What is the point of a business behaving well and responsibly if it does not actually generate more profit? For many years, companies have understood the need to act in an ethical and sustainable manner. But now a model of corporate social responsibility is emerging that seeks to weave it into the fabric of a profitable business, rather than just wearing it as a badge at a net cost to a company.
Puma chief executive Jochen Zeitz called for a paradigm shift in corporate attitudes when he spoke at the FT ArcelorMittal Boldness in Business Awards last month. “We corporations are part of the problem because our current economic model, which was organised in the industrial revolution, is not working with but against nature,” he said.
He branded existing models of CSR obsolete, saying that companies need to consider how to “do more good, not just less bad”. He said: “We cannot delegate responsibility to one department.”
To make this principle integral to their ways of doing business, companies need a commercial incentive. In other words, they must show that both CSR and doing business in a more sustainable way sells.
The desire to act ethically or in a green way can sometimes lead organisations to forget the fundamentals of making money
Raoul Pinnell, former chairman of Shell Brands International, argues that structuring a company around social responsibility might not initially appear to make commercial sense. “It might be that it is a new cost to the business and that you have to work around it,” he says.
Marks & Spencer is now reaping the rewards of Plan A, claiming that the programme made it an extra £50m in 2010, although it hasn’t always been so successful at making money according to some. In a similar fashion, Unilever wants to double its sales while reducing its environmental impact, something that chief executive Paul Polman has encouraged profit-focused shareholders to support.
Polman railed against investors looking only at short-term growth and ignoring longer term sustainability issues. At the World Economic Forum last year, he made an impassioned plea to fellow business leaders to “ignore the demands of short-term shareholders and lead from the front on sustainability and climate change”, The Times reported last autumn.
“The [shareholders] would sell their grandmother if they could make money. They are not people who are there in the long-term interests of the company,” said Polman.
But the desire to act ethically or in a green way can sometimes lead organisations to forget the fundamentals of making money, according to Jane Sheperdson, chief executive of fashion retailer Whistles. At a Luxury Marketing Council Europe (LMCE) panel debate last month, she described the difficulties she faced when putting together a range of Fairtrade clothing for Oxfam, saying the quality that suppliers presented was a disappointment.
“They wanted to be Fairtrade. What they could not do was be great designers or sell good clothes.” The problem with clothing produced solely to meet ethical standards, she says, “is that most of it is actually shit”.
Sheperdson demonstrates one of the principal failings of old models of CSR. For it to be a profitable part of a business, a strategy of simply marketing an inferior or more expensive product as a responsible purchase makes little sense. Being ethical or sustainable is not, in itself, enough to make something desirable to a mass consumer market.
Coca-Cola customer sustainability director Jake Backus puts the point simply: “Consumers will not switch to a more sustainable product unless it is equally good or better than the current one, and equally priced.”
They wanted to be Fairtrade. What they could not do was be great designers or sell good clothes
Coke is buying new machinery for its producers of plastic bottles so they can make them from plant-based material rather than oil-based matter. The plant-based plastic is likely to be cheaper in the long run. Efforts already made by Coca-Cola in 2009 achieved $100m worth of savings because it cut down on packaging.
Also outdated, it seems, are the traditional CSR programmes that grew out of the culture of corporate philanthropy. Mike Barry, head of sustainable business at M&S, says this practice used to be no more than a cosmetic attempt at appearing charitable. “Philanthropy was just scratching your head at the end of a profitable year and wondering who to write a cheque to, in order to keep the chairman’s wife’s favourite charities happy. Now it is much more sophisticated. Every product, every factory, every farm involved in our production is changing.”
This change is part of M&S’s extensively publicised and marketed Plan A programme, which has environmental, ethical and social principles at its heart and involved a fundamental review of all the retailer’s business processes. It is also now a programme that is generating money for M&S, rather than costing it cash (see Case Study, below). It does this by persuading customers to take positive action. “We believe there is even more traction to be had with the consumer by engaging them in activities like clothing recycling with Oxfam. It makes a much greater difference to the consumer to be participating in the Plan A journey rather than just being told about it by us,” says Barry.
Case study: Marks & Spencer
Marks & Spencer’s Plan A made the business an extra £50m in the 12 months to 31 March 2010. The programme is now four years old and aims to reduce the retailer’s environmental impact while trading ethically and helping consumers become healthier. This involves meeting 180 self-imposed targets by 2015.
