This coming March 2, 3 and 4, Connected Organizations for a Responsible Economy (CORE) will be sponsoring its annual Sustainability Summit. This year the event moves the sustainability discussion well beyond the business case for sustainability into highlighting sustainability initiatives in both the private and public sectors.

Much progress has been made over the past few years as private sector companies move towards a low “resource footprint,” leverage sustainability to drive innovation and create “green jobs.” Global companies now recognize that the business paradigm has shifted from a viewpoint where resources are abundant to one where resources are increasingly scarce and represent a material risk (and opportunity) to business operations. Moreover, there is a new found transparency with companies. Everyone is a stakeholder and can publicly comment on a company’s environmental and social performance.

What this means is that companies are taking a hard look at their operations – both within their fence line and within their supply chain for ways to reduce energy use, carbon emissions, water use and material use. This makes perfect business sense as a classic risk management strategy. In a world where resources are increasingly scarce and supply chain disruptions can shut down an operation (for example, imagine the sudden lack of water for a beverage company), proactively reducing your reliance on these resources becomes critical.

This is not only a risk management issue. This is a business opportunity. Companies that can be innovative and bring products and services to market that use fewer resources and can better mitigate resource risk for their customers will thrive.

Companies presenting at the Summit represent the future of business. I encourage everyone to attend the Summit this March and see how sustainability is transforming the global economy. To learn more about it, visit www.corecolorado.org/summit.

The reason I wanted to say a few words about Lunenburg is that the town is an example of how the environment and business are intimately connected.

The tie between Lunenburg and sustainability is that it’s a UNESCO World Heritage Site and for more than 200 years was the reigning center of the cod industry. Hundreds of schooners set sail every year to deliver salt cod around the world.

The cod population collapsed as a result of overfishing and mismanagement of the natural resource. After 1945, deep-sea trawlers, freezer ships and sophisticated “super trawlers” began to deplete the resource. In 1991, the industry was devastated as northern cod stocks essentially disappeared. Moratoriums were imposed, and now fishing fleets operate on strict quotas.

I bring all of this up because we seldom visit a community that has suffered ecological collapse and rebuilt its economy (Lunenburg is actually in the process of rebuilding). The city is now capitalizing on the fact that it is the best surviving example of a planned British colonial settlement in North America. Established in 1753, it has retained its original layout and overall appearance, based on a rectangular grid pattern drawn up in the home country. The inhabitants have managed to safeguard the city’s identity throughout the centuries by preserving the wooden architecture of the houses, some of which date from the 18th century.

Collectively, there is a prevailing view of a disconnection between business and the environment, as though they exist as separate entities. They do not. There is no business without the environment.

Think of how a collapse in agriculture (or a shift because of climate change, droughts, etc.) would affect your supply chain.

Sustainability is about being proactive in managing resources (including your supply chain) just as you would manage your financial performance.
Perhaps we need a real profit-and-loss statement and balance sheet for natural resources.

The issue includes “10 Trends You Have to Watch” and “Managing in the New World.” These articles highlight the new importance of “sustainability business drivers” and how there is a new business paradigm.

The old business paradigm relied on abundant resources and few stakeholders, and companies were not very transparent. In the new paradigm, resource efficiency is essential, “everyone” is a stakeholder and companies are increasingly transparent.

Even in the midst of the recession, the business drivers for sustainability are ever-present.

A few quotes from selected articles:

• “Resources feeling the strain” (page 56):
o “We believe that, in the years to come, ‘resource productivity’ (the output achieved from every unit of oil, power, water, or other resource input) will become central to company competitiveness.”

• “Trust in business is running out” (page 57):
o “Regaining trust also means dispensing with the view that the only objective of management is to increase shareholder value. Broadening the list of key stakeholders to include employees, customers, suppliers, communities, the press, unions, government, and civil society will help companies rebuild credibility.”

• “Innovation marching on” (page 60):
o “Research shows that companies investing countercyclically in R&D during downturns tend to outpace their competitors on the upswing.”

