Beyond Compliance: The Sustainability Challenge

As a new business strategy sweeps through the corporate world, many observers foresee the end of traditional EHS management.

Those who believe that complying with environmental, health and safety (EHS) regulations is the primary purpose of good EHS management may soon be left behind by their competitors, according to advocates of an emerging business strategy called "sustainability."

"Companies that need traditional environmental regulations will be going out of business," predicted Amory Lovins, co-author of Natural Capitalism and a featured speaker at the Global Environmental Management Initiative conference in March in Baltimore.

Some of the nation's leading companies no longer view EHS programs as an unavoidable cost of doing business but as key assets for building and maintaining profitable growth. The sustainability strategy is challenging the older compliance-based approach, thrusting EHS management willy-nilly to center stage of corporate operations.

The Appeal of Sustainability

"The growing acceptance of sustainability means that EHS activities are going to be at the heart of future business strategies," said Howard Brown, a director at ThermoRetec, a full-service environmental management company in New Haven, Conn.

In general terms, sustainability means meeting the needs of the present generation without impairing the ability of future generations to meet their own requirements. Most companies that have adopted the new strategy refer more specifically to the "triple bottom line" -- long-term, profitable growth along with contributing net value to the environment and to society. The synergy between the three bottom lines means there need be no trade-off between doing good and doing well.

Pressures on industry to be socially responsible and to avoid harming the environment are nothing new. Why, then, are many large multinational companies jumping on the sustainability bandwagon?

Robert Sherman, director of environmental affairs at Haliburton Co., said many companies are moving toward sustainable strategies because they want to gain a long-term competitive advantage over their rivals. As examples, he pointed to the recent decision by Shell and BP Amoco to become energy, rather than oil, companies. The shift entails reducing carbon emissions in the short term and converting to alternate fuels in the long term. The decision to move from selling a product (oil) to focusing more generally on serving the customer (i.e., providing energy) illustrates another typical feature of sustainability.

Howard Brown explained the change. "If you're Sir John Brown of BP Amoco," he said, "you look out and you ask: 'How in the world do I keep a company growing when there aren't many more people in the world who have the money to buy this fuel -- and every country in the world is passing carbon emission regulations?'"

Redesigning Production

What often makes the sale for senior management in companies not faced with such long-term problems are changes to production systems that improve a company's short-term financial performance.

In an article titled "A Road Map for Natural Capitalism," published in the Harvard Business Review, Lovins and co-authors L. Hunter Lovins and Paul Hawken explain that simple changes in the design of production processes can yield big benefits for shareholders and future generations.

The first stage entails wringing out the waste of energy, water, materials and other resources throughout a company's production systems and other operations. One way to accomplish this, the authors argue, is to adopt a fresh approach to process design: look at the process as a whole, rather than part by part.

For example, Interface Corp., a producer of commercial interiors, used two simple design changes in its Shanghai carpet factory to cut its power requirements by 92 percent.

The original design needed 95 horsepower to pump a liquid through a standard pumping loop similar to one used in nearly all industries. Jan Schilham, Interface's engineer, first substituted large-diameter pipes because they create far less friction and require much energy than thin pipes. According to conventional thinking, the energy savings of fat pipes do not pay for their additional cost.

But this traditional cost-benefit analysis does not look at the production system as a whole. Schilham counted not only the higher capital cost of the fatter pipes, but also the lower cost of the smaller pumping equipment that would be needed with fat pipes.

Schilham reduced friction even further by laying out the pipes first and then positioning the various tanks, boilers and other equipment around the pipes. This reversal of the normal design procedure meant the pipes were short and straight, rather than long and crooked, because they did not have to bend around the equipment.

The authors argue that this example of the "whole system" approach has enormous implications for general industry because pumping is the largest application of motors, and motors use 75 percent of all industrial electricity.

"Closed-loop manufacturing" is a more advanced level of production design that is rapidly gaining ground, according to Lovins. Closed-loop systems are designed to eliminate any materials, especially hazardous ones, that incur disposal costs. This means, of course, eliminating much of the costs and headaches of complying with EPA and OSHA regulations.

