could learn?
Prof Epstein: A good starting point for companies is to try
to identify what is the biggest social environmental impact
they have on society. Proctor & Gamble’s story around de-
tergent is an interesting example. P&G determined that its
BT-NBS Roundtable
THE BUSINESS TIMES
biggest impact on society was the use of hot water by the
consumer. It said if it was going to reduce its environmen-
tal footprint, the best way to do so would be by reducing
the amount of hot water customers used in washing their
clothes.
So P&G came up with cold water detergent. That has
the potential of having the biggest cost saving for the con-
sumer, the biggest saving of the environmental impact for
the society while making significant profits for the firm be-
cause their sales increased. This is a good example to fol-
low, because what it asks companies to do is first identify
what are their impacts and then think creatively about re-
ducing those negative social and environmental impacts.
Sometimes, that is in changing processes, changing pro-
ducts and services or changing the way consumers use
their products. This requires a fair bit of creativity but
with creativity I think, they can both decrease costs and
increase revenue. And that is how a business can be a
leader in sustainability.
Assoc Prof Chung: Take, for example, how Holcim (Singa-
pore), a leading supplier of concrete products to the con-
struction industry, responded to the sand shortage and es-
calating costs by developing “green cement”. It embarked
on a major R&D project to explore substitutes and experi-
mented with waste materials that were disposed of as
landfill. After its R&D and testing, it received approval to
use washed copper slag as a partial sand substitute.
Besides the cost benefit, their risk is reduced as now
they do not have to depend so much on sand and the mar-
ket uncertainty around it. Moreover, it is also good for the
environment as they are recycling waste into something
useful and also reducing the demand for sand which is a
natural resource. It is a win-win situation. But if you are
there for the short term, it is not going to happen as it re-
quires commitment to say that we will spend time on
R&D, work with the regulatory bodies to get the necessary
approval to have it as a substitute for sand. Due to their
long-term commitment, they were able to do that. This is
a good example of a company turning what was a dicey
situation into an opportunity.
Prof Epstein: Nike is a similar story. What is interesting
about Nike is that it has a large effort within the company
to improve sustainability while earning a profit. It has a
group within the company called “Considered Design”
and this group goes around the different business units to
provide advice as to how the individual business units can
maximise or improve their sustainability while making
more money.
The way Nike views this effort is that it is not a
trade-off. If you see it as a trade-off, you are not being crea-
tive and innovative enough. You need to overcome the
trade-off by looking hard for solutions that will give you
greater environmental responsibility while making grea-
ter profits. Through this group, they look and design their
way out of these challenges, and they have been very suc-
cessful in designing products that are more environmen-
tally responsible.
Mr Aggarwal: Do you see the push for new green technolo-
gies as the next big thing that could create the Googles
and Microsofts of tomorrow?
Prof Epstein: I would like to mention General Electric
which sees big demand over the next decade or two
around environmental and energy technology, and health
technology. Big demand, as there is greater concern in
our society over environment and climate change. On the
health side, we have a population that is ageing and get-
ting healthier as it ages, and wants more health technolo-
gy. So GE has invested heavily in developing environmen-
tal and health technologies as it sees them as areas of
great profit growth.
As former Unilever CEO Patrick Cescau said: “Perhaps
the biggest catalyst for change is that many of the big so-
cial and environmental challenges, once seen as obstacles
to progress, have become opportunities for innovation
and business development.”
Similarly many people, including myself, think that is
where the demand, big demand is and those who can crea-
tively find solutions to these challenges are the ones who
are going to create the greatest amount of wealth in the
next generation and come up with the Googles and the Mi-
crosofts of the new era.
Prof Yeo: There is this idea of ecological intelligence, or EI.
What is critical is that there are a lot of consumers who do
not have enough information about the social and environ-
mental consequences of many products. So businesses
that are really into green technology can benefit by provi-
ding more information about their products.
This can be done by having more informative labels so
that when consumers see the product they would be en-
couraged to buy it because they would appreciate that the
manufacturer has done a better job. It is the same thing as
our buying habits for our diet. You look at a product to see
how many calories it has and then decide whether to buy
it or not. The big challenge is still how to provide more in-
formation to consumers so that they can make intelligent
choices.
Assoc Prof Lang: One good example is our utilities bill
which shows how our monthly electricity, water and gas
usage compares with the national average based on simi-
lar house-type. When you have that information and if
you see that you are using more than what similar house-
holds do, you try to lower your consumption.
Similarly, manufacturers must give information that is
comparable and standardised. Otherwise, consumers will
be confused and companies could be engaging in a type of
environmental marketing which could amount to decep-
tion.
Assoc Prof Chung: I recently read in The Business Times
about an exhibition in Chicago where 1,000 exhibitors
from 60 countries focused on green tech and biotech. In-
terestingly, the article said that China is making a very big
push into these areas as it sees them as a big business op-
portunity.
Businesses and consumers can encourage this agenda
by voting with their dollars.
To the extent they make choices around environmental-
ly responsible items, they are going to have a long-term
impact on our society. They can make a difference and
should make a difference by being more sensitive to these
issues as they learn more about the social environmental
impact of products and services, and spend their money
accordingly.