The Man at Work Collection--Studies in Sustainability

Installment Twelve:  “It’s Just Good Business—Making the Business Case for Sustainable Practices”

  By Deborah L Jackman, PhD, PE, LEED AP™



The Money Lenders

Oil on Panel

  by Quinten Massys (1465/66-1530)

 

Introduction:


          In Europe during the Middle Age and Renaissance the Roman Catholic Church condemned money lending (usury).  Christians were forbidden to engage in banking and related occupations.  Yet, sources of capital were required to fund businesses and to advance society, just as they are today.  Thus, our subject painting depicts Jewish money lenders, whose religion did not forbid them from engaging in this practice.  While money lending activities conducted by Jews led some Christians to perceive the money lenders negatively, and in some cases led to anti-Semitism, the ‘Money Lenders’ were providing a vital service, without which much of the scientific and cultural innovation and global exploration, which characterized that period in history, could not have happened. Back then, as now, technology and culture could not advance on merit alone, but required the support and backing of the business community.  

 

          In this series of essays, we have explored ways to promote sustainability in human society and to help ensure the future of the Earth’s ecosystems.   I have used selected works of art from the Man at Work collection as a springboard for discussing these issues.  It is appropriate, therefore, that in this final essay of the series, I use The Money Lenders as a vehicle to discuss the essential role that business has in ensuring that we are able to transform our society into a sustainable one. 

 

Profit and Sustainability-- Not at Odds:


          Within the capitalist system, businesses are motivated by the ability to make a profit.   To the degree that incorporating sustainable practices can increase profitability and financial position, businesses will embrace the sustainable business model. Since environmental degradation continues across most economic sectors, can one therefore conclude that sustainability is fundamentally at odds with profitability?   The answer to this question is a resounding ‘No’!  The key to understanding this apparent inconsistency lies in differentiating between the short term view of maximizing quarterly profits, and a longer term view that values more moderate profits combined with the goal of long-term business stability and viability. 

 

          In the past, the short term “profit at all costs” model has prevailed in most large corporations.  CEOs have been disproportionately judged on how high their quarterly profits are. This has led some business leaders to forego investments directed at ensuring long term viability. One can argue that this short term profit mindset is a perversion of capitalism, because it incentivizes behaviors that make the long term survivability of businesses and the overall health of the economy problematic.   If one accounts for business costs and revenues using a life cycle cost model, a more nuanced view emerges.  In a life cycle cost model, up-front investments (costs), such as upgrading production equipment to be more energy or water efficient, are balanced against later operational cost savings.  Using the life cycle costing model, it is possible to justify system upgrades that improve overall sustainability because it can be shown that these same upgrades increase the profitability of the company over its life cycle.  When viewed in this way, profitability and sustainability become complementary to each other. 


          Yet, isn’t it human nature to ‘take the bird in the hand’ and to seek higher profits over the short term regardless of possible long term consequences?   After all, there is no guarantee of what the future holds.  It is this very aspect of human psychology that has supported the current system focused on short term profits over one focused on long term sustainability for so long.  But, there have been several paradigm shifts recently that are forcing businesses to take the longer view and to consider environmental impacts in their decision making. These paradigm shifts include:

 

  1. The recognition on the part of business of the huge financial risks they take by not addressing incipient environmental hazards proactively.
  2. Increased pressure from consumers, investors, and insurers for businesses to behave in an environmentally responsible manner.
  3. The increasing costs of natural resources and raw materials needed by businesses.
  4. New markets and business opportunities which have arisen precisely because of the need to address the consequences of wide-spread environmental degradation.


          The first paradigm shift is well illustrated in the aftermath of the 2010 BP oil spill in the Gulf of Mexico caused by the explosion of the Deepwater Horizon drilling rig.  According to a recent New York Times article [1], BP has already spent $28 billion dollars in clean up costs and settlements, has had to divest itself of 10% of its oil and gas holdings, and is currently facing additional US government fines of $18 billion dollars as a result of a court finding of gross negligence. In light of this, the future of BP as a corporation is in doubt.   BP was found to be grossly negligent because it used shoddy operational practices during attempts to shut down the rig and skimped on lab tests which would have indicated before the explosion occurred that key physical indicators inside the drilling rig were reaching dangerous levels.   BP managers believed they were saving money by cutting corners.  In the short term, they may have done so, but in the long term, their actions may well drive BP into bankruptcy.  In the wake of the BP disaster, more and more corporations have begun to include environmental risk management in their bottom line calculations.  