• “How Gen Y & Boomers Will Reshape Your Agenda” (page 71) and in particular “Portrait of Gen Y” (page 74):
o “Portrait of Gen Y, 86 percent say it’s important that their work make a positive impact on the world.”
o “Gen Y workers want an employer who shares their eco-awareness and social consciousness, even down to the details of office energy use. Nearly one quarter say it’s very important to work in a green, environmentally conscious workplace.”

• “Understanding the Post Recession Consumer” (page 106):
o “Slowed Trends, Green Consumerism. Environmentalism is by now deeply rooted in the consumer mind-set and public policy arena, although consumers and politicians express widely varying degrees of engagement. Consumers are forgoing pricey green products and instead are cheaply and discreetly reducing waste.”
o “Dominant Trends, A Focus on the Boardroom. Outraged by corporate malfeasance, people are punishing companies for unethical governance.”

• Emerging Strategies to Beat the Slowdown (page 134) and in particular Shift 4 (page 136), the “Higher Stakes in Sustainability”:
o C.K. Prahalad (University of Michigan): “Companies that understand the opportunities engendered by sustainability will come out of this recession ready to capitalize on the low-carbon and clean-energy economy of the future.”

What does all of this mean?

In my mind, it answers the question posed by clients and peers late last year: “Will companies abandon sustainability because of the poor economy?”

The answer is no because the business drivers for sustainability have not disappeared into the background of business priorities. Instead, sustainability represents opportunities to reduce operating costs (reduced energy, water and material use) and to innovate. The successful companies in 2009 are reducing their environmental footprint and investing in innovating new products and services to thrive in a global economy where resources are constrained, the climate is changing, companies are transparent and everyone is a stakeholder.

In my opinion, sustainability is fueling innovation through the creation of new businesses and new products. This innovation is also driving the “creative destruction” of some industries (some of the Detroit automakers?) and creating new ones (Tesla and Better Place?).

This is obvious.

What is not so obvious is that the job creation from these new and in some cases disruptive industries is creating brand value.

In my opinion, Serious Materials is now known, not only as an innovator, but a creator of “green jobs.”

Serious Materials is a great example of the “mash up” of innovation, green job creation and increased brand value. The Serious Materials brand is now linked to not only innovation with regards to building materials but now green jobs.

I was fortunate enough to attend the Fortune Brainstorm Green event a couple of weeks ago and listen to Kevin Surace, CEO of Serious Materials, discuss the opening of their new window manufacturing plant in the Chicago area. There was some discussion of their innovative products but the message was clear ¬Serious Materials is creating jobs in the midst of the “great recession.”

An example: on February 27, 2009 Serious Materials reopened a window plant in Chicago. The former Republic Window plant was sold to Serious Materials and the new owner rehired the 250 workers who were laid off.

A shuttered plant is brought back to life. Kevin’s story of the enthusiasm of the newly rehired workers was inspiring.

Not only was Kevin compelling in his message during the panel discussion but Serious Materials was extremely effective in broadcasting the linkage between innovation and green jobs.

The lapel pin and card below was distributed during the event. I made the leap, wore the pin and was on board with the message.

Serious Materials is not only viewed as an innovative start up, but one who will create new manufacturing jobs.
A couple of other examples of innovation and green job creation are provided below to illustrate my point.

In December 2008, the world’s largest manufacturer of wind turbines,
Vestas, opened a new plant in Windsor, Colorado. The facility will eventually
employ 600 workers. Colorado Governor Bill Ritter attended the plant’s
ceremonial opening and called it “a victory for our state.” He said Vestas will
help attract other renewable energy companies to Colorado. Ritter has set a
goal of attracting renewable energy research and manufacturing operations
to the state for what he calls the “New Energy Economy.”

In Colorado, Vestas is a welcomed new addition to our business base. We have seen
the loss of jobs in the mining and oil and gas sectors and are anxious to attract new
industries and “green jobs.”

This year during the dismal economic situation in in Detroit, Global Wind
Systems, Inc. will create 250 new employees starting in May 2009. This will
be Michigan’s first manufacturer of delivery-ready, large-scale wind turbines.
The alternative energy company, which now has about 20 employees, was
founded in September and is investing $32 million to establish the plant,
which will be an original equipment manufacturer or OEM for wind turbines.