For example, Motorola had been using chlorofluorocarbons (CFCs) to clean printed circuit boards after soldering. When CFCs were outlawed because they destroy the ozone layer, Motorola discovered it was cheaper to redesign its soldering process so that no cleaning agents were necessary.

The rapidly growing re-manufacturing industry -- 1996 revenues were $53 billion -- is another example of this approach.

Doug Weinfield, president of Environmental Performance Network, a Washington, D.C.-based consortium of manufacturing companies, pointed out that Xerox Corp. has boosted earnings by $200 million over three recent years by redesigning its copy machines for re-manufacturing. Xerox found it is cheaper, as well as kinder to the environment, to re-manufacture than to build from scratch.

There are also financial and public image reasons for moving toward sustainability. When DuPont began its corporate sustainability programs more than 10 years ago, explained Dawn Rittenhouse, Dupont's sustainability manager, the shift came as a result of input from all of the company's stakeholders -- not only managers, employees and customers, but also investors, local community members and the global community.

Because of the Internet, a company's reputation is going to be more important now than at any time in history, Rittenhouse said. "You can't hide anymore. If you have a problem in the U.S., they're going to know about it in Taiwan, and if we want to go there, we're going to have a problem."

Rittenhouse pointed out that new trends in the financial community have created opportunities for companies with a sustainable strategy. The Dow Jones Sustainable Development Index (DJSGI) ranks companies within industry groups based on their sustainability performance. Many investors prefer to invest in companies with high ratings. In addition, state and national pension funds are increasingly adopting social and environmental screens for their investment decisions.

"These investment strategies are small now," Rittenhouse said, "but they are growing rapidly, so we would see it as a lost opportunity if we didn't do the things that make us candidates for these funds."

Change or Die?

"Many environmental managers have failed to make EM [environmental management] a source of strategic value to their businesses," charged Weinfield, who is writing an article titled "The Death of Environmental Management." Too often, an environmental manager does not think enough like a businessperson, so EM has not been integrated into the company's operations. "There is no part of business that EM shouldn't be touching," he argued.

When environmental managers relegate themselves to compliance issues, they position themselves as cost centers, rather than profit centers. The failure to add value to the business, combined with diminishing environmental risks, is why EM departments have been decimated at many companies, according to Weinfield.

"Somebody's got to become the sustainability expert in these companies, so it might as well be the EHS people," said Jacqueline Ottman of Ottman Consulting. "They better, or they'll become extinct anyway."

The danger of extinction also exists for companies that do not go beyond mere compliance with existing regulations, according to Lovins. "Companies are going to be in trouble," he predicted, "if they are so badly run that they produce what we now call 'unsellable' production, formerly referred to as waste and emissions."

While some EHS people may feel threatened by the new demands of sustainability, the strategy does give EHS managers the chance to become central players as their companies pursue new business opportunities.

Learning how to communicate and partner with more people inside and outside the company is the biggest challenge posed to EHS managers by this new approach, according to George Nagle, corporate senior director of environmental, health and safety programs at Bristol-Myers Squibb Co. Nagle's company has adopted a number of ambitious goals in its path toward sustainability, including zero pollution and zero work-related injuries and illnesses. Bristol-Myers Squibb was recently named the pharmaceutical leader in sustainability by DJSGI.

"If I go back five or eight years ago, within our own company there was very little dialogue between EHS, and marketing and sales," Nagle said. "Since that time, we have communicated and partnered with them in developing EHS programs that actually strengthen business relations with our customers."

As an example, Nagle cited a best practices symposium his company supported to help hospitals -- big buyers of Bristol-Myers Squibb products -- minimize waste. Society benefits from cutting hospital waste, and the hospitals save money. Even though the program is not tied directly to his company's products, Nagle said, the initiative has helped cement relationships with customers.

Big savings available to companies that redesign their production system shows how important it is for EHS managers to be involved in that process.

While there will always be a need for EHS compliance expertise, Rittenhouse said that, because of the sustainability strategy, success at Dupont requires EHS managers to expand their skills. "You can't train engineers to just be engineers," she said. "They have to be able to understand the economics of what they're doing, and they have to be able to sell their program to upper management."

