Everybody’s talking about it: the cost of going green

Read the papers, listen to pundits, and you will know that everyone says it costs money to “go green” – and in a recession, it’s a luxury few firms can afford. This is consistent with other things we know – we think of environmental regulations, and we know that regulations often add cost to business. Take waste electrical goods – these now have to be disposed of correctly (WEEE regulations), and you can’t just hide them in the skip with the rest of your trash. So if everyone says it, and it makes sense, the logical conclusion is that it must be true.

Why would lemmings commit suicide?

There is a lovely example in this month’s news from an organisation that should know better: The Carbon Trust. This non-profit organisation has laboured with ingenuity and style for many years to help UK businesses become more cost competitive by reducing their emissions. Yet the first line of their press release says that four public sector organisations will “defy” the economic downturn by reducing their carbon footprints and slashing their energy costs by 25%. How cutting costs by reducing waste energy amounts to defiance in the face of pressure to reduce costs, is not made clear in the article. Could the strategy here be to use a standard prejudice about the cost of going green in order to lure readers in?

Many years ago, I was given a selection of books as a leaving present from a generous boss, of which my favourite was You Know What They Say... The Truth About Popular Beliefs. This book tackled a huge number of well-known “truths”, and examined the evidence for them in detail. These varied from things that just about everyone over five years old will tell you (“No two snowflakes are alike”) to beliefs that have serious consequences (“Rewards motivate people”). In some cases the evidence was mixed or reasonably good, but for most, the real evidence was so poor or non-existent that you wondered how people could go on saying these things (“Lemmings commit mass suicide”).

So what’s the evidence for the cost of going green? It is overwhelmingly in favour of saving money. There are of course rare exceptions – green initiatives that attract nothing but cost. In their excellent book Green to Gold, Winston and Esty describe how “going green” can (accidentally) reduce profits – most notably, through misunderstanding the market, for example by expecting a price premium, or planning on customer tastes fitting your planned innovations. However, the book mainly focuses on the plentiful examples of companies generating huge profits through environmentally sound strategies that are implemented well.

Recent research has continued to support the benefits of pursuing a green business strategy. For example, research published in January showed that firms that report emissions produce a bounce in their share price – especially if they’re small. In a study published last month, ISO 14001 certification in Brazilian firms was shown to correlate directly with improved profitability. There is a rapidly growing literature that looks at “green strategy” from a variety of perspectives, and shows that when executed well, green strategies pay dividends.

So, the next time someone tells you that going green will hurt your profitability, ask them if they know anything about lemmings.

Why your business customers want you to cut carbon

Recent research from The Carbon Trust reveals a potentially unsettling truth for the B2B market: multinationals are not just addressing their own greenhouse gas emissions.  They are also increasingly including carbon in their selection criteria for suppliers.  Within three years, the vast majority will do so – only 10% say otherwise.

Why this move – is it part of these multinationals’ attempts to look green?  The report ascribes the trend to “shareholder pressure”.  Are these shareholders investing in an increasingly ethical way, or are they looking for financial value?  I would suggest the latter - in other words, this isn't a fad.  It's part of a trend towards shareholders actively looking after the value of their investments.  Suppliers should take note.

It is not only shareholders who know that low carbon can translate into good value.  Sourcing professionals look for signs of quality and efficiency to ensure that they are getting the best goods at the best price.  Low carbon emissions signal efficiency – that a supplier is using less inputs for the same output.  That will translate into a sustainably lower cost structure, from which the buyer hopes to benefit.  Multinationals are sourcing low carbon because it’s often cheaper, and is likely to get even more competitive if fossil fuel costs rise further.  Shareholders and management want to know that their companies are managing for value.

A quote from Chris Harrop of Marshalls plc is particularly revealing: “By choosing suppliers of responsibly sourced goods not only do we cut carbon emissions but invariably there are cost and efficiency gains to be had, which all adds up to a strong competitive advantage.”  Perhaps it’s nice to be green, but it’s good business to be cost competitive, and paying attention to carbon in the value chain helps firms solidify this advantage.

So, suppliers now have another reason to address emissions, if cost competitiveness itself were not enough.  Multinationals will be expecting suppliers to report on, and compete on, greenhouse gas emissions.   Their suppliers will be asking the same questions right down the supply chain.  If your business customers are not already asking you to reveal to your carbon footprint, they soon will.

Reporting and green tourism – what happens when consumers know?

Emissions from tourism matter – they account for around 5-14% of total global emissions.  Developed countries produce considerably more GHG emissions per capita than developing nations, and one reason among many is the availability of time and money for leisure. 

Carbon emissions from leisure pursuits is a sensitive issue.  On the one hand, denying people air travel or even the experience of a heated swimming pool would be politically unrealistic.  On the other hand, consumers themselves are becoming increasingly interested in their personal impacts, and consumer goods companies from Puma to Unilever have been quick to respond, by reporting their impacts and showing annual improvements and innovations.

The same cannot be said of the leisure industry.   Few report on their emissions at the corporate level – but the rare leaders who do suggest some interesting conclusions.  Figure 1 shows emissions from a selection of firms in transport, holidays, casinos and hotels.   Two dimensions are relevant: emissions per customer, and per unit of spend.

For an individual trying to reduce their discretionary carbon footprint, the emissions-per-customer metric is highly relevant.  For example, a luxury hotel stay (measured on a room-night basis – HKS and Intercontinental) is clearly less green than a stay at a holiday park (Centre Parcs and Holidaybreak).

For a company looking to produce a more efficient product and deliver more value to their customers, the dimension of emissions per unit of revenue is most relevant.  For example, compare the two hotel groups, Intercontinental and HKS (Hong Kong and Shanghai), both targeting the high end of the market.  HKS is likely to keep costs low by reducing energy consumption relative to revenue, presumably without changing the quality of the experience.  This will help them boost their financial surplus, which can be invested in services their guests actually value.

At the moment, consumer tools like GoodGuide.com focus on goods rather than services.  Given the importance of leisure to global emissions, change cannot be far off.  When these tools are available for holidays, travel, and other leisure experiences, those companies that have already invested in their own sustainability – and reported transparently – will be the first to benefit.