In the current economic climate the winning brands are those that innovate fast, grow their business and create new jobs. The benefit that accrues to these firms, in the midst of the “great recession,” is brand value and loyalty.
Who will soon forget an innovative company that is creating new jobs?

Now, think creative destruction and job creation.

Some background, and how this latest move “fits” within the quickly evolving U.S. policy:
On April 2, 2007, in Massachusetts v. EPA, 549 U.S. 497 (2007), the Supreme Court found that greenhouse gases are air pollutants covered by the Clean Air Act. The Court ruled that the U.S. EPA Administrator must determine “whether or not emissions of greenhouse gases from new motor vehicles cause or contribute to air pollution which may reasonably be anticipated to endanger public health or welfare, or whether the science is too uncertain to make a reasoned decision.”

With this decision, “the U.S. EPA Administrator is required to follow the language of section 202(a) of the Clean Air Act. The Supreme Court decision resulted from a petition for rule making under section 202(a) filed by more than a dozen environmental, renewable energy, and other organizations.”

As a follow-up to this earlier decision, the U.S. EPA Administrator signed a proposal with the two findings:
“The Administrator is proposing to find that the current and projected concentrations of the mix of six key greenhouse gases—carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6)—in the atmosphere threaten the public health and welfare of current and future generations. This is referred to as the endangerment finding.”

“The Administrator is further proposing to find that the combined emissions of CO2, CH4, N2O, and HFCs from new motor vehicles and motor vehicle engines contribute to the atmospheric concentrations of these key greenhouse gases and hence to the threat of climate change. This is referred to as the cause or contribute finding.”

While this is a significant development (and was expected) it does not necessarily mean that greenhouse gases will be regulated under the Clean Air Act.

Before the EPA can officially adopt the ruling or take any regulatory actions, the proposed ruling – based on a peer-reviewed scientific analysis of: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride – must undergo a 60-day public comment period.

This move by the U.S. EPA is playing out while Congress also moves forward to develop a plan to regulate carbon. Congressional hearings are scheduled to begin this week.

The draft House bill, “American Clean Energy and Security Act of 2009” authored by Rep. Henry Waxman (Chairman of the Energy and Commerce Committee) and Rep. Edward Markey (Chairman of the Energy and Environment subcommittee) is significantly shaping the debate as to what a federal climate program looks like. This is essentially the current competition with the U.S. EPA.

Key elements of the draft bill are:
- “A national renewable electricity mandate where utilities need to get 6 percent of power from solar, wind, biomass, or geothermal sources in 2012 and 25 percent in 2025. One-fifth of the requirement can be met with energy-efficiency measures.

- A demonstration facility for carbon capture and sequestration where carbon dioxide from coal-burning power plants is stored underground.

- Giving authority to the Federal Electricity Regulatory Commission for planning power grid modernization with smart-grid technology and upgrades to the transmission lines.

- A single federal fuel-efficiency standard and low-carbon fuel standard for biofuels.

- An “energy efficiency resource standard” to create incentives for electricity and natural gas companies to invest in customer efficiency programs.

- A global warming reduction program modeled on recommendations from U.S. Climate Action Partnership (www.us-cap.org) which is a coalition of large corporations and NGOs advocating regulation. The target is a 20 percent reduction of greenhouse gas emissions below 2005 levels in 2020, 42 percent reduction in 2030, and 83 percent cut in 2050.

- Programs to promote “green jobs,” such as training, and rebates for heavily polluting industries that could be put at a competitive disadvantage from costs related to carbon regulations.”

It appears that the preference is for congressional action to regulate carbon and not U.S. EPA under the Clean Air Act. Congress is now in a race with the. EPA.

Bear in mind that we are also looking at the U.S. becoming engaged in upcoming negotiations in Copenhagen during early December 2009. It is unlikely that the US will go into these negotiations with a final congressional bill or U.S. EPA regulations in place. There needs to be “room to negotiate” during Copenhagen. As we move forward on a federal program to regulate greenhouse gases a clearer message as to what the program will look like will wait just a bit longer until later this year.

In the midst of all of this, U.S. companies need to determine their carbon footprint (including their supply chain and products) and explore the various regulatory scenarios and how they will impact their business (including potentially new products and services).

This is now a classic risk management exercise.