Brown said learning these new skills is difficult for many EHS managers, because they were trained as engineers and are not used to taking political risks. DuPont has recognized this and offers special training programs on sustainability to its EHS personnel.

The sustainability strategy is also tied to the elimination of many layers of middle management at Dupont, as EHS managers assume new tasks formerly performed by others. In the short term, the transition means more work and learning new skills. Rittenhouse said that, while there has been some resistance to the change, sustainability is largely being accepted at Dupont.

"The people I've met in EHS like feeling they're really integral to the business, rather than always having to fight for full participation," she said.

Measuring Success

Brown, who was interviewed as thousands of demonstrators tried to block the Washington, D.C., meetings of the World Bank and International Monetary Fund, argued that the pressure to move toward sustainability arises not only because of environmental factors.

"The kind of uprising that's occurring in Washington and elsewhere about world trade organizations, that's the social equivalent of the environmental constraint," he said. Activists around the globe, Brown explained, are demanding more participation in how the benefits of economic growth are distributed.

A good health and safety record is one critical component of the social dimension, but so is corporate giving, diversity in the workplace and fair trade.

Because sustainability is still a relatively new business strategy, measurement tools for it are in their infancy. As the old maxim "what gets measured gets managed" suggests, measurement is crucial, not only to chart a company's progress, but also to convince senior management that sustainability will improve profits and sales.

Making the sale to upper management is the first big opportunity sustainability offers to EHS managers, who must show how the strategy can boost profits and give a company a competitive edge. Yet, it is often difficult to make a convincing case for sustainable growth, according to Mike Harbordt, vice president of Temple-Inland Inc. a forest products company. "The problem is measuring the value of the paradigm shift," Harbordt said, "because it's hard to quantify its advantages."

According to Nagle, metrics being developed by the Global Reporting Initiative (GRI) are the closest thing there is to an emerging consensus menu. Although the GRI guidelines are still incomplete, Nagle said, the finished product should have a great deal of credibility, because stakeholder groups include representatives from business, governments and nongovernmental organizations.

Weinfield prefers a different method: Look at how many units of service you are providing to your customer per unit of material energy used in manufacturing, use and disposal of your product. The analysis should be weighted for the toxicity of materials, he added.

Other experts suggested using the criteria developed by DJSGI.

Whatever problems there are with measuring the new strategy, Brown recommended that companies waste no time in pursuing it. "If you don't move toward sustainable development, you may find yourself at a serious competitive disadvantage," he said. "The environmental issue and the social issue are not going to go away."

Measuring Sustainability

In 1997, the Global Reporting Initiative (GRI) was established to design guidelines for preparing corporate sustainability reports. Current guidelines, posted on GRI's Web site at www.globalreporting.org,are being tested and are receiving comments from stakeholders.

GRI is convened by the Coalition for Environmentally Responsible Economies and benefits from the active participation of corporations, nongovernmental organizations, consultants, business associations, universities and other stakeholders from around the world.

The purpose of the GRI guidelines is to provide a sustainability reporting framework that shows linkages between environmental, social and economic aspects of a company's performance. While environmental measurement has become relatively established, GRI states that "integrating the environmental with the social and economic is at a very early stage."

The following items, taken from GRI's guidelines, show the kinds of data used to measure sustainability. Each item is explained in greater detail on GRI's Web site:

  • Key environmental, social and economic issues and impacts associated with operations, products and services.
  • Major stakeholder groups.
  • Number, volume and nature of accidental or nonroutine releases to land, air and water, including chemical spills, oil spills and emissions resulting from upset combustion conditions.
  • Indicators of occupational health and safety.
  • Total energy use.
  • Quantity of nonproduct output to land by material type and by on- and off-site management type.
  • Emissions to air, by type.
  • Discharges to water, by type.
  • Indicators of social and economic aspects of operational performance.
  • Major environmental, social and economic aspects associated with the life cycle of products and services, with quantitative estimates of such impacts.
Hide comments

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish