Directions 2014: New Sustainability Thinking

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CIRCULA ECONOM SHARED VALUE

UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS BENEFIT CORPORATION of new sustainability leadership thinking

NET POSITIVE

CIRCULAR ECONOMY SHARED VALUE

UNITED NATIONS SUSTAINABLE DEVELOPMENT GOALS BENEFIT CORPORATION

ENVIRONMENTAL PROFIT & LOSS

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DIRECTIONS 14:

GETTING UNDER THE SURFACE It has long been clear that if we are to tackle the major challenges facing humanity – whether it be access to healthcare, environmental degradation, poverty, food shortages, education or human rights abuses - business has a vital role to play. However, many companies are still struggling to reconcile the challenge of unceasing demands for growth and economic returns with the less tangible, but nevertheless real, opportunities presented by playing a positive role in society Yet a growing number of businesses are moving beyond the tactical responses to these issues – energy efficiency, carbon reduction, codes of conduct – to form a more strategic view of how their businesses need to adapt. These are businesses that will not just be viable, but will thrive in the starkly different future that lies ahead of us.

This is no easy task. But the rise of a number of potentially transformative approaches to business sustainability – Shared Value, Environmental Profit & Loss, Circular Economy, Net Positive, Benefit Corporations – offers solutions for moving away from ‘business as usual’ on a much broader scale than has been previously seen.

So what is it about these particular approaches that has seen them become the new power behind some of the worlds most sustainable companies?

Are these concepts genuinely transformative? Or are they just the latest ‘big ideas’ that will be shelved in times of trouble or replaced by shiny, new alternatives in the near future?

Directions 2014 dives under the surface of these approaches and concepts for sustainable business to analyse what lies at their core, their strengths and weaknesses and their potential impacts.

By bringing together insight from the academics behind the concepts, experiences from the companies pioneering them and the ambitions of the organisations trying to bring them into the mainstream, we hope to shed some light on the inner workings of these models and to help you explore which – or which combination – might be the right fit for your business.

Directions 2014 Team NIGEL SALTER Founder & CEO JIM PEACOCK Director, Consultancy and Communications ANNIE LANCASTER Senior Consultant TOM LOVE Senior Designer ARIAN OLDROYD Digital Design Director ELLEN ALM Account Manager LOUISE MOYNA Production Team Manager GARY McCALL Manager of Print Production and Resources JEFF SUTTON Business Development Director KIM FORSBERG Marketing Executive

CONTENTS Evolutionary Timeline..........................................................................................................................................................................................................2 Edging towards a Tipping Point.........................................................................................................................................................................................4 RIP: The End of Business As Usual...................................................................................................................................................................................6

SUSTAINABILITY THINKING: THE CONCEPTS UNDER REVIEW

1 3 5

CIRCULAR ECONOMY New Opportunities Seen in the Round.............................10 Vision 2030...............................12 China Looks to take a Leading Role.............................16 Every company should have a ‘North Star’............................18

EP&L A Quantum Leap Forward......30 EP&L and the Triple Bottom Line...............................32

B CORP Profit with Purpose................44

2 4

NET POSITIVE The Next Frontier of Sustainability Leadership ....22 One Year In; Many Years to Go ....................26

SHARED VALUE Forging the link between economic and social value.....36 CSR into CSV..............................40

Our contributors............................................46 About us..........................................................48

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EVOLUTIONARY TIMELINE The question of how business can be more sustainable is not new; indeed, the thinking we’re reviewing in Directions 2014 originated as early as the 1960s, with principles that hark back to the dawn of capitalism.

Here, we explore how the concepts and models under review have evolved in parallel, some key moments in their development, and their adoption by flagship brands.

1966

The idea of circular material flows as a model for the economy was presented by Kenneth E Boulding in his paper ‘The Economics of the Coming Spaceship Earth’.

2006

1976

2006

In their research report to the European Commission, ‘The Potential for Substituting Manpower for Energy’, Walter Stahel and Genevieve Reday sketched the vision of an economy in loops (or circular economy).

1966

Nestlé signs up to CSV

1982

2006

The report was published in the book ‘Jobs for Tomorrow: The Potential for Substituting Manpower for Energy’.

2005

General Electric launches ‘Ecomagination’

Promoting a circular economy was identified as national policy in China’s 11th five-year plan.

1982

2005

2006

2007

2008

2006

2007

2008

Certified B Corp Founded

CIRCULAR ECONOMY 2

SHARED VALUE

The concept of Creating Shared Value (CSV) is first introduced in The Harvard Business Review

First B Corp certified

Policy efforts to support B Corps first launched

NET POSITIVE 2012

IKEA announce net positive intentions (not officially affiliated with the movement)

2012

Kingfisher announce net positive intentions (not officially affiliated with the movement)

EP&L

2012 2011

Kramer & Porter & FSG found the Shared Value Initiative – to enhance knowledge-sharing and best practice for CSV, globally.

2011

2012

Official Launch by PUMA

UK Government uses the PUMA EP&L as a case study for sustainable business in a DEFRA white paper

2011

EP&L theory announced

by PUMA

2009

Conceived by PUMA chairman Jochen Zeitz

2009

The Ellen MacArthur Foundation and McKinsey release a report entitled ‘Towards the Circular Economy: Economic and business rationale for an accelerated transition’ – the first of its kind to consider the economic and business opportunity for the transition to a restorative, circular model.

2013

BT announce net positive intentions (not officially affiliated with the movement)

2013

2014

Forum for the Future, WWF, and The Climate Group publish a report (sponsored

by BT) that captures the principles of what it means to take a Net Positive approach

The Ellen MacArthur Foundation is established.

Shared Value concept further explained in The Harvard Business Review

2012

Patagonia becomes a certified B Corp

Forum for the Future partners with WWF and The Climate Group to form Net Positive Group, which aids companies in accelerating their progress towards becoming Net Positive

2010

2011

2012

2013

2014

2010

2011

2012

2013

2014

2011

2010

Maryland becomes first U.S State to pass Benefit Corporation legislation

500 Companies have signed on as B Corps

the European Commission published a document entitled Manifesto for a Resource Efficient Europe. This manifesto clearly stated that “In a world with growing pressures on resources and the environment, the EU has no choice but to go for the transition to a resource-efficient and ultimately regenerative circular economy.”

19 US states have passed Benefit Corporation legislation

2014

Novo Nordisk becomes the first big pharma company to publish an EP&L report.

Unilever joins the movement

2013

Some big-name brands sign up to the circular economy: IKEA, Cisco, Coca-Cola, Renault

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NIGEL SALTER N Founder & CEO F Sa Salterbaxter MSLGROUP

Nigel Salter asks: do these new schools of thought on sustainability provide business with the tools of transformation – or are they just more smoke and mirrors?

thing, regardless of the alignment or choice of one method over another.

There’s something different about this latest edition of our Directions report.

THE NEED FOR PRACTICALITY

All of this year’s inputs and contributions seem to confirm that business and brands are now focused very much on the question of how to drive sustainable commercial success, rather than on whether or not this is an agenda that actually matters to them.

There is simply no doubt in my mind – sustainability thinking has spent too long with its head in the clouds and not enough time homing in on the commercial realities. This is now changing.

It seems to me that, in their different ways, all of the ideas and methodologies – circular economy, Shared Value, EP&L, Net Positive and Benefit Corporations – discussed here (there are others of course too, but we have highlighted the ones that we see as the most significant) are proof that business is trying to integrate sustainability thinking more fully and make it more operational – clearly a good

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But what are the key factors at work here?

Business knows that there is a huge opportunity in the sustainability challenge.

It is now trying to work out how to maximise this opportunity to achieve competitive advantage and ensure future viability and profitability. These different methodologies and ideas give business leaders and managers some of the tools and processes needed to plot a path to the desired results. They may not be perfect yet, but they are at least valid attempts to move from management theory to real,

on-the-ground transformation that delivers useful outcomes – social, environmental and commercial.

LEGITIMISING THE TRANSFORMATION And it is perhaps also down to the fact that these models are not perfect yet that they are acting slightly as totem poles around which there’s growing collaboration, innovation and momentum.

The fact is that managers within business often need the legitimising effect of a credible school of thought in order to get adequate buy-in within their companies to spur on real change.

We should not underestimate the important legitimising effect within business that’s come from the names of the Ellen MacArthur Foundation and McKinsey sitting comfortably alongside the circular economy movement and the Michael Porter/Harvard name being put squarely behind the concept of Shared Value.

As well as the legitimising effect, the fact that these concepts are seen to be increasingly credible also provides another kind of much needed security. It offers cover for some of the failure that is going to be an inevitable and, indeed, essential part of the journey to find workable solutions.

As Kingfisher confirms, not all the innovation and new thinking will work and so it is essential to experiment within a framework that creates enough room for failure, as well as success, to be acceptable.

Innovative thinking needs an umbrella!

COMMUNICATING TO BUILD CRITICAL MASS We should also not underestimate the massive role that communications and effective engagement have to play in driving change.

As everyone knows, good stories really do help to get people on board and, to a degree, all of the models and ideas covered here have a storytelling role to play as well

as doing the actual job of turning science into substance. The circular economy somehow wouldn’t be as memorable or as attractive if it was called The Regenerative Economy. Net Positive is a simple story to capture. The EP&L is a neat blend of sustainability and finance – written in a language business can understand. All of these methodologies enable business to explain itself better.

And one step beyond just storytelling is actual engagement – where people are compelled to act and get more involved.

As Robert Metzke from Philips explains, all businesses need an ambition – a ‘North Star’ to strive for. Over and above just storytelling, these models provide the desired destination and a sense of purpose that gets organisations, teams, people and processes all properly and effectively lined up.

These organisations themselves would undoubtedly prefer to emphasise the substance and science part of the argument. But in the practical, messy reality of business, there is no doubt these models also help with the important task of communicating new ways of thinking and getting people to engage with them.

BUSINESS FILLING THE GOVERNMENT VOID It was probably shortly after COP15 that business woke up to the reality that governments were not going to be the force for change needed to address the world’s sustainability challenge.

Since then, business has taken on the responsibility much more by itself – or in sector or even multi-sector collaborations – to build the momentum needed. All of these models and processes could be said, at least partially or indirectly, to have been borne out of that lack of leadership from government – or at least from the sense that if business is to gain commercially from the agenda then it needs to apply its own rules and operate on its own terms.

That’s not to say that government and other policymakers have failed to respond totally.

The big focus on public-private partnerships we’ve seen in the last few years, particularly in developing markets, is evidence of a changing mindset – Guido Schmidt-Traub makes this point well in his article and underlines that, actually, the scale of the challenges we face means that public-private collaboration is essential.

And the fact that the United Nations Sustainable Development goals (UN SDGs) appear to be a more relevant framework for business to engage with, and have been relatively well received by business, points to some positive potential.

THE NEED FOR SCALE But we also have to be honest with ourselves. Despite all the talk of the last decade and the great theories, has that much really changed?

Michael Porter made this point well in last year’s TED talk called ‘Why business can be good at solving social problems’.

As he points out, business really has to roll its sleeves up now and apply the profit motive to the societal challenge of sustainability.

This is partly because business is good at solving problems. But it’s also down to the simple fact that it controls the vast majority of the world’s resources, and most of the efforts and initiatives to date have operated at too small a level.

The only way to truly address the issues is to operate at scale across the system.

And only business has the model (profit based) and the resources to deliver this effectively. Porter’s statistics underline the dilemma pretty dramatically – total global revenues by stakeholders split like this: Non-profit organisations – $1.2 trillion; Governments – $3.1 trillion; Business – $20.1 trillion.

These new models and schools of thought are all significant attempts to square this circle and to apply commercial thinking to society’s key sustainability challenges – in a way that can be quickly scaled up.

They may not provide the final answers.

But, taken together, they are starting to look like a tipping point.