According to head of sustainable business Mike Barry, the financial benefits from Plan A are the result of modest gains accumulating in various areas of the business. He says the nature of corporate finance means that without a concerted effort to review M&S’s processes as an entire organisation these small changes would not have been made or the cost reductions realised, even though they are often the result of making relatively simple efficiencies.
“Plan A has been enormously powerful to link together relatively small sums of money that we save in many different stores, products and supply chains. On their own, none of them would have got the attention that they actually merit without the Plan A wrap-round.”
Some aspects of Plan A cost M&S more, for example sourcing Fairtrade products, but Barry says any extra expenditure is covered in other areas. “We will face some higher costs for certain products, but within the overall Plan A business case we can subsidise any additional costs on product from savings elsewhere in the business. The overall cost to the consumer is zero,” he adds.
There is also a need for investment in the supply chain if M&S is to fulfil the social aspects of its CSR commitments. But these investments also contribute to the retailer’s long-term profitability or at least become cost-neutral, Barry claims.
He says that in Bangladesh, for example, M&S is working with factory owners to ensure workers there are paid enough to support themselves. “Although that leads to higher wages, we also improve the productivity of those factories through training and that has released the cash to pay the workers more. They get the outcome that they want without costing us or the suppliers any more money.”
Plan A has also been a vehicle for moving M&S into new business areas, notably M&S Energy, which now supplies more than 500,000 households. The service offers gas and electricity through Scottish and Southern Energy, and pledges to return one unit of low-carbon hydroelectric energy to the National Grid for every unit used by customers.
Clearly this kind of consumer involvement will also benefit the retailer. Some of the recycled fabric goes back into the supply chain, while handing on old garments gives consumers an incentive to buy new items, along with the voucher rewards that M&S gives out.
However, M&S was not always so good at making money from CSR. Its former head of internal communications Robert Nuttall says that in the first year of Plan A, M&S bought about a third of the world’s Fairtrade cotton, but clothes made from this stock did not sell well.
Nuttall, now running the corporate responsibility division of PR firm MHP, explained at the LMCE event that some of the cotton went to make T-shirts, which sold poorly, prompting the business to decide that Fairtrade products were not a proposition that held great appeal for consumers. Finding marketable uses for the material “took two years, by which time there was still a pile of Fairtrade cotton”, he said.
Barry at M&S acknowledges that the company bought the cotton in significant volume, but adds: “We very deliberately aimed initially to put Fairtrade cotton into T-shirts because it is a huge volume pull to our business. We knew that we were going to buy a substantial part of the world’s supply in the first year of Plan A because we were making the market. It was M&S’s commitment to drive this commodity in a Fairtrade direction, just as we had with coffee and tea in the past.”
He adds that retailers with the buying power of M&S can help a market such as this to mature, allowing greater economies of scale at the production stage, which in turn allows prices to fall and attract more buyers. But Barry recognises the importance of having a solid business case for the sourcing strategy, and having a viable product in mind at the end of it. So financial gain for any responsibility drive is crucial. As Nuttall says: “Unless sustainability has a strong commercial outcome, it is by definition not sustainable.”
Like M&S, Unilever has set out to entirely reform the impact of its business on the planet and its people (see Case Study, below). While there is an aspect of social conscience behind the decision, there are also significant economic benefits. According to Unilever’s vice-president of sustainability Karen Hamilton, large FMCG manufacturers need to invest in production processes that are environmentally sustainable and that seek to ensure the welfare of people throughout the supply chain.
Like M&S, Unilever has set out to entirely reform the impact of its business on the planet and its people. While there is an aspect of social conscience behind the decision, there are also significant economic benefits
Increased demand around the world for basic raw materials will put a strain on current high-volume production models in the long term. Commodity and energy prices are also ever more unstable, and wages are likely to rise in countries where economic activity is rapidly increasing.
Hamilton at Unilever says it is better for it to use suppliers that pay workers a living wage in return for better productivity, and which have room to scale up and therefore meet demand at competitive prices. Consuming less energy and resources will also mean that Unilever is less sensitive to shifts in these markets.
She says: “We need to be less susceptible to fluctuating commodity costs, particularly with agricultural raw materials, which make up half of our production chain.”
Socially responsibility also apply to products that are often assumed to be unethical or unsustainable, according to Jan Erik Carlson, chief executive of Saga Furs, which produces fur for the fashion industry from farmed mink and foxes. Its pelts have been used by fashion brands Burberry, Roberto Cavalli and Michael Kors among others.
