Connecting Innovation with Sustainability

Professors Tima Bansal (Ivey Business School), Joel Gehman (University of Alberta), and Marie-France Turcotte (Université du Québec à Montréal) have been awarded a $2.5 million grant from the Social Sciences and Humanities Research Council of Canada to help companies connect innovation with sustainability. In this Q&A, the researchers discuss why this work is so important, what it will accomplish, and how businesses can get involved.

Q1. Why do innovation and sustainability need to go together? How hard is it to accomplish this in business?

Answer: Sustainability is about creating shared value—value for the business and for society simultaneously. It means business activities benefit a range of stakeholders—shareholders, employees, the community, society, the ecosystem—today and over time.

But if sustainability was easy, everyone would be doing it well. It’s not easy. It’s complex and it’s uncertain. In an effort to simplify, firms often think about sustainability as an ‘add on’ to what they’re already doing. This approach results in a vastly distorted picture of a firm’s long-term sustainability potential.

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Sustainable Microbreweries

I was recently interviewed by Nikki Wiart for a story about “Sustainable Microbreweries.” Other interviewees include my University of Alberta colleague Matthew Grimes, and Neil Herbst, owner and founder of Alley Kat Brewing Company, Edmonton’s oldest microbrewery.

The segment covered a range of issues: the importance of distinctiveness and legitimacy, the liability of newness, and some of the policy considerations related to small and large businesses. Below is one quote from the interview:

A lot of small businesses [and] new startups face a similar set of challenges, which [are]: one, around distinctiveness. What is my point of difference? How do I compete in the marketplace? But then [two] also around legitimacy. So, how is it that my customers and other stakeholders are going to take me seriously and think that I am viable? … Whether you are a microbrewery or some other kind of business, those are the kinds of challenges you are facing.

The interview was broadcast on Terra Informa, a weekly environmental program produced by CJSR and syndicated to about 50 radio stations throughout Canada. The interview starts about 2 minutes into the program and runs about 10 minutes long.

In addition to Alley Kat Brewing Company (which was founded in 1994), two other microbreweries call the Edmonton area home: Amber’s Brewing Company (founded in 2007) and Yellowhead Brewery (founded in 2010). Of note, Yellowhead Brewery is located in the space formerly occupied by Maverick Brewing Company (which was founded in 2005 and went out of business in 2007). The Alberta Small Brewers Association counts 11 members throughout the province.

Dow’s Sustainability Strategy

The March 19, 2012 issue of Fortune featured an interview between Geoff Colvin and Andrew Liveris, Chairman and CEO of The Dow Chemical Company (NYSE: DOW).

Entitled “Dow’s New Direction” I found several snipets of the interview to be interesting.

What’s Dow’s strategy now? This is the third great transformation of the company. It started out as an inorganic chemistry company 115 years ago. It became a petrochemical and plastics company. The transformation of the past seven or eight years is to a science-based company that takes feedstocks and adds value to them. So less commodities. We’re bringing in biological science, physics, chemistry, material science.

Basically, Liveris is offering a real-time narrative that makes sense of Dow’s past legacies while seeking to insure Dow’s future relevance. Later, Liveris connects these “great transformations” with Dow’s sustainability journey.

I think we’ve really elevated our position, representing ourselves not as Dow Chemical but as Dow, a company based on sustainable business… “Sustainable” is no longer an option, it’s an adjective — sustainable business, sustainable science, sustainable solutions.

Finally, an interesting comment that I don’t believe has received much attention: sustainability as a recruiting strategy.

Our recruiting strategies have changed with our advertising strategy, rebranding the company around the human element and sustainability, presenting a company that is innovation-centric vs. the notion that it was a legacy company in commodity chemicals.

Strategic Social Responsibility

Some interesting sound bites in a recent New York Times article on a large desalination project in China. Although the $4 billion Beijiang Power and Desalination Plant is “a technical marvel,” “the desalted water costs twice as much to produce as it sells for.”

“Someone has to lose money,” Guo Qigang, the plant’s general manager, said in a recent interview. “We’re a state-owned corporation, and it’s our social responsibility.” In some places, this would be economic lunacy. In China, it is economic strategy.

For more in-depth coverage, see Water World’s report on the Chinese desalination market.

Shareholder Activism, Corporate Boards and Sustainability Accounting

When it comes to the issue of sustainability accounting, corporate responses are all over the map. Some corporations have voluntarily reported on a host of what are now called environmental, social and governance (ESG) factors for more than 20 years (e.g., Kodak), whereas as others have generally tried to avoid doing so (although the empirical evidence suggests that such a position is becoming less and less tenable). And of course, there are a host of intermediate responses, in terms of when companies decide to account for sustainability, and in terms of what they count as sustainability, and how they account for it.