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GUIDO SCHMIDT-TRAUB Executive Director UN Sustainable Development Solutions Network

RIP: THE END OF ‘BUSINESS AS USUAL’ We’ve come to the end of ‘business as usual’. Guido Schmidt-Traub argues that if we are to meet the scale of the environmental challenges that face us, and to have a chance of achieving the UN’s Sustainable Development Goals, the models under review here are only the start: the private sector must play a central role in making a reality of sustainable development. Here he outlines the need to fundamentally change how business works, and the major transformations that need to take place.

According to NASA figures, the frequency of extreme temperature events – events that should occur only once every 700 years – has already risen 100-fold, even though the earth has warmed by “only” 0.9°C. Warming by another 0.4–0.6°C is built into the system at today’s concentration of greenhouse gases, meaning that even if we were able to stop emitting greenhouse gases today, things would still get significantly worse.

But if we carry on along the road we are currently on, the earth will be 4–5°C warmer by the end of this century.

This will put the climate system outside the stable range of the Holocene epoch that has enabled human civilization to flourish over the past 10,000 years.

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It’s clear that ‘business as usual’ simply does not offer a viable long-term perspective for economic growth. And yet rapid growth is still possible, but only if it becomes sustainable by respecting environmental boundaries at local, regional, and planetary levels.

“IT’S CLEAR THAT ‘BUSINESS AS USUAL’ SIMPLY DOES NOT OFFER A VIABLE LONG-TERM PERSPECTIVE FOR ECONOMIC GROWTH.” FOUR MAJOR TRANSFORMATIONS TO SUSTAINABLE DEVELOPMENT STAND OUT FOR BUSINESS.

01. EMISSIONS A drastic reduction of greenhouse gas emissions – from 5.2 tons of carbon dioxide per capita to 1.6 tons by 2050.

This will require massive increases in energy efficiency; low-carbon electricity generation; the electrification of

transport, heating and cooling in buildings; and the decarbonisation of industrial processes, such as cement, steel and chemical production.

02. AGRICULTURE An increase in agricultural production by at least 50 per cent to serve the needs of a growing and increasingly prosperous global population.

This need must be met using far fewer resources. Before 2030, the world needs to stop land degradation and net conversion of land to agricultural use, bring water use in line with sustainable supply, reduce excessive nutrient flows, and lower chemical pollution.

03. SUSTAINABLE CITIES Cities will require higher-density housing and land-use planning; resource-efficient infrastructure and services; and drastically reduced pollution of air, water, and land.

This urban transformation must occur soon. If not, countries will get locked into unsustainable infrastructure and landuse patterns that might have a lifetime of 70–100 years.

04. PRODUCTION Industry must transform itself to respond to rapidly changing tastes and lower resource intensity and environmental pollution.

This will require higher resource efficiency in energy, water, and other material inputs; drastically lower levels of emissions and pollution; and innovative life-cycle management of all industrial products – particularly long-lived pollutants, such as plastics. With some four to five billion people aspiring to middle-class lifestyles, this process of industrial transformation needs to happen at an unprecedented pace.

SOME PROGRESS – BUT A LACK OF SERIOUS ACTION Each of these four transformations marks a major departure from ‘business as usual’. The “circular economy”, “Net Positive”, “Shared Value”, and other emerging business strategies for sustainability are an important step towards launching the four transformations.

Some businesses are already finding new opportunities in these transformations, but overall, governments and business have not begun to tackle these transformations seriously.

So the question is: how can governments and business harness such innovation to drive transformations in energy, agriculture, cities and industry?

DIRECTED CHANGE The Sustainable Development Solutions Network (SDSN) – commissioned by UN Secretary-General Ban Ki-moon to accelerate practical problem-solving for sustainable development – shows that each transformation requires long-term change in technologies, in business models, in regulation, and in consumer behaviour.

Achieving the transformations will require “directed technological change”, a process involving six steps:

01. GOAL SETTING Just as business requires clear goals to succeed, the world needs to adopt longterm goals for sustainable development.

Building on the success of the Millennium Development Goals (which set quantitative targets for reducing extreme poverty), governments are now debating a new set of Sustainable Development Goals for the period 2015–2030.

02. BACK-CASTING AND NATIONAL PATHWAYS Countries and businesses need to backcast feasible trajectories to work out what needs to be done today to achieve longterm goals. These should be transparent and public to promote open debates with the active participation of business.

“RESPONSIBLE BUSINESSES… WILL BE AMPLY REWARDED IN TERMS OF THEIR BOTTOM LINE, THEIR BRAND, AND THEIR ABILITY TO ATTRACT TALENT.” 03. TECHNOLOGY BENCHMARKS AND R&D ROADMAPS Countries and businesses can set technology benchmarks, providing the long-term incentives that businesses need to innovate and to mobilise the ingenuity of their engineers.

Benchmarks also provide a framework within which businesses and other innovators can develop long-term R&D roadmaps. We could do something similar for energy transition, with the International Energy Agency perhaps leading roadmapping processes for energy storage, solar power, wind power, carbon capture storage, electric vehicles, residential energy efficiency, smart grids and fourth generation nuclear power.

04. PROTOTYPING Prototyping of new technologies requires extensive public-private partnerships to ensure adequate public co-financing, supportive regulation, and effective monitoring and evaluation. Unfortunately, public financing and support for

prototyping are widely inadequate. A vivid example is provided by lacklustre efforts to invest in large-scale demonstration projects for carbon capture and storage (CCS) even though all available pathways suggest that this technology is required to decarbonise energy in countries that rely heavily on coal, such as China and India.

05. PUBLIC-PRIVATE PARTNERSHIPS FOR SCALING UP Public-private partnerships can roll out new technologies at the requisite scale.

Such partnerships need to mobilise public and private financing, ensure sound regulation, and promote technology diffusion. Business leadership will be required to think through how partnerships can be designed.

06. BEHAVIOUR CHANGE The scale of the sustainable development challenges requires mass adoption of new technologies, but also of healthier lifestyles and resource-saving behaviours. Mass education will need to be promoted to raise awareness.

DYNAMIC PARTNERSHIPS Some worry that such directed technological change smacks of Gosplanstyle central planning, but this is a profound misunderstanding of the challenges facing us, and the available responses.

All successful technology transformations have relied on strong and dynamic public-private partnerships around shared goals.

Responsible businesses and their leaders who invest in such partnerships should and will be amply rewarded in terms of their bottom line, their brand, and their ability to attract the best available talent.

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OPTIMISING THE VALUE OF BUSINESS The circular economy aims to move us towards an industrial economy that is restorative in nature. Moving from the current linear model – take, make, dispose – to a circular economy requires a fundamental rethink of how business operates, with emphasis placed on reducing the use of natural resources, designing-out waste and allowing valuable biological and technical materials to deliver value beyond the life of a single specific product or service.

KEY FACTS • The Ellen MacArthur Foundation was founded in 2010 with the aim of accelerating the adoption of the circular economy. This crystallised and unified thinking dating back to the 1970s • The Ellen MacArthur Foundation and McKinsey & Company have collaborated in making the business case for the adoption of the circular economy with their reports, titled ‘Towards the circular economy’

• In 2014, Project MainStream was announced: a collaboration between World Economic Forum, Ellen MacArthur Foundation and McKinsey & Company to help businesses shift towards a circular economy and as a result save US$500 million in materials • Key players include Philips, IKEA, Cisco, Coca-Cola, Renault, H&M, The LEGO Group, and Unilever.

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ELLEN MACARTHUR Founder The Ellen MacArthur Foundation

NEW OPPORTUNITIES SEEN IN THE ROUND Today’s linear economy – in which resources are extracted, made into products, sold and ultimately thrown away – is facing fundamental challenges. A new regenerative model – the circular economy – is taking root, offering huge opportunities to those progressive enough to make an early shift, says Ellen MacArthur.

energy and materials, the linear model inherited from the Industrial Revolution has proved successful, fuelling unprecedented economic development throughout the twentieth century. And, boosted by new discoveries, increased efficiency and new technologies, we’ve also felt the benefits of steadily declining commodity prices.

The economic model we have lived by for the best part of 200 years has served us well. In terms of cheap and accessible

But all that changed in the early years of the new century. As investment expert Jeremy Grantham first observed,

ELLEN MACARTHUR FOUNDATION CIRCULAR ECONOMY MODEL

we reached an inflection point in 2002, when commodity prices started to rise sharply and we entered an era of increasing price volatility.

Suddenly it became far harder to predict resource and energy prices with any certainty. This has potentially devastating effects for companies with high fixed costs, which rely on achieving economies of scale to continue growing. Clearly, in this volatile context, making gradual efficiency gains will not be enough to fuel that growth. Indeed the very notion of “business as usual” is put under the spotlight in this new environment and, with three billion new middle class consumers coming into the market by 2050, just using a bit less and recycling a bit more material might not be enough to cut it.

Moreover, a throughput economy relies on high volumes of goods and services being sold, and that calls for a healthy customer base. However, while productivity has been steadily increasing over the past 60 years, wages have been largely stagnant since the 1970s. To counteract this and to keep the wheels of the economy turning, large amounts of credit were made available at low cost. But the era of cheap credit hit a roadblock with the financial crisis of 2008, resulting in less disposable income for consumers.

THE RULES HAVE CHANGED MINING/MATERIALS MANUFACTURING

PARTS MANUFACTURER

BIOLOGICAL NUTRIENTS

TECHNICAL NUTRIENTS

FARMING/COLLECTION BIOCHEMICAL FEEDSTOCK

PRODUCT MANUFACTURER

BIOSPHERE

RECYCLE

SERVICE PROVIDER RESTORATION REFURBISH/ REMANUFACTURE REUSE/ REDISTRIBUTE

BIOGAS MAINTENANCE ANAEROBIC DIGESTION/ COMPOSTING

COLLECTION EXTRACTION OF BIOCHEMICAL FEEDSTOCK

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COLLECTION

Ellen MacArthur Foundation, adapted from McDonough & Braungart (C2C Protocol) and Stahel (Performance Economy)

So, in two very fundamental ways, the ‘rules of the game’ for our economy are changing, and business leaders, innovators, academics, students and scientists are looking for a way out – a new model which will allow us to redefine our notion of economic progress in the twenty-first century.

One option is the circular economy, a model that has been gaining traction around the world in recent years. Unlike the linear model – based on the idea of mine, make, sell, dispose – the circular model is regenerative by design.

It relies primarily on optimising two distinct material flows, biological and

THE CIRCULAR ECONOMY

technical. Products and services in this model are designed to circulate efficiently, with biological materials returning to the food and farming system, and technical materials being kept in production and put to new use, without loss of quality. A circular model generates new revenue streams, reveals overcapacity and puts assets to good use while ensuring that, as leading Performance Economy thinker Walter Stahel puts it: “The goods of today become the resources of tomorrow, at yesterday’s prices”.

GROWING MOMENTUM As well as the decline of cheap materials, energy and credit, there are other changes underway that are supporting the transition to a circular economy.

A combination of factors – including reducing home sizes, less disposable income, the prevalence of the mobile web and smartphone capabilities – has led to the emergence of a “new consumer”, one who is less concerned about owning ‘stuff’, and more interested in the services or power technology provides.

We see evidence of this in a number of ways. Just look at the momentum growing behind the collaborative consumption movement or ‘sharing economy’, and the huge number of new businesses set up to exploit the idling capacity of a range of assets. Empty rooms can be booked through AirBnB, journeys through Lyft, and even musical instruments through Sparkplug. Clothing company Le Tote provides access to women’s fashion for a flat monthly fee, in the same way people use Netflix or Spotify instead of owning physical DVDs or CDs. Technological advances are facilitating these business models – finding and booking the nearest communal car or bike has only been made convenient with the advent of smartphones and mobile networking. Product tagging and tracking and the the ability to analyse huge amounts of data through the ‘Internet of Things’ are also enabling manufacturers

“THE GOODS OF TODAY BECOME THE RESOURCES OF TOMORROW, AT YESTERDAY’S PRICES.” or service providers to keep an eye on their products – how much they’re being used, if they’re performing properly and when they’re about to go wrong. This makes product recovery feasible, and opens up valuable new customer service or aftermarket opportunities.

Global trends are providing a fertile environment for a shift in the economy.

And, in addition to offering an exciting new lens for innovation, increasing circularity could offer a significant economic advantage too.

In 2012, the Ellen MacArthur Foundation published the first in a series of reports entitled ‘Towards the Circular Economy’.

These reports have concluded that a circular economy would not only help

decouple economic development from use and overuse of finite resources, but also represent new economic opportunities worth more than $1 trillion.

As our first report showed, circular processes could play straight to one of Europe’s greatest strengths – its highvalue manufacturing sector, where up to $630 billion of net material savings can be achieved per year through improvements in design, business models, reverse cycles and improvements in education and policymaking.

In a world of uncertainty, many are asking what the future economy will look like in the context of population growth and resource constraints. Our research and analysis tends to indicate that a circular economy framework could offer guiding principles for rethinking and redesigning the future.

There are promising signs that a shift is taking place. But creating a new system, which rebuilds economic, social and natural capital, will require real ambition, a pioneering spirit and the willingness and ability to collaborate in new ways.

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MARTIN STUCHTEY Director McKinsey & Company

HELGA VANTHOURNOUT Knowledge Expert McKinsey & Company

VISION 2030:

The logic behind d creating a circular ar economy is rather than linear asingly clear to many becoming increasingly ue Martin Stuchtey companies, argue hournout, of and Helga Vanthournout, mpany. But progress is McKinsey & Company. esses and consumers slow, with businesses k the habits of several needing to break lifetimes to reap the benefits of a new industrial era. ee billion consumers By 2030, up to three ng world will enter the from the developing ing enormous pressure middle class, putting ces. This is already on natural resources. showing up in the market: since 2009, commodity prices have grown faster than utput. At the same time, global economic output. mpetition intensifies, even as global competition olitical and public there is growing political ess to improve its pressure on business d social performance. environmental and omy” offers a way to The “circular economy” ssues. address all these issues.

This regenerative economic model helps ate value while reducing companies to create their dependence on resources by s for multiple cycles of designing products use, disassembly, and re-use. The circular economy aims to eradicate waste –not cturing processes, but just from manufacturing e cycle of products and throughout the life their components..

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It is built on four principles: 1. Creating business models to capture more value from a manufactured product 2. Designing products with multiple useful lives in mind 3. Developing “reverse logistics” that keep the need for quality and cost efficiency in balance 4. Co-ordinating with players within and across supply chains to create scale and to identify higher-value uses.

This approach contrasts sharply with the mind-set embedded in most of today’s industrial operations, where even the everyday terminology – value chain, supply chain, end user – describes a rigid linear approach.

In the circular economy, the traditional linear model of manufacturing – take, make, and throw out – becomes a regenerative one that retains and restores material, energy, and labour inputs. Re-use, refurbishing or recycling, not disposal, is the new default option.

THE CIRCULAR ECONOMY

HERE ARE SOME EXAMPLES OF HOW THE CIRCULAR ECONOMY CAN WORK:

H&M LONG LIVE FASHION

“JUST BECAUSE SOMETHING IS DIFFICULT, THOUGH, DOES NOT MEAN THAT IT CANNOT, OR SHOULD NOT, BE DONE.”

RENAULT

H&M

Renault leases batteries for electric cars, in large part to recover them more easily so they can be re-engineered or recycled for additional use. The French carmaker has a dedicated plant near Paris that remanufactures automotive engines, transmissions, injection pumps, and other components for resale. The plant’s remanufacturing op operations use 80 per cent less energy, an and almost 90 per cent less water, compared compare with a comparable new production facility. faci The plant also delivers higher operating oper margins.

Global apparel retailer H&M encourages customers to bring in old clothes in exchange for discount vouchers. Most are dispatched to the global secondhand apparel market. The rest can be used as substitutes for virgin materials in other applications, such as cleaning cloths and textile yarns or to create damping and insulation materials for the auto or construction industries.

When all other options are exhausted, the remaining textiles become fuel to produce electricity.

CATERPILLAR

RENAULT ELECTRIC CAR BATTERY LEASING SSCHEME

Caterpillar anticipates remanufacturing needs when designing its products and then uses its dealer network and aftermarket service infrastructure to ensure that its components are returned at minimal cost. The Cat Reman business refurbishes and uses the parts in remanufacturing, with the resulting products sold on at a fraction of the price of new. The company moved 70,000 tons of remanufa remanufactured products in 2010.

“The results results,” says Caterpillar, are “maximum productivity and lower costs”.

CATERPILLAR REMAN ENGINE PARTS CATERPILL

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VALUE CREATION AND CAPTURE CAN BE MAXIMISED BY ADDRESSING PRODUCT AND SYSTEM DESIGN SIMULTANEOUSLY

DESIGN CHOICES Optimise resource efficiency through system design of > Manufacturing

CREATE

> Retail sales channel

System

Design

Product

Design

> Supply chain

USE

Optimise customer interaction through > New business models > Closer interaction with customer

Optimise resource efficiency through

Optimise for efficiency in use through

> Specifications

> Material selection

> Material selection

> Component selection

> Reduction of materials

> Technology/software usage Complement product w/ ancillary services that increase efficiency

Optimise EoL treatment > Material selection

RETURN

Optimise collection infrastructure through increased collection rates

> Component selection

> New business models

> Product modularity

> Value chain design & incentives > Alignment of external influencers

PROJECT MAINSTREAM Project MainStream is a collaboration led by the World Economic Forum, Ellen MacArthur Foundation and McKinsey & Company as knowledge partner. MainStream will accelerate the transition to the circular economy by taking CEO-led collaboration on carefully selected pressure points to a

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new level. This will unlock the stalemates that individual organisations cannot resolve, even when working with their own partners and supply chains. MainStream is now launching its first three flagship delivery projects – on plastic packaging (bringing together cities

and large players in the consumer industries), paper eco-design (improving yields through better choice and use of inks and additives), and asset tracking (better end-of-use value recovery through knowledge of product whereabouts, ownership, and quality).

THE CIRCULAR ECONOMY

The circular economy benefits the environment, by reducing extraction and manufacturing emissions and moderating the consumption of natural resources. But for corporate leaders who need to satisfy investors and shareholders with tangible benefits, what does the circular economy have to offer?

First, more efficient energy and resource use translates directly into lower production and operational costs. On materials alone, McKinsey estimates that companies could save more than $1 trillion per year using circular economy principles.

For example, P&G identifies partners that can use its process waste and nonperforming inventory. The strategy has created $1 billion in value over the last five years and the consumer-goods giant has also achieved zero waste at 25 per cent of its manufacturing facilities.

“IT HAS TO BE SAID THAT THE CIRCULAR ECONOMY IS NOT EXACTLY TAKING THE BUSINESS WORLD

BY STORM.” Second, the circular economy provides additional ways for companies to connect with their consumers and thus to build loyalty. Instead of selling a product, and not seeing the consumer until it is time to buy again, in the circular system there can be more (and more interesting) touchpoints. For instance, Philips is beginning to sell lighting as a service, not as a product. In some cities and institutions, customers pay for the light, and the firm does everything else, from installation to maintenance to recycling.

It makes for a much stronger relationship than ringing up light bulbs at the cash register. Caterpillar’s programme allows it to make money on second-hand parts, so that it captures a bigger share of the total lifecycle.

So that is the case, and it makes sense.

But it has to be said that the circular economy is not exactly taking the business world by storm.

Few companies have gone in this direction in a big way – and that is understandable, given the difficulties of adapting business practices according to the four principles.

Closing product and component loops is no easy task, despite attractive arbitrage opportunities. With dozens of components from dozens of suppliers (and even countries) embedded in a product, it can also be difficult to develop alternative supply chains.

“A circular economy on a worldwide scale will require a lot of players to change simultaneously,” notes Philips CEO Frans van Houten, “and that’s a bit of a chickenand-egg problem”.

Moreover, the power of inertia should never be underestimated. Many aspects of business-as-usual reflect decisions made long ago. The “take-make-and throw out” model of production has been familiar since the earliest days of the Industrial Revolution and companies have spent 150 years optimising their production, logistics, and marketing operations around it.

Consumers have their own hard-to-break habits. For instance, most people evaluate the expense of products only at the point of sale, though that does not always make sense. The Ellen MacArthur Foundation has estimated that leasing high-end home washing machines would lower the cost of use for consumers by a third over five years. Manufacturers would also earn more by leasing their fleets of machines multiple times before refurbishment. But who thinks about renting a washing machine?

“COMPANIES COULD SAVE MORE THAN $1 TRILLION PER YEAR USING CIRCULAR ECONOMY PRINCIPLES.” In the past, respondents most often cited cost cutting or reputation management as reasons for pursuing sustainability initiatives. That is changing. In a recent McKinsey survey, 43 per cent said their companies were trying to align sustainability with their overall business goals, mission, or values, up from 21 per cent in 2010. Almost half of CEOs (49 per cent) said they considered sustainability a top-three priority, up from 34 per cent in 2010.

As sustainability rises in significance, capturing its full value grows more challenging. To do so, the four principles need to be ever more integrated into the core business, and this is not easy. There are, however, proven approaches and techniques. The larger point is that moving toward a circular economy can help forward-looking companies innovate and find new paths to growth, while also laying the foundations for a new industrial era that benefits companies, economies, and the environment alike.

Just because something is difficult, though, does not mean that it cannot, or should not, be done. Clearly, the era of low and falling resource costs is over. At the same time, the idea of sustainability is spreading.

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PROFESSOR HAIFENG HUANG Assistant Dean, Peking University HSBC Business School Executive Chairman Ecological Development Union International

CHINA LOOKS TO TAKE THE LEADING ROLE With growing environmental and technological challenges, China has very clear reasons to search for a new model of economic development. But it’s not just about achieving the ‘Chinese Dream’ in a new, more sustainable way, says Haifeng Huang of Peking University. China wants to be part of a global transition.

The Industrial Revolution brought huge benefits to society, benefits that were felt throughout the twentieth century. But today the picture has changed.

With many countries facing a growing income gap and wrestling with serious environmental problems, it is becoming increasingly clear that – as the Club of Rome’s book The Limits to Growth argues – our previous approach to economic development now has the power to destroy human life. We need to find a new way to secure growth.

It is in this context that the idea of a circular economy has emerged, and gained serious consideration across the world as a creative way to balance economic, environmental and social sustainability.

CHINA’S CIRCULAR ECONOMY – IT’S TIME TO CHANGE Not surprisingly, the circular economy is being looked at carefully in China where industrialisation, urbanisation and modernisation are still in their early stages, and where it’s an increasingly tough task to

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strike a balance between stimulating growth, improving people’s livelihoods and protecting the environment.

The government’s own strategic goals for 2020 indicate why a shift to a circular economy holds so much appeal.

“CLEARLY, IF THE COUNTRY CONTINUES ITS TRADITIONAL APPROACH TO ECONOMIC DEVELOPMENT, THE ENVIRONMENT AND SOCIETY WILL NOT BE ABLE TO BEAR THE BURDEN.” Within that time, the Chinese economy is expected to reach RMB35–36 trillion, GDP per capita has been forecast to exceed RMB250,000, and the population is expected to grow to 1.4 billion, with 55 per cent of people living in cities and towns.

However, in these forecasts, traditionally polluting industries still make up a large part of China’s industrial output.

Clearly, if the country continues its traditional approach to economic development, the environment and society will not be able to bear the burden.

And there are dangers for Chinese industry too, if things do not shift. Chinese enterprises lack advanced technology

and market competitiveness, and as a result are about an eighth as efficient as those in Japan and a fifth as efficient as their US competitors. If energy prices continue to rise sharply, or if global environmental regulation gets tighter, China, the so-called ‘factory of the world’, will face a series of significant problems.

PROGRESS AT EVERY LEVEL To stimulate a healthier economy and tackle the growing logjam of environmental constraints, China is paying increasing attention to a circular economy and sustainable development to find a new way to pursue the “Chinese Dream.” It is something you see at every level, from government to businesses, to individual consumers.

First, the government is focusing more on the quality of economic development rather than, as in the past, its speed. The emphasis on economic development is also being transferred away from the heavy manufacturing industry, and more to the soft service industry.

A high-efficiency, low-emission energy system is being built, and the development of renewable energy sources, including hydropower, biomass, solar energy, geothermal, and ocean energy, are being sped up. Enterprises are also focusing on improving labour standards and testing new approaches to management.

For the individual, lifestyle and consumption patterns are also changing.

Environmental issues have become an increasingly important concern for informed consumers. For them, products labelled ‘circular’ have a growing appeal.

A NEW KIND OF DIALOGUE In the past, a number of stumbling blocks have stood in the way of progress, and two of them relate to China’s relations with the rest of the world.

Take technology transfer, for example.

America has the world’s leading

THE CIRCULAR ECONOMY

technology for controlling sulphur dioxide emissions. However, because of tariff barriers, US firms can only export the second best technology, not the best and most efficient, to countries like China. The circumstance is the same when China brings its own products to international markets.

PUBLIC POLICY IN CHINA IS ALSO DEVELOPING RAPIDLY TO REFLECT THESE NEW ECONOMIC AND ENVIRONMENTAL REALITIES.

Foreign investment in China is obviously welcome, but it can have negative impacts too. Investing in exporting oldfashioned products and processes to China and concentrating investment in environmentally unfriendly industries like textiles, chemicals, and electronic manufacturing, has played a big part in creating China’s current environmental and pollution problems.

Specifically, the government is trying to stimulate green and circular development in nine ways:

This has been an issue in the past but, thankfully, the dialogue between China and the rest of the world is changing.

Nowadays, it tends to focus much more on green issues and on the circular economy. You can understand why. Mr. MA Jun, the chief economist of the Central Bank’s research bureau, predicts that China will have the demand for a staggering RMB2 trillion of green investment a year in the future.

WHAT CAN CHINA BRING TO THE WORLD? In July 2014, China staged its Eco Forum Global Conference with the theme of “Joining Hands, Leveraging Reforms to Bring Forth a New Era of Eco-civilization.”

As China’s Prime Minister, LI Keqiang, stated, “Protecting the environment and stimulating green development requires the cooperation of the whole world”.

Embracing a circular economy is a good way to promote mutual trust and business benefits between China and other countries.

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Establishing a ‘green bank’, using green bonds as the major financing mechanism

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Completing the fiscal interest rate mechanism to encourage green debt

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Banks and rating agencies are introducing more indices on environmental risk and building up a green credit system

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An environmental measurement system, based on natural capital liabilities, is being created

A pilot mandatory green insurance plan has been launched

Listed companies are being encouraged to disclose important environmental information

A network of green investors is being established

A carbon trading market is being developed

Consumers are getting much better information to help them choose green products.

China has made its position clear. It is ready to play a big role in developing a circular economy – not only at home, but across the world.

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ROBERT METZKE Senior Director of Group Strategy and Alliances, Philips

JIM PEACOCK Director, Consultancy and Communications Salterbaxter MSLGROUP

EVERY COMPANY SHOULD HAVE A ‘NORTH STAR’ Robert Metzke tells Jim Peacock why and how Philips has embraced circular economy thinking as its strategic guiding light. Short-term pressures might stop other companies following suit, but there is a real danger they will cease to exist if they fail to adapt to a more sustainable model.

JP: How did circular economy thinking come into being at Philips?

RM: It emerged as part of our EcoVision5 programme. We understood from lifecycle analysis that the impact of our products and services on society and the environment is orders of magnitude bigger than the impact that we have within our own factories.

When you think about sustainable development in a nutshell, it is really about providing more people with better opportunities, whilst meeting the boundary conditions for environmental sustainability. We just have this one planet for all the nine billion people that will be living here in 2050. If you zoom in a bit and try to understand some key drivers behind this, you very quickly get to econometrics that measure quality of life.

As a leading company in health and wellbeing, Philips can make a significant contribution in the field of access to health care. But on the environmental axis, the biggest two components are energy use and material resources.

Now, energy use is something Philips has been addressing for decades, pioneering in the field of energy efficient lighting, for instance – leading the LED revolution. But trying to understand the importance of closed material loops was the next logical step for Philips – it was the missing piece needing to be put in place.

And that is what we sought to address with EcoVision5, by doubling the amount of recycled materials in our products and doubling the amount of recycled products themselves. Formulating that into a specific programme around the circular economy is just the next logical step – as well as asking: how can this help us to drive business, reinvent our business models, and make it attractive for our customers and suppliers to support and participate in it?

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THE CIRCULAR ECONOMY

JP: What did you do to bring the rest of the business on board? Was it a pure business case argument? Or was it about connecting it to improving the lives of three billion people?

RM: It was a bit of both. We started with the megatrends and the strategy piece to understand what is relevant to us. We were in discussion with our supply chain experts to understand resource security for example. The interesting thing is that everything points in the same direction and leads to the same conclusion.

The other discussion was: what really has the biggest impact on people in the world, on our customers? That was linked to our vision to improve the lives of three billion people, so we had to dig into what ways we can have an influence on improving lives.

And of course we were looking into new business opportunities. The early works published by the Ellen MacArthur Foundation and McKinsey really helped to kick-start our thinking; we just put it on the agenda for internal meetings – to

“I DON’T THINK IT CAN BE STOPPED. COMPANIES THAT DON’T GET IT WILL PUT THEMSELVES AT A SIGNIFICANT STRATEGIC DISADVANTAGE AND MAY EVENTUALLY CEASE TO EXIST.” discuss what it all means for Philips.

We tried to quantify it, using individuals from various markets to translate the thinking for the regions, to make the overall business case for a change in thinking for Philips.

JP: What’s been behind the recent rise to prominence of the circular economy?

RM: One factor is the ‘perfect vortex’ in terms of societal interest. There is a huge societal interest in environmental issues, and the debate about climate has broadened significantly. Also the perception of what to expect from whom has shifted: should we wait for government to define new rules of the game? What is the role of companies?

What can you expect from good corporate citizens?

This thinking is changing.

Part of it is becoming mainstream thinking amongst strategists and economists. On all sides it is coming out of the niche.

JP: So what role have Ellen MacArthur and McKinsey played in driving this into the line of fire for business?

RM: I would not underestimate the role they’ve played. It has been stunning and successful. The trends are there, the insights are there, but they created a platform to exchange thinking around it and to bundle the forces, and that was very useful.

Ellen MacArthur has determination and an all-encompassing vision that enables people to join and to build on it. But the partnership with McKinsey – translating the thinking into language specifically understandable for business – was hugely important too.

JP: What are the barriers to its adoption?

RM: I don’t think it can be stopped.

Companies that don’t get it will put themselves at a significant strategic disadvantage and may eventually cease to exist. So eventually it will spread, and the question perhaps is whether there are accelerators that will help us to get through this transition more quickly and without the huge supply disruptions that might happen if we run out of precious materials.

“EVERY COMPANY SHOULD HAVE A ‘NORTH STAR’ – WHERE YOU WANT TO GO, WHO YOU WANT TO BE IN 5, 10, 20 YEARS.” JP: Is short-termism a threat?

RM: There is enough distraction in the short term to duck the issues for a while and not do the right thing; everybody knows this.

But it will catch up. Investors are becoming more interested in the role of a good sustainability strategy on driving shareholder value. They are increasingly learning what the impact is on stock markets. This will enable them to ask the right questions at shareholder meetings to trigger action in businesses that have not yet engaged.

The rest comes back to execution. Every company should have a ‘north star’ – where you want to go, who you want to be in 5, 10, 20 years. And then you have to back-cast it and make it part of your strategic planning cycle, and eventually it can be broken down into very operational stuff that can be managed quarter to quarter.

JP: What would be your advice for organisations looking to adopt circular economy thinking?

RM: I would urge them to think about what their company is all about: where they really can make a difference and what they want to achieve. Then explore the link between this and circular economies. If you can link it to your core strategies, to your reason for being, then you tap into the intrinsic motivation of your people.

You make it strategically relevant, and it creates a lot of energy and direction.

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KY 120 mA 170 NET POSITIVE 10.00 Tilt: 0.0 2.0s 17:21:10:09 v:74 1:90

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FROM ZERO IMPACT TO POSITIVE CONTRIBUTION Net Positive asserts that the ambition of many businesses to ‘do less harm’ is simply not enough to effectively tackle the social, environmental and economic challenges we face. Companies therefore have a duty to go beyond ‘zero harm’ and deliver a ‘Net Positive’ impact to society that leaves the world better off than they found it.

KEY FACTS • The Net Positive Group, made up of Forum for the Future, WWF, and The Climate Group, was established in 2013 to crystallise the net positive intentions announced by several flagship brands • Key players include IKEA, Kingfisher, SKF, Capgemini, Coca-Cola Enterprises, The Crown Estate and BT.

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ZOE LE GRAND Principal Sustainability Advisor Forum for the Future

THE NEXT FRONTIER OF SUSTAINABILITY LEADERSHIP Zoe Le Grand invites you to imagine what your business would look like if the net effect of its existence were positive – in the widest sense. More and more businesses are taking this “Net Positive” approach, but the window of opportunity to create a more equal and sustainable future is closing.

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Imagine a world where businesses exist for three main purposes: to deliver social value to customers and society, to restore the natural environment and to deliver healthy profits to their shareholders.

It’s a world where businesses replant and replenish the land, use their buildings to generate clean and green energy and help their customers to do the same. A world where they provide fulfilling, well-paid jobs and apprenticeships, and help communities to gain skills. And one where they work with their clients and supply chain partners on amazing new innovations which not only make people’s

lives easier, without damaging the environment, but also provide their shareholders with healthy, long-term returns.

Some sustainability leaders have called this approach: “Net Positive”. It’s a step change beyond more conventional approaches to sustainability and for those companies slogging their way towards targets that start with a zero – zero carbon, zero waste – becoming Net Positive can sound like a tall order.

NET POSITIVE

So what does Net Positive really mean?

Why should your business adopt this approach? Where should you start?

REASONS TO REACH FURTHER The foundations that businesses rely upon – raw materials, supply chains and a supportive civil society – are being eroded. To survive in the long term, businesses need to work harder to shore up those foundations.

Aiming to minimise harm or to have zero impact won’t be enough. Businesses need to reach further, become active contributors to the environment and society, and move from just minimising the harm they do towards a position where the “net” effect of their existence is “positive”.

Many companies may feel they make enough of a contribution to society through their tax contributions and the jobs they provide. But being Net Positive means taking this even further and in doing so securing benefits for both society and the business itself.

“IF YOU WANT YOUR BUSINESS TO SURVIVE FOR THE LONG TERM THE TIME TO ACT IS NOW.” If you’re Kingfisher and you’re reliant on a product like timber to make 40 per cent of your products, you need to be sure that the supply of timber doesn’t run out.

So you don’t just need to reduce the trees you cut down, you need to actively plant more.

Ikea have chosen to focus on greening their own, and their customers’, energy supplies. By selling more efficient electrical products and even solar panels, they can expand market share whilst reducing carbon emissions for them and their customers.

Being Net Positive goes beyond mitigating risk and making incremental improvements. It encourages companies to get innovative with their products and services and enter new partnerships and markets.