Saga Furs has been involved in promoting the Origin Assured (OA) label, which tracks pelts through the production chain to help make sure animals are treated fairly. This has perhaps been influential in the sudden upsurge in designers’ use of fur at fashion shows this year, and OA has run ad campaigns to sell more of it.
Crucially, Carlson says that some of his customers are willing to pay more for certified fur, which is seeing a resurgence. “You have to invest – and see it more as an investment than a cost. It is clear today that this investment will bring back a return in the long run once you get established and once you get a critical mass.
“We have customers in our auction room that are willing to pay more for a certified fur than a non-certified fur,” he says.
The OA scheme is not without detractors. An investigation by the Daily Mail uncovered evidence of animals being trapped in North America using methods outlawed for cruelty elsewhere – yet the fur is eligible for certification, it reported.
And Nuttall at MHP warns that there is a danger for companies using CSR as a marketing tool. “There is often a disconnect between communications professionals and those who understand the issues from a technical standpoint. That leads to confused and opaque statements,” he says.
CSR might be finding a new role as a profit centre for some of the world’s biggest businesses, but that will only make scrutiny more intense. Brands must make sure that their marketing messages match what they are actually doing and are transparent.
Case Study: Unilever
As one of the world’s largest FMCG companies, the social and environmental impact of Unilever’s business activities will always be huge relative to most other organisations. However, by 2020 it aims to halve the environmental footprint of its products, improve the welfare of 1 billion people and source all its agricultural products sustainably, while doubling its revenues.
There are two strands to this growth strategy, according to Unilever vice-president of sustainability Karen Hamilton: “We will sell more volume of product because a lot of our growth is going to be in developing and emerging markets. We will also develop products that are higher value.”
The environmental impact takes into account emissions, waste production and water use, but the majority of the impact comes from how products are used by consumers. As a result, marketing and design will play an important role in helping to change people’s behaviour.
Hamilton says: “We have done a very in-depth analysis that allows us to see that our direct manufacturing impacts are less than 5%. When it comes to greenhouse gases, for example, almost 70% of the lifecycle impacts are tied up in the way consumers use our products, so we are going to need to innovate.”
Though there are opportunities for cost reduction, there is also a need for investment. This is certainly the case when it comes to Unilever’s sourcing of agricultural products. “You need an initial outlay for setting up some of these schemes, such as for sustainable sourcing of palm oil,” says Hamilton.
Shareholders’ attitudes towards the way Unilever has communicated its new approach to CSR will need to be gauged as results emerge. The share price has been volatile in recent months, with movements both up and down in the days following the unveiling of the Sustainable Living plan.
Hamilton says that both the finance department of the company itself and its shareholders recognise that this is not a “nice-to-do”, but is necessary for protecting Unilever’s future profitability in an uncertain world economy.
Jake Backus, customer sustainability director at Coca-Cola
We are integrating more plant-based plastic into our products and are providing new equipment to our supply chain to do this. This has some start-up costs but we believe our investment will eventually yield a more sustainable supply chain. Over time there will be less volatility in pricing for plant-based plastic when compared with plastic made from petroleum.
In 2009 we avoided the use of 85,000 tonnes of primary packaging resulting in estimated savings of $100m (£60m). In the same year,
our water efficiency improvement avoided $19m in costs and our energy savings resulted in $28m savings.
Jan Erik Carlson, chief executive of Saga Furs
We are at a crossroads. People used to trust the big companies and think that if they bought a fur coat at a particular fashion brand it would be OK. People’s trust in big corporations is not the same any more. In the future we need systems that are more hands-on and have more
Raoul Pinnell, chairman of Bromley Healthcare and former chairman of Shell Brands International
In the energy industry, the case for sustainability is made first from the business perspective. Demand for energy is increasing so fast that it is in the interests of commercial companies that they encourage their consumers or customers to use their
products more wisely. If they do not, there will not be enough.
Ashish Deo, commercial director of Fairtrade Foundation
It is quite likely that businesses will save rather than spend money because one of the biggest drivers behind sustainability is reducing the amount of resource used.
However, if you do it for only part of your business, you are injecting a degree of complexity. If you are a clothing retailer, buying a token amount of any ethical cotton makes your system more complicated, which has knock-on effects.