For further reading on the endangerment assessment, visit http://epa.gov/climatechange/endangerment.html.

Tim Carey from PepsiCo (Director, Sustainability) participated on the panel and presented “Sustainability in a Recession: Keys to Performance in a Capital-Constrained Environment.”

Tim presented a very clear and concise case for aggressively pursuing a sustainability strategy in the “middle” of this economic downturn.

His key theme was that during the recession it is essential (yes, essential) to leverage sustainability to drive innovation and increase resource efficiency. Why, you ask, would this be critical during a recession? Simply put, resource costs will continue to increase over time (energy costs from hydrocarbons will increase going forward) and we will come out of the recession.

So, how do you want your company to come out of this recession? Will you be tied to a costly supply chain lulled into thinking that current cheap fuel costs excuse inefficiencies, high material use in packaging, still tied to high carbon energy sources such as coal and the wasteful use of water (while water is relatively cheap, take note of increasing stakeholder interest in how companies use water)?

Now is the time to “dematerialize” packaging, increase energy and water efficiencies and move towards a low carbon footprint on an enterprise-wide and product basis.

The bottom line is that you want to be the low cost producer (low Cost of Goods Sold (COGS)) compared to your competitors when the costs of resources increase (which they will going forward).

So, what is PepsiCo doing now? Some recent public announcements:

Bottles – The new “Eco-Fina” water bottle uses 50 percent less plastic than traditional designs with a half-liter bottle that weighs in at just 10.9 grams. 
 “Eco-Fina” will save 75 million pounds of plastic a year according to estimates by PepsiCo. In addition, the company has eliminated the cardboard base pads from its Aquafina 24-packs which will result in a savings of 20 million pounds of corrugate by 2010.

Another clever move is that PepsiCo is manufacturing the water bottles at the purification centers where they are filled in an effort to reduce fuel consumption and greenhouse gas (GHG) emissions from transport.

Shipping – Quaker, Gatorade and Tropicana will be shipped exclusively on lightweight, recyclable plastic pallets as a way to reduce fuel costs. In addition, the pallets are tagged with bar codes to enable tracking throughout the supply chain.
Vending machines – PepsiCo launched a pilot program in the Washington, D.C.-area to test “green” or “climate-friendly” vending machines. The Pepsi Bottling Group (PBG) is placing 30 energy-efficient Pepsi-Cola vending machines in high-consumer traffic areas with machines comprised of all-natural refrigeration systems. The machines apparently use less energy and generate 12 percent less GHG emissions than current vending machines.

Water - PepsiCo India is changing all of the labels on Aquafina, its bottle water brand, to announce that by next year, PepsiCo India will be a “positive water balance company.” Apparently the labels will urge consumers to partner with the company to “use water wisely so it could be enjoyed by future generations.” In addition, water usage in its manufacturing plants has been reduced by over 60 percent, and that has saved 2 billion liters of water in the process.

Late last year, I was repeatedly asked if sustainability initiatives would continue during an economic downturn or would they be viewed as expendable.

PepsiCo and other companies such as GE, Wal-Mart and Coca Cola are answering this question.

The plan outlines a cap and trade program to regulate greenhouse gases. The draft proposal will use 2005 as a base year and require that U.S. greenhouse gas emissions be reduced by 20 percent by 2020, 42 percent by 2030 and 83 percent by 2050. This draft legislation is a bit more aggressive than the timetable proposed by the administration.

In addition the legislation would require utilities to generate 25 percent of their electricity from renewable energy by 2025.
Key provisions, yet to be detailed, include the allocation of emission permits to regulated industries – either through sale or a percentage given to the firms.

So, the race between U.S. Environmental Protection Agency and Congress is on. We can expect increased progress in moving forward with U.S. regulations as we move closer to upcoming COP15 negotiations in Copenhagen in December 2009.

It is very important to note that the U.S. Climate Action Partnership (USCAP – www.us-cap.org) “hails” the draft as a “strong start.” USCAP, a coalition of U.S. companies (such as Alcoa, GE, BP America, PepsiCo) and NGOs (such as The Nature Conservancy and Environmental Defense Fund), has long recognized the need for clear and consistent public policy on climate change as a way to promote private investment in low carbon technologies to drive innovation, create jobs and provide a foundation for economic recovery.