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THAT’S GREAT, BUT WHERE SHOULD I START? Together with The Climate Group and WWF, we brought together an exciting new partnership of businesses keen to make this a reality – the Net Positive group. The group includes Ikea, Kingfisher, SKF, Capgemini, Coca-Cola Enterprises, The Crown Estate and BT. Together we’ve identified a set of key principles that characterise a Net Positive approach and provide a simple framework to help develop a new strategy or test an existing one. The full list is in the Net Positive Group report – but here are a few of the main ones:

03. INNOVATE ACROSS THE VALUE CHAIN AND BEYOND Becoming Net Positive requires companies to think bigger and to enter into new partnerships and networks to create wider positive impacts than would be achievable alone. For instance, The Crown Estate is working with farming tenants to investigate new and improved methods of food production.

01. FOCUS ON THE AREAS THAT MATTER MOST

04. CHALLENGE BUSINESS-AS-USUAL

The first step is to look right along the value chain and find out where your biggest material impacts are, including the areas which have the biggest impact on your business, and those that your business has the biggest influence over.

A Net Positive impact can’t be achieved by business as usual. Indeed, for some, it challenges their very business model.

Kingfisher is trying to move beyond the “selling more stuff to more people” model by experimenting with smallscale, rental models that provide access to all the tools customers need for a job without having to buy new products. It also provides online tutorials to improve customers’ skills.

BT, for example, realised it could reduce the amount of carbon emissions created by its customers. By innovating products, such as home hubs, and delivering tele-conferencing and other services to reduce customer travel, BT managed to cut carbon while growing its business.

Good news all round.

02. SHOW WHERE YOUR POSITIVE AND NEGATIVE IMPACTS ARE Becoming Net Positive brings significant measurement challenges. How do you demonstrate that your contribution is really additive? No company can measure everything down to the nearest decimal point. So it’s critical to be clear about where you draw your boundaries and report in a transparent, consistent and authentic way. If you have to make tradeoffs, be clear about where and why. The Net Positive group will be working this year to make measurement of Net Positive impacts easier. Watch this space!

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NET POSITIVE

Net Positive Group members

05. WORK WITH OTHERS TO INCREASE YOUR IMPACT A Net Positive approach challenges business to work in new ways. For instance, the only way Coca-Cola Enterprises could recycle more packaging than it uses was to establish JV businesses in France and the UK to transform the PET recycling infrastructure for the benefit of the wider community. Where communities will be affected, work with them to create a positive impact for you and for them.

06. BREAK DOWN BARRIERS The regulatory landscape may not be designed to support the level of innovation that a Net Positive approach requires. You will need to work with policymakers and lobby for change.

07. DO THE RIGHT THING Some things can’t be replaced. A new pine forest won’t make up for the destruction of ancient woodlands. Net Positive results in one area will never compensate for irreplaceable natural losses, or ill treatment of individuals and communities, somewhere else.

Proving you’ve got this balance right can be tricky – and that’s why the Net Positive group will be looking at this in more detail this year.

Some cynics believe that being Net Positive in some areas could make up for bad practice elsewhere. Don’t use it as a smoke screen. Being Net Positive means that you also demonstrate a good level of corporate responsibility across the board, in line with internationally recognised guidelines.

THE WINDOW IS CLOSING – ACT NOW More and more companies are making Net Positive commitments.

Manufacturers such as SKF are committing to going “Beyond Zero”. Velvet toilet tissue has promised to “put more trees in the world”. And it’s not just the private sector; public organisations are stepping up as well. Greater Manchester Fire and Rescue service, for instance, has committed to being carbon positive by focusing on preventing fires as well as putting them out. It is also using fire stations to generate clean, green energy, reducing carbon and saving taxpayers’ money too.

But our window of opportunity to create a more equal and sustainable future is closing. It’s time for businesses to make a positive contribution to the environment and society as well as to the bottom line.

It won’t be easy, and there may be some mistakes made along the way, but if you want your business to survive for the long term the time to act is now.

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JAE MATHER Guest Lecturer at the University of Cambridge Institute for Sustainable Leadership (CISL) and Non-Executive Director at Newform Energy

ONE YEAR IN; MANY YEARS TO GO...

Jae Mather looks at one company’s experience of putting a Net Positive approach at the heart of its business strategy. Kingfisher is not only prepared to experiment boldly, he says, but also to learn from the mistakes that inevitably come with being a pioneer.

For many years, zero carbon – having no impact on the environment – has been the goal of forward thinking organisations.

But, in reality, zero isn’t enough for those companies that are right out in front in terms of sustainability. Increasingly they see the need not only to tackle their own impacts, but also impacts that would, in the past, have been seen as outside their direct control.

Kingfisher – whose interests include B&Q, Castorama, BricoDépôt, Screwfix and Koctas – falls into this more ambitious category. It has embraced Net Positive so that a restorative approach to operating sits at the centre of how it does business.

THROUGH ITS NET POSITIVE APPROACH, KINGFISHER AIMS TO: > Have a positive impact on people and communities > Be restorative to the environment > Become carbon positive > Waste nothing > Create wealth and grow

“IN REALITY, ZERO ISN’T ENOUGH FOR THOSE COMPANIES THAT ARE RIGHT OUT IN FRONT IN TERMS OF SUSTAINABILITY.” This transition – from business as it was to business as it will be – will lead to largescale transformations across most areas of the business, from redesigning its stores and buildings to changing the products and services it offers to customers.

But why embark on such a journey?

It comes from a powerful realisation that global macro trends are all leading to an increasingly challenging business environment for a company of its kind, where pressure on natural resources, and the impact of growing populations and climate change all mean that continuing with a strategy of “business as usual” is, simply, not viable.

In order to maintain growth and reduce businesses exposure to resource limitations and increasing price volatility in global supply chains, Kingfisher has decided it needs to completely re-evaluate and re-design its existing business model.

Simply put, it has transformed a basic business strategy into a much broader sustainability strategy.

Take timber, for example. It was identified that timber is used in up to 40 per cent of

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its products. Expected price rises of up to 75 per cent and supply shortages of up to 30 per cent are anticipated by as early as 2020. With global forest cover steadily reducing year on year, it became readily apparent that this reliance on timber is unsustainable, not only for Kingfisher itself but also for the global community. So it has decided that, to protect timber resources, it needs to go far beyond just replacing what it uses to becoming a Net Positive producer of timber.

The lofty aim is that a Net Positive threshold is achieved by 2021. This will be hugely challenging and equally rewarding and an example of the kind of champion leadership that is so very needed in our world.

The first year’s 2013/14 Net Positive Report begins with a quote from group CEO, Sir Ian Cheshire:“What we’ve learnt in our first year is that our challenge is the right one, but that business ‘unusual’ isn’t easy”.

What I like the most about Kingfisher’s Net Positive model is that it recognises that mistakes will be made; there will be failures – and that this is OK. In fact, not only is failure OK, it is to be embraced and welcomed. We have for many years been used to living within social, educational, business and political systems built on the idea that failure is something that should be avoided at all costs. In reality, taking risks and being brave enough to fail is an essential part of learning, growing and evolving.

The Chinese character for “threat” is a combination of the characters for “danger” and “opportunity”. Net Positive embraces this type of thinking.

There will be many climate change billionaires in the world in the years to come.

Those business leaders who understand the need to embrace circular business models and Net Positive thinking will reduce exposure to the risks that lie ahead.

But they will also build a valuable new business model – one offering huge material, reputational and financial benefits.

NET POSITIVE

Here’s how the timber strategy fits alongside the company’s other Net Positive goals, in terms of overall vision, aspiration and concrete targets:

TIMBER

ENERGY

Vision To achieve a global net reforestation

Vision All homes are zero carbon or net generators of energy

Aspiration To create more forest than is used

Aspiration Every store and customer’s home is zero carbon or generates more energy than it consumes

2020 target To achieve 100 per cent responsibly sourced timber and paper in all operations

2020 targets To achieve energy savings of 37TWh for customers and 45 per cent reduction in energy intensity of own properties

BECOMING NET POSITIVE

INNOVATION

COMMUNITIES

Vision Creating and using products wastes nothing

Vision Businesses help people to help each other

Aspiration Every product will enable a more sustainable and ultimately Net Positive lifestyle

Aspiration Every store and location supports projects that build local communities or equip people with skills

2020 target To achieve 1,000 products with closed-loop credentials

2020 target To achieve 4,000 community projects completed by internal people that deliver “Better Homes, Better Lives”

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WHAT’S THE BOTTOM LINE? Environmental profit & loss (EP&L) accounting puts a financial value on the environmental impacts across the entirety of a company’s value chain. This approach not only gives complex environmental metrics greater resonance by translating them into the core language of business – finance – but also provides a measure that enables companies to better assess and manage risks and opportunities.

KEY FACTS • Introduced by Jochen Zeitz, then-CEO of PUMA, in 2009 • PUMA conducted first ever EP&L assessment in 2011 • Novo Nordisk became the first pharmaceutical company in the world to conduct an EP&L account in 2014 • Kering has committed to rolling out the EP&L assessment across its brands (including Gucci, Stella McCartney, Yves Saint Laurent, and Volcom) by 2015.

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MICHAEL BEUTLER Sustainability Operations Director Kering

A ANNIE LANCASTER S Senior Consultant S Salterbaxter MSLGROUP

A QUANTUM LEAP FORWARD IN VALUING IMPACTS It takes both hard work and a pioneering spirit to become known as one of the greenest companies in the world1. Here, Michael Beutler, Director of Operations in Kering’s Sustainability Department, talks to Annie Lancaster about how the company’s commitment to rolling out an Environmental Profit and Loss assessment across their brands is paving the way for a standardised measurement tool that benefits everyone.

AL: How would you sum up the EP&L in simple terms?

MB: It’s a way to understand your environmental footprint going all the way back to the raw material level, and putting a value on it so you can understand the differences between what resources you use, and what kind of impact that has on society.

AL: Tell me about how the EP&L came into being.

MB: The initial concept – from then CEO of PUMA, Jochen Zeitz – was created by Kering and PUMA in 2010 and the firstever EP&L was published in 2011.

And our leadership took that initial analysis and decided to turn it into an integral part of how we work with all our brands on sustainability: how we understand our supply chain, our 1

Newsweek, 06/05/2014

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processes, our suppliers, and the impacts of all our activities.

AL: Was it challenging to get the buy-in needed across Kering’s stakeholders to start the process?

MB: Once François-Henri Pinault decided we were going to do an EP&L, there wasn’t any pushback from the individual brands.

It makes sense.

But the level of engagement we’ve had across the business has been fantastic.

AL: And why do you think engagement was so good?

MB: Firstly, there’s a lot of business value in mapping and understanding the supply chain.

Secondly, from a sustainability standpoint, I think everyone saw that the EP&L represented the next frontier – a quantum leap forwards. In the sense that traditional environmental reporting is one dimensional, an EP&L is a threedimensional view.

AL: Presumably it comes with a corresponding leap in the amount of effort or work that goes into conducting something like this.

MB: In the beginning, when we were mapping processes and categorising inventory and our suppliers, yes.

But we’ve completed EP&L reports for about 73 per cent of the Group thus far, and in the process we’re becoming more and more efficient.

It has taken a lot of dedication to streamline the process – across the business but particularly from our sustainability team – but our level of effort per EP&L now is probably onetenth of what it was when we first started.

AL: The EP&L is primarily a measurement tool; the obvious question it throws up is, having understood your environmental footprints, what next?

MB: We take the results and we work with our brands to identify opportunities to reduce them. We also have a roadmap of projects that align into our 2015 targets, and they all link up – we can calculate the savings each would generate from an EP&L perspective. So it helps us to evaluate where we can have the maximum impact.

AL: Have there already been benefits from its implementation?

MB: Yes definitely. We’ve created many initiatives – both public and internal – that are driven by reducing the impacts we’ve discovered through the EP&L, for example metal-free tanning, or sourcing strategies for some of our key materials.

It’s not just environmental sustainability – it’s also about long-term viability. In terms of supply chain security, the EP&L tells us where we can find sources that are more reliable for our business to plan around.

Social issues also come to the fore, such as local livelihoods. On sourcing particularly, we’ve definitely identified issues that we can scale into really significant impacts in the long run.