         Second, consumers and investors are becoming increasingly willing to “vote with their feet,” and not patronize or invest in companies with poor records of environmental stewardship.  While this has led some companies to engage in “greenwashing,” a practice in which companies make superficial changes to their operations in an effort to court environmentally conscious consumers, it has also caused a number of companies to make genuine efforts to improve their operations in meaningful ways.   In 2007, Goldman Sachs released a report on a new initiative it was launching called GS Sustain [2].  Investment analysts at Goldman Sachs had created an index to rank corporations on their commitment to helping to address global environmental issues. Preliminary review of market data by Goldman Sachs had concluded that companies with a strong commitment toward addressing global environmental issues had stock valuations which were 25% higher on average than companies of similar size in the same sector without such a commitment.  A 2012 white paper [3] by the International Finance Corporation, part of the World Bank Group, also confirmed this correlation between good environmental performance and good financial performance. 

 

          Large insurance companies and their underwriters, the reinsurance industry, readily acknowledge the effects of climate change, even if some in the American political Right still deny them [4].  Large reinsurance companies in Europe such as Munich Re and Swiss Re are active participants in global initiatives to reduce greenhouse gas emissions.  Several American insurance companies have begun to challenge local zoning ordinances that allow continued development along coastal regions because they acknowledge the reality of rising sea levels and the increased severity of storms caused by climate change.  And, insurers have begun charging corporate clients who are not managing their environmental risks appropriately higher premiums.  To insurers, the financial and economic impacts of environmental degradation and global climate change are very real indeed. 

 

          Relative to the third major paradigm shift, the same Goldman Sachs study cited earlier [2] also discusses that, in the opinion of its analysts, the world has reached a tipping point in terms to the availability and affordability of natural resources, and that in the future, businesses must consider environmental impacts as a fundamental parameter in their strategic decisions.  In particular, looming global water shortages and shortages of clean sources of energy are cited as critical factors.  In light of this, water reuse and conservation, increased energy conservation and development of clean energy sources, and recycling of raw materials will become not only important for the global environment, but will be critical to a business’ bottom line. Very telling are the actions taken in 2013 by SC Johnson Company to negotiate long term contracts with renewable energy providers as a hedge against future energy price volatility. Forty percent of all of SC Johnson’s energy requirements are now supplied by renewable sources [5].  Campbell’s Soup has earned a 15 to 20 percent internal rate of return on investments it has made to upgrade plant energy systems and to conserve water along its entire supply chain [5].  Southwest Airlines has an aggressive program in place to increase fuel efficiency and touts having saved 60 million gallons of jet fuel in 2013. It boasted record revenues of $17.7 billion during this same period [6]. Similar examples involving other prominent companies abound.

 

           Finally, as global environmental problems have escalated and the effects of climate change have become more pronounced, new market opportunities are emerging and entrepreneurs are devising ways to profit from them.  In his fascinating book, Windfall: the Booming Business of Global Warming [7], McKenzie Funk describes a number of entrepreneurs across the globe who are structuring business plans around the effects of global warming—rising sea levels, droughts, and floods.  Dutch architects and engineers, who have centuries of experience in designing flood control systems to hold back the North Sea, are marketing their services to coastal countries and municipalities.   Greenland, whose lands were previously locked in permafrost, is now making plans, in light of the thawing tundra, to harvest minerals previously inaccessible.   Private firefighting companies are securing lucrative contracts with a number of California counties and municipalities seeking to protect themselves from the increasing threat of wildfires brought on by persistent droughts.  Funk cites many more examples and his book is definitely worth reading.      

 

Some Tools for Making the Business Case:


          Even though ample evidence exists that sustainable operating practices make good business sense overall, one must still build the case for investing in them in specific business situations under a particular set of business conditions. Otherwise, a company’s senior management or its investors are likely to remain skeptical.  In recent years, a number of financial models and tools have been developed to help model the economic impacts of various environmental factors and to calculate the rates of return associated with various sustainable design options.

 

          The Forum for the Future [8] is a non-profit organization founded in 1996 and headquartered in the United Kingdom.  Its mission is to assist organizations across the globe in finding ways to create a sustainable future.  One key area of focus is to develop tools that organizations can use to justify the adoption of sustainable practices from a financial perspective. To this end, Forum for the Future has developed the Better Decisions Real Value (BDRV) Toolkit [9].  The BDRV Toolkit describes methodologies that can be used to financially justify capital investments designed to improve operational efficiency.  It was developed by Forum for the Future with input from a number of corporate partners including Unilever and AkzoNobel.  In one case study, Sainsbury’s, a large supermarket chain located in the UK, used the methods contained in the BDRV toolkit to justify capital improvements that improved the energy efficiency of its retail stores [10].

