THE BLOG
05/27/2015 12:51 pm ET Updated May 27, 2016

Can You Afford Not Being Sustainable? (Part III)

As we have seen in Part I and Part II, sustainability lies in the core of our economy, something that becomes evident by taking into account the realistic parameters of economic growth (environmental consequences and raw materials limitations) and not an ideal scenario, which has been the business as usual growth model.

Tangible Examples of Sustainable Development

But what a sustainable development model involves? There was an attempt to evaluate and measure sustainability based on Global 100 index from Corporate Knights ten years ago, and based on Dow Jones sustainability indices from 2002. Both indices consider three main categories, the economic, the environmental and the social; however, with different approaches (this subject will be further analyzed in a future post).

Sustainable Development Model

Risk Mitigation Approach

Dow Jones indices correlate sustainable development performance with investments by allowing investors to observe sustainability-driven funds and derivatives over the long term. Derivatives as security-based financial products of underlying assets introduce an important key factor of sustainability, which is the mitigation of risk exposure. In particular, the exposure to fossil fuels, water and raw materials, along with the environmental consequences, are important risk-related factors.

Companies that rely their production on high energy consumption for instance, like cement industries, are greatly exposed to fossil fuel price volatility, which means high risk exposure for the investors. This is a reason for example why CEMEX is a pioneer in utilization of AF in their high energy demanding processes. Another example of high risk exposure based on natural capital is water, and California is a meaningful case since it has the worst drought on record. Almost 50% of California State has exceptional drought (May 2015) with severe consequences for its citizens and industries. Agriculture is of paramount importance for California and for the rest of U.S. since is one of the largest suppliers of the country; the industry suffered $2.2 billion loss and 17,100 jobs due to the drought. The energy sector was heavily influenced as well, and specifically hydro-based power generation had losses of $1.4 billion over 2011 to 2014. The industry of semiconductors, which requires vast quantities of water, faces the dilemma of relocation of the production plants if more water restrictions are needed.

There is a critical effort from EU to assess raw materials scarcity based on methodological framework and to communicate its importance. For decarbonizing technologies in the energy sector in particular, there are 32 materials identified with demand implications. From these materials, one (dysprosium) is at high supply risk and its importance becomes evident from the fact that EU, in order to meet demand of its vehicles and its wind technologies in the near future, has to allocate the 30% of world's supply. Environmental pollution is another important factor and closely related with economical risk as well. China's pollution problems, for example, cost the country $220 billion per year nearly 10% of its GTP, indicating the relation and limitation of economic growth from environmental factors.

Volatile fossil fuels prices, scarcity of raw materials and water supplies, along with environmental consequences shape a completely different and unsound economic development environment for countries and corporations. New development models that will incorporate these challenges are required.

Two top technology firms, Apple and Google, have recently invested in massive solar and wind energy projects respectively. However, this is not big news since both companies have been investing in renewable projects in the last years; what is new though is that both are investing in renewables as a development strategy for their headquarters. Apple's CEO, Tim Cook, during Goldman Sachs conference, said about the environmental approach of the company:

We know, in Apple, that climate change is real. And our view is that the time for talk has passed, and the time for action is now.

Apple is building an 850 million dollar solar farm close to their headquarters, which will be 1300 acres and will generate enough power for almost 60,000 California homes. Tim Cook's words illustrate the relation of sustainable development approach with risk mitigation:

Is that a good use of funds or not," and, you know: quite frankly, we are doing this because it is right to do, but you may also be interested to know that it's good financially to do it. We expect to have a very significant savings because we have a fixed-price for the renewable energy, and there's quite a difference between that price and the price of the brown energy.

Similar approach comes from Google, which is to buy electric power from the Altamont Pass wind farm. The investment involves replacing about 770 old turbines with 48 new technology machines producing twice as much energy, enough to power Google's corporate campus in Mountain View with 100 percent renewable power. Sam Arons, an energy strategist at Google, points out:

Not only do we think renewable energy is important from a climate change perspective, it also makes business sense. The buy helps protect Google from higher energy prices in the future.

Both investments, along with all aforementioned examples, signal a new era of strategic development through proactive risk mitigation. However, this is not the only sustainability development approach.

Growth Approach

The growth approach of sustainability as a development model fosters collaborations, enhances innovation and reveals new products for corporations. A nice example of how sustainable development might significantly change and improve a business, is a small ice cream manufacture in Scotland (Makies). They have started as a milk farm that took advantage of the high wind energy potential of their location by installing a wind turbine. The energy surplus led them to introduce a new product, ice cream, which was more energy demanding since it required refrigerators. The company proceeded to a second and later to a third wind turbine investment to cover their new energy consumption, but at the same time they created another new product for their business, electricity. Their electricity consumption graph shows that they constantly sale electricity back to the grid generating profit for their company.

Innovation and collaboration is not only desirable for this development approach but it is essential. Timberland and Omni United are two companies that started their collaboration based on their common fear regarding a fundamental raw material for their business, which is natural rubber. The footwear and tire industries are the main consumers of virgin rubber. By making a product that can be reused, not only do they respect the environment, but they are also able to protect their business. A new innovating product was developed, and designed to be recycled from tire into footwear outsoles.

Unilever is an excellent example of sustainable development model. They set their own sustainability high standards and only invest in projects that fulfill these standards. They have discovered that improving their performance to reach those goals wasn't enough; their suppliers had to become sustainable as well, which led to a huge transformation through collaboration and innovation in order to achieve this.

It makes business sense to reduce our risk by securing sustainable sources of supply for raw materials, to cut costs through reducing packaging materials and higher manufacturing efficiencies, and to appeal to more consumers with sustainable brands.-Unilever

Sustainability shouldn't be seen as a debate between ecologists and corporations, but rather as a different model that promotes collaborations, reduces risk exposure, and as an approach that takes into account the real dimensions and limitations of our planet -- something that leads to better standards of living, improves business and economic viability.