AL: As you mention, it’s not only about the environmental impact. Is a Social Profit and Loss on the cards for Kering?

MB: We’re doing something far more extensive than any other company with the EP&L – in terms of methodology, depth of analysis, and across all of our business units.

EP&L

So while there’s a lot of value in something like the SP&L, having pioneered the EP&L it’s incumbent on us to see it through, so it’s not just an innovative new methodology, but also an effective tool that is understood across the board in terms of its importance from a business standpoint.

AL: So to what extent would you call the EP&L a sustainability tool, vs. a strategic business tool?

MB: It’s really both. Every business that makes something is depleting natural capital. If you don’t understand how you’re using natural capital – what the risks are, the stress points, and the potential for doing it more efficiently and in a way that is less impactful – there’s a whole aspect of your business risk that you just don’t understand. And that means your future viability and your future strategy can’t be well informed.

AL: You’re very much a pioneer of this tool; have you seen a lot of interest from other organisations wanting to run EP&Ls of their own?

MB: There’s been a lot of interest. That’s why we’re working to make a more standardised EP&L that is comparative across companies and industries. A financial statement is a financial statement, but right now in sustainability reporting, even EP&Ls may not be

“IF THEIR SOURCING AND SUPPLY CHAIN ISN’T HEALTHY – THEN THE COMPANY ISN’T HEALTHY.” comparable across companies. So it’s very important for us that we collaborate with other businesses in the hope that it becomes standardised.

We’re not working on the EP&L for competitive advantage for us; in the long run it’s to benefit everyone.

AL: By its nature, an EP&L is about increased transparency and could potentially expose you to critical voices.

Have you felt that?

MB: There are risks to transparency.

Some companies believe that an EP&L account could open them up to criticism from their shareholders or even to litigation.

But on the flip side, if you’re not transparent, you’re not meeting your fiduciary duty.

We’ve had nothing but enthusiasm as a result of the EP&L, but of course different industries have different

perspectives and issues to wrestle with, that might make the level of exposure associated with conducting an EP&L publicly feel less comfortable.

AL: Do you think the concept of an EP&L arose as a result of something specific within Kering, or could it have happened anywhere?

MB: It could have happened anywhere.

We happened to have a leader, first in Jochen Zeitz who had the vision and came up with the concept, and then with François-Henri Pinault who saw how it could be taken to the next level. So we had the leadership. I think someone would have done it eventually, but like anything new and innovative someone had to do it initially.

AL: Where do you see the EP&L going in the next 10 or 20 years?

MB: I hope to see it standardized; scaled across our industry and other industries; and standing next to financial reporting as a deeper understanding of a company’s risk and opportunities.

If their sourcing and supply chain isn’t healthy – then the company isn’t healthy.

So it could go in two directions. As an internal tool, much like management accounting; or externally, integrated into financial performance as a broader indicator of a company’s health.

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SUSANNE STORMER Vice President, Corporate Sustainability Novo Nordisk

ANNIE LANCASTER Senior Consultant Salterbaxter MSLGROUP

ENVIRONMENTAL PROFIT AND LOSS AND THE TRIPLE BOTTOM LINE Novo Nordisk has been called the ‘world’s most sustainable corporation’1. Here, Susanne Stormer – Vice President, Corporate Sustainability – describes to Annie Lancaster how measuring the company’s EP&L is just one strand of a corporate philosophy that balances economic, social, and environmental perspectives.

AL: Tell me about how the EP&L fits within Novo Nordisk’s broader philosophy.

SS: For more than 25 years our approach to sustainability has been built on the philosophy of the Triple Bottom Line.

This gives us a 360° lens on how we make decisions: we consider the potential implications for the environment and for society, as well as the financial dimension.

This way we are able to make more balanced choices; by recognising their implications, we can take action to mitigate any potentially negative impacts.

On the social side, it is possible for companies to have a net positive contribution. In the case of Novo Nordisk, we benefit patients through the products that we provide; we can develop the skills of our employees so we have a positive social dimension there. If we were to do a social P&L it would most likely be a positive one.

But on the environmental side there is a cost. We need to understand that cost, and recognise that if you consider the externalities, some of these costs are not currently priced adequately.

1

Corporate Knights, 2012

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The link to the EP&L is clear. By default any company using resources to produce its materials has a negative environmental footprint. So how can we reduce that negative footprint?

That is what we’re trying to answer with the EP&L. AL: And what have you learned through this approach?

SS: Inspired by Puma’s activities, the Danish Environmental Protection Agency (EPA) wanted to look into whether it would be possible to do an EP&L for a company such as Novo Nordisk.

So we agreed to be a pilot, working both with the EPA and Trucost. Over several years we’ve been reporting on our environmental performance, but we wanted to go further – to take a value chain approach. So we looked into our supply chain, going several steps deeper than our standard reporting.

What we learned when we added it all up was that of the total cost of our environmental impact, about 87 per cent, is generated through our supply chain.

Only the remaining 13 per cent happens within the company’s own operations.

AL: Having understood that the majority of environmental impacts are happening outside of your direct control, what steps are you now taking to mitigate your impact?

SS: This is where it ties in with our ongoing sustainability initiatives. For over a decade we’ve been managing our supply chain on the basis of responsible sourcing – asking our suppliers to meet certain standards and requirements.

Now we’re seeking to understand what kinds of suppliers generate the biggest environmental impacts, and what we can do about it.

We are working with our suppliers to help them be more sustainable. We’ve found that our suppliers are keen – they see the benefit. And it translates into a better financial bottom line because it can be tied to energy savings, or conversion to renewable energy, or smarter processes in so many ways.

AL: As the first pharmaceutical company in the world to run an EP&L account, have you experienced challenges in being the front runner?

SS: I think any innovation initiative such as this will have challenges.

One we’ve faced is a practical one – how do you find the data for a robust analysis?

As a science-led company we are generally quite data-driven in our approach, and the fact that we’ve been

EP&L

working with data reporting on our environmental and social performance for many years has facilitated that process, but clearly Trucost needed to go into lots of what you might call ‘sensitive data’ – for instance data relating to financial interactions with suppliers – so it requires a large degree of trust in your partners.

Another challenge, having understood the data, is what are you going to do about it.

If you’re just going to say ‘oh, that’s interesting…’ it’s a pointless exercise.

“BY DEFAULT ANY COMPANY USING RESOURCES HAS A NEGATIVE ENVIRONMENTAL FOOTPRINT. SO HOW CAN WE REDUCE THAT FOOTPRINT?” A third challenge is how to translate the impact into a value in a monetary sense. We don’t have a currency for these things; the closest we get is with carbon, because there is a price on carbon. When it comes to something like water – how do you put a real cost on the availability of fresh water?

AL: Given these challenges, was it difficult to convince the whole company ght that an EP&L assessment was the right road to go down? der SS: When reaching out internally in order to compile the data needed, we were aware that we were asking people to do a lot of extra work on top of their alreadyy ading busy schedules. When you are persuading people to go out of their way to dig outt data, they have to appreciate the reasoning behind it.

Nevertheless, you need to be able to rely on good working relationships, not just with external partners but with colleagues.

AL: The EP&L remains a somewhat ‘niche’ measurement & reporting tool at current; do you think we will see a broader uptake in the future?

A lesson we’ve learned is that while you can push your way through an organisation to get the information or results you want, if you are unable to convince internal partners that it is meaningful and value-creating for them, you’ll have a very hard time.

SS: The expectation is definitely growing for companies to be accountable for their performance throughout their value chain. In that regard the EP&L is most likely the best method. But then again, it’s only one dimension – looking at environmental performance.

AL: Having gone through that process, do you feel the EP&L assessment has generated real value?

What would be more beneficial would be to be able to also look at the social and economic dimension of a company’s contribution.

SS: It certainly reveals perspectives that we previously may not have thought about. For years we’ve been working at reducing our environmental impact, so we have a pretty good idea about how that impact is split out amongst our own operations. But looking at carbon emissions as an example, we began by focusing on the emissions generated from production, which was the immediate largest impact, and then worked our way into managing emissions from transportation of products and people.

Now we can see that production, and indeed the direct impacts of our activities, is actually only a small contributor to total carbon emissions – with the majority coming from other parts of the supply chain. That kind of information is a real eye-opener, and facilitates conversations about what we can do across all the functions of the business – from offices all the way through to the selection of materials or processes. It becomes a much richer and more nuanced discussion than it would be were you just looking at your impact from a ‘helicopter’ perspective.

AL: And that ties into some of the other approaches we’re looking at in Directions – such as Net Positive.

SS: Novo Nordisk hasn’t made a formal commitment to being Net Positive the way some other companies have, but that is exactly what we are trying to achieve with the Triple Bottom Line: our impact should be a net positive one.

If it weren’t, the world would be better off if we weren’t here.

By implication I would say that every company should be able to say its contribution to global society is a net positive one. Otherwise we are in big trouble!

ct Here, again, we benefited from the fact that we have been working with is responsible sourcing and data analysis e for many years. As a result of our Triple Bottom Line philosophy, there is an understanding within the company of the y. importance and value of sustainability.

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SALTERBAXTER MSLGROUP

HEALTHY SOCIETY, SUCCESSFUL BUSINESS At the heart of the shared value concept is the idea that the future success and competitiveness of businesses is directly linked to health of the communities within which they operate. By working to tackle the big issues faced by society, whether economic, environmental or social, companies will generate economic value through new innovations, access to new markets and by creating business models that foster long-term sustainable growth.

KEY FACTS • Concept first introduced by Mark Kramer and Michael Porter in The Harvard Business Review in 2006 • The Shared Value Initiative – seeking to enhance knowledge-sharing and Shared Value best practice – founded in 2012 by Kramer & Porter and FSG • Key players include Nestlé, General Electric, Walmart and Dow AgroSciences.

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DIRECTIONS DIRE REC CTION CTIO NS S 2014 2014

SALTERBAXTER SALT ALTE MSLGROUP

MARC PFITZER M Managing Director F FSG

FORGING THE LINK BETWEEN ECONOMIC AND SOCIAL VALUE

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SHARED VALUE

Marc Pfitzer charts the emergence of Shared Value as a driving force for innovation and growth in companies determined to create both social and economic value. Like other new approaches to sustainability, it is filling in huge gaps left by earlier experiments with philanthropy and CSR – but is still in its infancy and its potential is vast.

For well over a decade, we’ve searched systematically for practices that lead to extraordinary social impact. Our journey with Shared Value started with the same idea: what were companies doing that truly changed the world? 1

But it all started with investigating other, ultimately disappointing approaches. Our deep dive into corporate philanthropy in 2002, for instance, left us unimpressed.

Guided by notions of moral obligations, investments were diluted. We saw many heartfelt projects which had little impact.

There were exceptions, of course. Cisco, with its Network Academies, was on its way to training four million young people in ICT around the world because it powered the global adoption of its technologies. Nestlé’s vast agricultural development programmes similarly enabled it to localise and expand its dairy or coffee businesses. Social constraints to growth were the target, changing conditions unlocked new business prospects, impact was increased in scale.

Then we turned to the sustainability and CSR movements.

“WE ALSO GRASPED THAT PROFITS ARE NOT ALL EQUAL. THOSE THAT ADVANCE SOCIETY CREATE THE CONDITIONS FOR FUTURE GROWTH. PROFIT IS NOT THE PROBLEM, BUT THE NATURE OF PROFIT MATTERS IMMENSELY.”

1

MITIGATION Back then, the emphasis was on mitigating the negatives. We loved the principles, but questioned the results.

‘Tick box CSR’ had pushed companies into a multitude of efforts in areas of concern to all. But were emission reductions, water saving efforts, or human rights standards truly making a difference to climate change, water basins or working conditions?

Meanwhile, some truly impressive outcomes did begin to stare us in the face.