 

          Even the accountants are getting into the act.  The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a group that was formed in 1985 at the request of the Securities and Exchange Commission (SEC) to help formulate accounting standards to prevent fraudulent financial reporting.   Over the years, they have been involved in the development of a number of policies and standards related to good accounting practices. Recently, they have published a report [11] which explains how to integrate the “triple bottom line” of people, planet, and profits into a corporation’s risk management program.         


Final Thoughts:  


          The figure of speech, ‘Jack of all trades, master of none,’ is usually used as a pejorative.  Our society respects experts, especially technical experts, many of whom are expert in increasingly specialized and narrow fields.  The importance of the generalist—the person who understands aspects of many different fields—both technical and non-technical--and how they are interconnected—is sometimes downplayed.  Yet, if we are to successfully address the serious environmental challenges we face today we must take a broad and inter-disciplinary approach because the problems are multi-faceted and cross disciplinary lines. Today’s successful business leaders are well-positioned to lead these efforts.   Not only can they leverage needed financial support but they also have the needed mindset.  According to a recent article in the Harvard Business Review [12], the most successful business people tend to be generalists—the very same trait needed to effectively address complex environmental issues.  While we certainly need scientists and engineers to analyze problems and to propose solutions, artists and writers to inspire us to act, and statesmen (but not partisan demagogues) to guide our political institutions, the involvement of the business community is essential in the context of our capitalist system.  If we work collaboratively, we might just have a fighting chance to reverse the devastating environmental consequences of 19th and 20th century industrialization.  


“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

Adam Smith

Acknowledgements:


I wish to express my appreciation to the following individuals for their support during the writing of this essay series:

 

  • To Mr. James Kieselburg, Director of the Grohmann Museum--for sharing his expertise of the Man at Work collection.  James’ insights on the history behind the works of art and the artists, and his knowledge of the collection, were invaluable in helping me identify which works best characterized the topics about which I wrote. 

 

  • To Dr. Eckhart G. Grohmann—for his generosity in donating the Man at Work collection to the Milwaukee School of Engineering, so that its students and faculty, could learn from it; and for granting permission to use the collection as a basis for these essays.

    

References and Further Reading:

  1. Robertson, C., and Krauss, C., "BP May Be Fined Up to $18 Billion for Spill in Gulf," The New York Times, September 4, 2014. Retrieved 14 February 2015.
  2. “Introducing GS SUSTAIN,” Goldman Sachs Global Investment Research, June 27, 2007.  https://www.unglobalcompact.org/docs/news_events/8.1/Goldman_sustain.pdf , retrieved 10 February, 2015.
  3. The Business Case for Sustainability,  International Finance Corporation—World Bank Group, Washington D.C., July 2012. 
  4. Porter, E., “For Insurers, No Doubts on Climate Change,” The New York Times, May 14, 2013,  http://www.nytimes.com/2013/05/15/business/insurers-stray-from-the-conservative-line-on-climate-change.html?pagewanted=all&_r=0 , retrieved 20 February, 2015. 
  5. Kaye, L., “The Business Case for Sustainability is Becoming Easier to Make,” The TriplePundit—People, Planet, Profit, March 15, 2013. http://www.triplepundit.com/2013/03/business-case-for-sustainability/ , retrieved 17 February, 2015. 
  6. “Southwest Airlines Releases Fifth Annual Integrated Report On Triple Bottom Line Of Performance, People, And Planet:  2013 Southwest Airlines One Report™ Adheres to Global Reporting Initiative Guidelines,” June 17, 2014.  http://swamedia.com/releases/southwest-airlines-releases-fifth-annual-integrated-report-on-triple-bottom-line-of-performance-people-and-planet?l=en-US , retrieved 15 February, 2015.
  7. Funk, McKenzie, Windfall: The Booming Business of Global Warming, Penguin Press, 2014.
  8. Forum for the Future organization website, https://www.forumforthefuture.org/ , retrieved March 1, 2015. 
  9. Better Decisions Real Value Toolkit homepage, http://www.forumforthefuture.org/project/better-decisions-real-value/overview , retrieved March 1, 2015.
  10. “Case Study: Understanding Decision Making at Sainsbury’s,” http://www.forumforthefuture.org/project/better-decisions-real-value/more/case-study-understanding-financial-decisions-sainsburys , retrieved March 1, 2015.
  11. “Demystifying Sustainability Risk: Integrating the Triple Bottom Line Into an Enterprise Risk Management Program,” COSO, 2013. http://www.coso.org/documents/COSO-ERM%20Demystifying%20Sustainability%20Risk_Full%20WEB.pdf , retrieved February 22, 2015.
  12. Mansharamani, V., “Hail the Generalist,” Harvard Business Review, June 4, 2012.  https://hbr.org/2012/06/all-hail-the-generalist/ , retrieved 20 February, 2015.