This is encouraging as it focuses on the business opportunities (read top line growth) in moving to a global low carbon economy. The participants in USCAP get it.

Recent taglines regarding the “new colors of green” include:
“Blue is the New Green”, The New York Times. November 20, 2008
“Yellow is the New Green”, The New York Times. February 27, 2009
“Black is the New Green”, Financial Times. February 28, 2009

I will go further and recommend we jettison the words “green” and “eco” as more than ever we need to move ahead and embed sustainability into private and public sector enterprises as quickly as possible. We do not have time to waste.

We need to describe sustainability in terms of the value it creates not by adding a tag line. This is the only way that consumers, customers and businesses will understand the benefits sustainability can bring. Sustainability adds business value by increasing revenue, increasing brand value, managing risk and reducing operating costs. Simple business concepts in the language of business.

Sustainability programs are alive and well during the recession. Examples include the GE’s ecomagination and Wal-Mart initiatives. Both of these companies are realizing value from embedding sustainability practices into operations and through new products. Neither of these companies have confused consumers or businesses by calling their programs “blue” or “green.”
Consumers are confused enough by green claims and wary of greenwashing – what will we have now, perhaps “blue washing?”
We need to ensure that sustainability goes mainstream as quickly as possible and is embedded into businesses and public policy. It will never be embedded if it is viewed as something extra. It will always be viewed as something extra if it is tagged as green, blue or another color ginned up as a marketing exercise.

We need to reach the point where sustainability performance is built into all products, all business models and services.
Let’s get on with the work at hand and lose the cute taglines.

I agree with Hart and Millstein. A lot of people think that the current destruction we’re seeing is exclusively the result of the financial meltdown, but I believe creative destruction was in play well before the financial meltdown. The meltdown is accelerating this destruction, but innovation is alive and well, and for those who can survive this unprecedented economic environment, they will thrive.

Innovative companies are better positioned to survive beyond the recession. Constraints on carbon, water, materials, etc. will require companies to do more with fewer resources. More importantly they will have the opportunity to create the new products and services that will thrive in this new business environment.

Most large corporations developed in an era of abundant raw materials, cheap energy, and limitless sinks for waste disposal. This is no longer the world we live in. Hart and Milstein argue that “the emerging challenge of global sustainability will catalyze a new round of ‘creative destruction’ that innovators and entrepreneurs will view as one of the biggest business opportunities in the history of commerce.”

Businesses that view sustainability as an opportunity will drive the creative destruction process and build the foundation to compete in the twenty-first century.

Recent articles in the New York Times (February 19, 2009) and the Wall Street Journal (February 23, 2009) summarize the recent announcement that the EPA will be moving ahead in responding to a Supreme Court order to determine whether carbon dioxide is a pollutant that endangers public health and welfare. It was almost two years ago that the Supreme Court decision (Massachusetts vs. U.S. EPA) ruled that the EPA was required to undertake this evaluation.

This move by the EPA is very likely to accelerate action by the U.S. Congress and provide some insight as to the U.S.’s position during the next round of global climate negotiations.

Basically, the EPA will review current scientific evidence and prepare documentation as to whether carbon dioxide endangers public health and welfare, an “endangerment assessment.” If the endangerment assessment determines that carbon dioxide is a pollutant it will trigger an extensive rule making effort under the Clean Air Act.

Some argue that the Clean Air Act is poorly suited as the path forward to regulate carbon dioxide and that a more efficient approach would be to have Congress tailor a bill to meet the somewhat unique aspects of carbon dioxide.

According to the media, the White House has been also pushing Congress to craft legislation to reduce greenhouse gas emissions by 80 percent below 1990 concentrations by 2050. The “hammer” appears to be the threat to have the EPA use its authority under the Clean Air Act. Moreover, Ms. Browner has confirmed this by stating that although the EPA will move forward with its rule making, the White House does favor Congressional legislation to “deftly regulate” carbon dioxide through a cap-and-trade system.

I recommend watching this closely as the outcome will impact businesses from a purely regulatory perspective, and of course will create new business (product and services) opportunities for those that can innovate quickly.