India’s Jain Irrigation wasn’t trying to save water in manufacturing; it was growing the world’s largest drip irrigation business. Toyota didn’t focus on factory emissions, but led the way in developing clean mobility solutions.

Here were truly world-changing developments, promising a thousand times more potential. Unmet needs were the target for product innovation, profits enabled reinvestment and – once again – impact was scaled up.

See : “The Competitive Advantage of Corporate Philanthropy” by Michael Porter & Mark Kramer in Harvard Business Review Dec 2002; “Strategy & Society; “The Link Between Competitive Advantage and Corporate Social Responsibility” by Michael Porter & Mark Kramer in Harvard Business Review, Dec 2006; “Creating Shared Value: How to Reinvent Capitalism and Unleash a Wave of Innovation and Growth” by Michael Porter & Mark Kramer in Harvard Business Review, Jan 2011.

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CREATING SOCIAL AND ECONOMIC VALUE Shared Value had crystallised. Companies that changed the world found ways to create social and economic value simultaneously. By 2011, we were no longer looking at marginal initiatives but ‘Shared Value companies,’ who defined their purpose around social progress, powered by strong economics.

We sharpened our understanding of the linkage between society and business, and helped codify how Shared Value is created (through products, value chain reconfiguration, and investments in the enabling environment). We understood the enormous potential here: solving social problems profitably meant solutions would not be limited by scarce public or non-profit budgets.

Yet we also grasped that profits are not all equal. Those that advance society create the conditions for future growth. Profit is not the problem, but the nature of profit matters immensely.

Shared Value practices are spreading throughout the world in name or form.

A million viewers have followed Michael Porter’s TED talk, thousands of corporate and cross-sector members have joined the Shared Value Initiative, hundreds of companies contribute to the annual Shared Value summit, dozens of firms (some trained by us) in every continent are consulting on Shared Value across the world: why?

Well, because many now understand that simply managing the footprint is not enough.

Shared Value does sit on the shoulders of the sustainability and CSR giants, and the mitigation work is far from over. But it is not sufficient.

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For two decades now, a multitude of companies has scored high on CSR ratings. And yet simultaneously, trust in business has crashed and a Living Planet Index has worsened year-on-year.

Where Shared Value is different is in the fact that it gives the moral leader a new set of tools so that their best work on footprint management is just the foundation of a whole new world of impact and value creation.

“SHARED VALUE REPRESENTS THE MOST SIGNIFICANT OPPORTUNITY FOR INNOVATION AND GROWTH IN BUSINESS TODAY.”

Another reality is that our social deficits are hurting companies. Mining companies have seen a ten-fold increase in community conflicts in the last decade, and over two-thirds of the discount applied to gold mining companies by investors today, for example, is due to political and social risks.2

Shared Value gives the competitive leader a language for adopting purpose-based strategies, as well as concrete guidance on how to turn on the social innovation engine in their companies.4

Globally, companies face another paradox. They can’t access well-trained vocational staff, while massive youth unemployment threatens stability in key markets. Shared Value gives the cost conscious leader guidance for driving both resource and labour productivity in the value chain. And it gives the risk averse a business case for mobilising kindred spirits, both internally and externally, to address local development needs.

Shared Value is positive – it moves the rationale for investing in society from a licence to a reason to operate. Purpose is immensely powerful: it channels resources to the right kind of ideas and partners, and it puts fire in the organisation and in people’s hearts.

Shared Value is bringing the best talent back into business or into partnership with business.

And Shared Value opens the field to immense market opportunities, represented by the billions who lack access to proper nutrition, housing, sanitation, health, energy – you name it.

Our recent work in financial services uncovered 2.5 billion “unbanked” people, $2.1 trillion in unmet credit needs for SMEs, and a $3–10 trillion future market opportunity in impact investing.3 The reality is, Shared Value represents the most significant opportunity for innovation and growth in business today, as demonstrated by GE in environmental and health technologies, Nestlé or Dow in nutrition, Veolia or Kemira in water treatment, and Intel or Pearson in education technology and content.

POSITIVE AND COMPREHENSIVE

And it is comprehensive: based in the interdependence between business and society, it acknowledges remaining areas of trade-off while opening the possibility for breaking these through innovation.

A measure of its comprehensiveness is its consistency with the related movements featured in this report. The EP&L and SP&L movements focus on trade-offs and seek to apply a price to externalities.

Companies internalising such environmental and social costs will find a way to innovate out of them, and that will create Shared Value.

SHARED VALUE

The circular economy and Net Positive movements are providing guidance on achieving resource productivity (value chain reconfiguration) and the B Corp movement is giving an institutional framework to a purpose-driven company.

MEASUREMENT Our focus has been on illustrating the management practices that advance both social and business conditions. And in many ways, Shared Value is still in its infancy. The big frontier is measurement.

We have described how companies, which systematically measure the link between achieving new social outcomes and business returns, unlock further value creation – but these practices are just emerging.5 Measurement validates purpose, and opens the door for authentic cross-sector collaboration. Measurement provides the foundation for a new discourse between government and business, not anchored in traditional wealth extraction through taxation, but in incentives to drive social outcomes in ways that decrease cost to the public sector.

And importantly, as shown by leading practitioners, measurement will guide investors to fulfil their social purpose in allocating resources to ventures that outperform the market through their extraordinary contribution to social progress.

2

See “Spinning Gold: The Financial Returns to External Stakeholder Engagement” by Witold J. Henisz, 2011

3

See “Banking on Shared Value” by Bockstette, Smith, Pfitzer et al. FSG, 2014

4

See“Innovating for Shared Value” by Marc Pfitzer et al in Harvard Business Review, Sept 2013.

5

See “Measuring Shared Value” by Porter, Hills & Pfitzer, 2013

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DIRECTIONS DIR D DIRECTIO DIRE IRE R CT RE CTIO C T TIO TI ONS NS 2014 2014 4

SALTERBAXTER SALT ALTE LT TE MSLGROUP

JJOHN BEE C Communications Manager N Nestlé

JIM PEACOCK Director, Consultancy and Communications Salterbaxter MSLGROUP

“WHEN YOU’VE FULFILLED YOUR RESPONSIBILITIES, THEN YOU CAN TALK ABOUT CREATING SHARED VALUE, BUT ONLY THEN.” But this all came to a head at the World Economic Forum in Davos, in about 2005/2006. About that time we began talking to Michael Porter who fundamentally disagrees with the belief that the aims of business or its shareholders need to be at odds with those of society. We think there’s a third way – and we began calling it Creating Shared Value (CSV).

John Bee talks to Jim Peacock about the journey Nestlé went on to become a company focused on creating Shared Value and suggests it’s a concept that could be adopted across many markets and sectors.

JP: Can you explain how and why Nestlé adopted the Shared Value approach?

JB: We feel that if you can embed a social purpose deep within an organisation it will begin to deliver the returns that society needs it to make.

But to do that requires an end to the short-term thinking that has led to the loss of public confidence in business over the past 10–15 years, and a conscious re-engagement with the communities that the business serves.

We have actively conceptualised that as Creating Shared Value, because it means the social issues we seek to have an impact on become integral to our global business strategy – they’re not just an add-on. Having said that, we’ve got a huge journey to go on before we can have the sort of impact on society we want to have, but we think we’ve made a positive start.

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Also, going back to the roots of Shared Value for Nestlé, we had a particular view.

Our chairman was a little bit concerned at the whole premise behind Corporate Social Responsibility (CSR). Because it was predicated on the notion that you have to give back to society, it implied something had been stolen – and we don’t really share that view.

We want to identify social issues that we can positively address through our business propositions. If you look at these issues purely through the lens of philanthropy, at a certain point you have to ask your shareholders’ permission to get involved. Whereas if you’re looking at solving social issues through business solutions that also allow you to grow your business at the same time, then that represents future investment and becomes part of your growth strategy.

As a company we’ve had a long history of recognising that there is a shared benefit for communities that comes directly from our business activities. If you look at Nestlé as a milk producer you can see that all the way back to the 1920s.

CSV was born at Nestlé because we were the first company that Porter and Kramer analysed.

JP: How does this all fit with CSR and other approaches to sustainability?

JB: Shared Value is only part of our engagement with society.

We have consciously looked to build our corporate business principles in alignment with the UN Global Compact’s 10 principles. We then look to make sure our impact on the natural environment – on which we depend greatly – is as beneficial as possible. We’ve increased our production output by 50 per cent over the last 10 years, but all of the environmental impact indicators are going in the opposite direction.

With traditional CSR, it’s principally about mitigating risk and limiting impact, not about creating new opportunity. When you’ve fulfilled your responsibilities, then you can talk about creating shared value, but only then. We don’t see the approaches as mutually exclusive, we actually see them as mutually reinforcing.

SHARED VALUE

JP: How much convincing did you need to take the Shared Value route, given how complex a business Nestlé is?

JB: Well, fortunately, our CEO and chairman bought into it straight away, so we had top management enthusiasm for this. Then of course it’s about making sure that you’re communicating that across the organisation. We’ve systematically brought it into our annual global training courses, covering our 3,000 top performing and high potential managers.

We’ve also created some high profile external opportunities to help move the concept of CSV forward through a global forum that we’ve been running for the past five years. This is an idea that’s gathering momentum in sectors we didn’t think it would take off in. Its time has obviously come.

JP: Can you talk a bit to the commercial drivers and case for CSV? JB: I’ll give you one very good example.

We’re a significant producer of chocolate products, and that depends on cocoa, clearly.

About 40 per cent of global cocoa supply comes from the Ivory Coast, where there was major conflict from around 2003 -2010. The average life of a cocoa tree is 25 years, and as you can imagine, during that time of conflict not much replanting was done. So something had to be done to secure future cocoa supply.

Before the crisis ended we were developing our Nestlé Cocoa Plan, giving $110 million worth of support to cocoa farmers. The plan is principally focused on the Ivory Coast, but also looks to open new cocoa growing communities around the world. This involves a lot of R&D – breeding drought- and disease-resistant strains, for example. And we give the cocoa plants to the farmers, who are under no obligation to supply to us. So we’re investing in growing the long-term supply of cocoa but we can also address social issues while we do that.

JP: How are your shareholders responding?

JB: Almost exclusively positively. There is a great deal of confidence in our business and in our ability to deliver our financial plan, whilst still being able to address some of these social issues.

JP: Does CSV fit specific markets particularly, or is it an all-encompassing concept?

JB: If you look at the diversity of the organisations in the Shared Value Initiative, you can see this is an approach that can be applied to many different kinds of businesses and sectors.

The thing we learnt very early on is to focus. And the reason we chose nutrition, rural development and water is because we know we can have an impact in these areas. If Nestlé wants to be the leader in nutrition, health and wellness, it’s pretty obvious why we go there. You know, over one billion Nestlé products are sold every day of the year. So if we can’t have an impact on nutrition, it’s hard to imagine who can!

“THIS IS AN IDEA THAT’S GATHERING MOMENTUM IN SECTORS WE DIDN’T THINK IT WOULD TAKE OFF IN. ITS TIME HAS OBVIOUSLY COME.” We choose water because of all the environmental impact indicators, we feel that it’s the most relevant in terms of our business, but it’s also the least understood.

Again, in rural development, we not only source about $25 billion of agricultural raw materials each year, but we have these 465 factories, and half of those are in developing countries, and two-thirds of

those are in rural locations. So whether we want to or not, we have an impact on rural communities.

We focus on the areas where we believe that we can make the largest difference.

JP: We have talked about lots of the positives about CSV, did it throw up any internal challenges that you hadn’t foreseen?

JB: It has been said that while it is very easy to see where the benefit can be created from CSV in developing countries, it’s not quite so apparent in developed countries. But we’ve actually found that there are some good initiatives in developed economies, including great examples surrounding sustainable farming in France, Italy and Poland.