Shareholder activism is one of many factors which might influence if, when and to what extent a corporation chooses to produce a sustainability account. With that idea in mind I was intrigued by a recent press release from Harrington Investments:

Intel corporation has agreed to amend the Charter of the Corporate Governance and Nominating Committee to include “corporate responsibility and sustainability performance” into the committee’s overall policy responsibility. Intel also provided [Harrington Investments] with an outside legal opinion stating that under Delaware Law directors have a fiduciary duty to address corporate responsibility and sustainability performance as specified in the committee charter.

Harrington Investments describes itself as “a 28 year-old Napa, California-based socially responsible investment advisory firm that manages assets of individual and institutional investors requiring social and environmental as well as financial portfolio performance.”

This was the second year in a row that Harrington had introduced a shareholder resolution to amend Intel’s bylaws to create a Board Committee on Sustainability. Although Intel initially opposed the resolution, it later engaged in a dialogue with Harrington. As of March 18, 2010, Intel’s Corporate Governance and Nominating Committee charter now requires its that the committee:

reviews and reports to the Board on a periodic basis with regard to matters of corporate responsibility and sustainability performance, including potential long and short term trends and impacts to our business of environmental, social and governance issues, including the company’s public reporting on these topics.

Currently, Intel’s Corporate Governance and Nominating Committee is chaired by David B. Yoffie.  Other members include Reed E. Hundt, Jane E. Shaw, and John L. Thornton.

College Sustainability Report Cards

One trend I’ve been paying attention to lately is the growing tendency for organizations to provide an account of their sustainability. In fact, thousands of companies now voluntarily report on environmental, social and governance issues (ESG). Of course, some organizations prefer not to be so transparent, either on principle, or because they’d rather keep their dirty laundry private. But in those cases where organizations are unwilling to voluntarily offer their own sustainability accounts, detailed ratings and evaluations are increasingly available through ASSET4, Goldman Sachs SUSTAIN, KLD and others. And in August 2009, Bloomberg’s 250,000 customers gained access to ESG data on more than 3,000 public companies at no extra charge.

Synthesizing these trends has led me to postulate what might be termed the “inevitable sustainability accounts” thesis. Love them or hate them, whether by choice or compulsion, over the past 10 years or so sustainability accounts have become a virtual requirement for large, complex organizations.

With that general thesis in mind, I was intrigued by news of the 2010 College Sustainability Report Card . In much the same way KLD rates some 4,000+ global public companies across more than 200 sustainability indicators, the Sustainability Report Card graded the sustainability efforts of more than 300 public and private colleges and universities with the largest endowments, from Harvard University ($26 billion endowment) to West Los Angeles College ($0 endowment). In other words, my “inevitable sustainability accounts” thesis seems to not only cover the realm of public companies, but also the realm of another sector of large, complex organizations: higher eduction.

Grades were determined by assessing performance across 43 indicators in nine main categories, including:

  1. Administration
  2. Climate Change & Energy
  3. Food & Recycling
  4. Green Building
  5. Student Involvement
  6. Transportation
  7. Endowment Transparency
  8. Investment Priorities
  9. Shareholder Engagement

Among the 332 schools evaluated this year, 8% of schools earned cumulative “A” level grades, 45% earned “B” level grades, 34% earned “C” level grades, and 13% earned “D” level grades.

Of local interest, Penn State received a B grade as announced on the PSIEE website. A detailed summary is available at GreenReportCard.org. As a point of comparison, Cornell University, my undergraduate Alma Mater, also received a B grade. However, while a B grade put Penn State in the top half of the Big 10 conference, a B grade left Cornell in the bottom third of the Ivy League conference.

Given these apparent systematic differences between the two conferences, an interesting exercise might be to think about possible explanations for “grade” variations across the larger sample. In short, can we “predict” the grades these colleges received? And if so, on what basis? Just off the top of my head: location (blue state v. red state, urban v. rural, single campus v. multi-campus), average SAT scores, admission selectivity rates, endowment size, state funding, research grants, governance structure (centralized, decentralized, federated, etc), athletic program revenue, responsiveness to ESG past issues (e.g., recycling, South African investments, sweat shop labor, etc), characteristics of the top management team (“TMT”; e.g., age, gender, educational and functional background, level of discretion, etc), values of the TMT (egoistic, altruistic, biospheric, etc.), participation in the UN Global Compact.

Although this might seem like a relatively undisciplined list, behind each factor are theoretical reasons why variations might play a contributing role in explaining a college’s sustainability grade. No doubt reasonable people could come up with even more possible explanations if they spent more than 5 minutes thinking about it.

What factors would you use to predict grades? Add a comment or send me an email with your ideas.