And while we have our CSV focus areas, it doesn’t stop us from engaging with other social issues when we see the opportunity. One of the areas we’ve been addressing recently in Europe is the huge problem of youth unemployment. We have pledged to create 10,000 direct jobs for people under 30, and 10,000 more apprenticeships, and we’re also going out to our network of suppliers and customers to encourage them to join a movement. This is very exciting. So yes, you want to focus, but you also need to be aware of other chances to engage.

JP: Where do you see CSV going in the future? Not just for your organisation but on an international scale?

JB: Three things that need to happen.

We need to find a reliable way of measuring mutual benefits.

We’re beginning to detect signs in financial markets that CSV is going to move out of the socially-responsible investment community and into mainstream investors. We need them to understand and buy into CSV. And then we need to think about how CSV will be taught and propagated within business education and training.

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SALTERBAXTER MSLGROUP

BUSINESSES THAT BENEFIT Benefit Corporations are for-profit companies that commit to placing social and environmental goals on a par with financial performance.

Performance is therefore judged not only on revenue, growth and profit but on the positive material impacts a company delivers to society and the environment. In many states in the US this is now enshrined in legislation and the approach is gaining traction with a new generation of businesses around the world.

KEY FACTS •

B Lab – the company responsible for codifying the requirements needed to be a certified B Corp – was founded in 2006

•

The first B Corps were certified in 2007 in the USA

•

Benefit corporation legislation was first passed in the US state of

Maryland in 2010, allowing for-profit companies to consider society and the environment in addition to profit in their decision making process. 17 US states have now passed benefit corporation legislation •

Key players include Patagonia, Ben & Jerry’s, Etsy, and Plum Organics.

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DIRECTIONS 2014

SALTERBAXTER MSLGROUP

MARCELLO PALAZZI Co-founder B Lab Europe

ANNIE LANCASTER Senior Consultant Salterbaxter MSLGROUP

PROFIT WITH PURPOSE Marcello Palazzi, co-founder of B Lab Europe, talks to Annie Lancaster about why it is important we re-evaluate our economic system and how B Corp has become a globally recognised standard for doing business better.

AL: Could you explain a bit about what Benefit corporations are?

MP: In the last 20 years there have been many different attempts to make capitalism work in the best possible way.

When B Corp launched eight or nine years ago, the first step was exploring the various different standards for business to create a more holistic look into all the different areas of a corporation.

And after several years of refining these standards, version one of the B Corp assessment was created. It’s now in version four; the assessment involves 200 questions split into eight or nine sets of criteria that touch upon everything a corporation does that has an impact on people and society.

What B Lab has done is to create a structure to better align the work of corporations and the needs of society.

AL: How do you feel about the idea that what you describe harks back to business as it used to be – before the belief that shareholder value is all that matters?

MP: In the US, some of the very first corporations were started with a literal licence to operate, granted by the citizens’ community. You can go back even further – at the origins of capitalism

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there was a public accountability that went beyond shareholders.

In the last 25 years we have seen Anglocapitalism and the free market doctrine, which many people are now questioning.

B Corp is providing a return back to those original values - the concept of the social contract between society and corporations.

“B CORP IS PROVIDING A RETURN TO THE ORIGINAL CONCEPT OF THE SOCIAL CONTRACT BETWEEN SOCIETY AND CORPORATIONS.” On the other hand, the world is changing.

One of the key B Corp criteria is diversity, something that wasn’t an issue 200 years ago. So it’s an evolving system: not just going back to a ‘romantic past’, but moving forward too.

AL: How would you answer those who argue that a business with altruism at its core is destined to fail in today’s aggressive business environment?

MP: There are lots of answers to that line of thinking.

If you take the hard-nosed experience of investment funds, we have enough evidence to show there’s no trade-off: those that have invested in more

sustainable or ethical companies in the last 20 years are no worse-off than those who haven’t.

But it goes beyond idealism. Humanity is a huge asset. We’re not working in a time when you can employ slaves – you have to motivate people to work for you; to ‘bring the whole person to work’. Many studies show that employees are more motivated in B Corps.

And if you look at the expectations of shareholders and board members and society, companies need to be well governed. The first test of a B Corp is that it should be profitable, and well governed.

It’s a much wider lens than altruism alone. There’s that old management theory – the distinction between ‘hygiene’ and ‘health’ factors. In the past CSR was considered a hygiene factor. But just as a person can look pretty without being healthy, so too can a business. B Corp is being healthy – making sure that every ‘organ’ in a company – your factories, the way you engage with employees, the way you relate to investors – is functioning properly.

AL: Tell me about the certification process.

MP: There are two routes to becoming a B Corp. One is through the law. In 26 states in the US, the Public Benefit Corporation Statute has been enacted.

There are now 1,100 such companies in the US. In countries and states where there is no legislation as yet, you can go down the auditing route. The first stage assessment is free on our website.

Companies that score at least 80 out of 200 can then ask to be audited by B Lab. If you pass the audit, you are entitled to use the B Corp logo.

AL: What do you see as the key difference between B Corp and, say, Shared Value?

MP: Shared Value is a great thing. But B Corp goes further, in the sense that we have the assessment, the auditing…it’s

B CORP

not easy to become a B Corp. Shared Value is a little bit more libertarian.

The second difference is that B Corp is more suitable for smaller and mid-size corporations, whereas Shared Value is generally applied to big companies – such as Nestlé. Which is fantastic – we need to work together to have a bigger impact on the wider economy.

There are approximately 250 million companies in the world. If you add together B Corp, Shared Value, Conscious Capitalism, etc, – it’s in the thousands of companies. Perhaps less than 10,000. There’s a long way to go.

B IMPACT SCORE: 89 What we learned: We’ve been reviewing and reporting on our social and environmental performance since 1989. But the B Impact Assessment added a new twist – it helped us understand where we are in comparison to other companies. There were certain areas like HR and Supply Chain that we had always paid attention to, but the Assessment forced us to look deeper into the specifics of how we could match or beat best practices.

What we did as a result: It prompted our exploration on how the Assessment experience could be extended to our Scoop Shops, which are franchised retail locations that sell our ice cream. This community is an extension of our brand in localities, and the Assessment might be an easy way to engage our franchise partners on our social mission.

AL: Are there specific sectors to which the B Corp approach is more suited?

MP: It’s not so much about sectors as it is about consumers. If consumers share your values and are prepared to buy your products because you are different, that’s a big incentive to become a B Corp.

B IMPACT SCORE: 107

“IT’S ABOUT REINVENTING THE ECONOMIC THEORY THAT HAS LET US DOWN.” AL: And do you see that consumer pressure growing?

MP: Absolutely, there’s no question. It’s been growing for 20 years. There are many, many issues that consumers care about, and with the macro-economic and political framework within which we work, they are going to become more and more challenging.

There is no question that society is responding. It could respond more quickly, sure. But on the whole, we expect that consumers will ‘vote with their feet’ more and more.

AL: What benefit does B Corp bring beyond the individual players involved?

MP: A huge issue since the financial crisis is economics.

From the beginning B Corp has stressed the importance of good governance, the failure of which is at least partially responsible for the recession we’ve been going through. Billions and billions have been wasted, and you have to wonder what kind of management these companies have had.

That’s a big part of B Corp, and it is an element that is not often included in other CSR or Sustainability initiatives. It’s about reinventing the economic theory that has let us down from time to time. It goes beyond the individual companies – it has a systemic effect. If there were more B Corps or B Corp-like companies, we would have a better economic system overall.

What we learned: The B Impact Assessment incentivised us to take the time to quantitatively measure the performance of our programmes. For example, we provide several opportunities for employees to participate in environmental or social activism. But we didn’t know how many employees participated and to what degree. But this Assessment asked us those tough questions, and we took the time to measure and manage the participation and outcomes of these programmes. This has given us a better understanding of which ones are most effective and which ones could be made more robust. Because the Assessment gathers all of this information in one place, it allowed us to really recognise our strengths as well as see where we have room for improvement.

What we did as a result: We have had numerous opportunities to publicly speak about our commitment to being a B Corp. This is an important part of fulfilling the third part of our mission statement: to inspire and implement solutions to the environmental crisis. We are trying to share this story more, because we hope that it will inspire other businesses to find ways to incorporate environmental and social considerations into their practices.

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OUR CONTRIBUTORS

Guido Schmidt-Traub is Executive Director of the UN Sustainable Development Solutions Network (SDSN).

Launched by UN Secretary-General Ban Ki-moon, the SDSN mobilizes scientific and technical expertise from academia, civil society, and the private sector in support of sustainable development.

Ellen MacArthur is the founder of the Ellen MacArthur Foundation with the mission to accelerate the transition to a circular economy and to give the concept a wide ranging exposure and appeal.

Martin Stuchtey is a Director at McKinsey & Company where he advises countries and companies on water transformation strategies and broader resource challenges, including value-capture from waste. He co-leads McKinsey’s Special Initiative on the Circular Economy.

Helga Vanthournout is a Knowledge Expert at McKinsey & Company where she works with clients on waste and resource management (technologies and economics of waste treatment options and waste avoidance). She co-leads McKinsey’s Special Initiative on the Circular Economy.

Professor Haifeng Huang is Assistant Dean of Peking University HSBC Business School in China and Executive Chairman of Ecological Development Union International.

Robert Metzke is Senior Director of Group Strategy and Alliances at Philips, which was announced as a Global Partner of the Ellen MacArthur Foundation in 2013. Robert was previously Senior Director of the Philips EcoVision Program.

Zoe Le Grand is Principal Sustainability Advisor at Forum for the Future who, along with The Climate Group and WWF, have brought together big companies with Net Positive commitments to help bring clarity to this emerging concept.

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Jae Mather is a Guest Lecturer at the University of Cambridge Institute for Sustainable Leadership (CISL) and Non-Executive Director at Newform Energy.

Michael Beutler is Director of Sustainability Operations at Kering. Prior to Kering, Michael was Global Director of Sustainability and Strategy at SAP, and has worked at international corporations DHL, PWC and Ford over the last 20 years.

Susanne Stormer is Vice President of Corporate Sustainability at Novo Nordisk, the first pharmaceutical company in the world to conduct an EP&L assessment. Susanne sets the strategic direction for the company’s positioning as a sustainability leader and a pioneer.

Marc Pfitzer is Managing Director of FSG, who operate the Shared Value Initiative, facilitating a global community of leaders who find business opportunities in societal challenges.

John Bee is Communications manager at Nestlé, a flagship brand in the adoption of Creating Shared Value as a central tenet of their sustainability strategy.

Marcello Palazzi is co-founder of B Lab Europe, and is responsible for launching the B Corp certification in Europe.

Nigel Salter is CEO and co-founder of Salterbaxter MSLGROUP.

Jim Peacock is a Director, Consultancy and Communications at Salterbaxter MSLGROUP.

Annie Lancaster is Salterbaxter MSLGROUP’s Senior Consultant.

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About us:

About Directions

We work where business strategy, sustainability and creative communications meet, creating strategies and stories for some of the world’s leading businesses and brands. Our aim is to help business perform better; communicate better and deliver better long-term outcomes.

We call this Ideas for Better Business.

Directions is in its fourteenth year. It is widely viewed as the leading annual publication on trends in sustainability and communications. Salterbaxter MSLGROUP also produces regular supplements and events on key topics throughout the year.

2013 Authentic?

2012 Profits from purpose

2011 Opportunity in the new age of uncertainty

2010 The Innovation Edition

2009 Mapping the landscape of European CR

2008 Sustainability gets tough

Our clients include: Absolut adidas Group Allianz Anglo American ArcelorMittal BP BSkyB BUPA C&A Coca-Cola Enterprises De Beers Diageo Giorgio Armani GlaxoSmithKline H&M

Harrods ING Jaguar Land Rover Kering L’Oréal LEGO Group Maersk Group Marks & Spencer Philips Premier League PVH RSA Standard Chartered Toyota Europe Viacom

Contact us: Jeff Sutton Director of Business Development jsutton@salterbaxter.com Tel +44 (0)20 7229 5720 salterbaxter.com @salterbaxterMSL

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