In the book Greenthink (Disruption Books, 2015), Rick Fedrizzi makes a case to business leaders that sustainability is profitable. In the following edited excerpt, Fedrizzi, the CEO and founding chairman of the U.S. Green Building Council and a former executive at Carrier Corporation, explains how businesses can capitalize on the "green" movement.
Environmental degradation is taking a heavy toll on business today. It's not only polluting the air we breathe and altering the climate of our planet--it's starting to suck the air out of the lungs of the private sector.
To use a phrase economists like, there's no free lunch. The environmental disasters we've taken for granted are starting to catch up with us, and paying for these losses and other externalities is threatening the very foundation of our global economy. Indeed, it's hard to deny what's going on: the economic scales are tipping in favor of sustainability.
In 1991, economists Gene Grossman and Alan Krueger found that in certain cases, and in certain places, the relationship between economic development and inequality is similar to the relationship between economic development and pollution. At first, rising incomes damage the environment. But then the trend reverses, and more wealth coincides with more conservation.
For two decades, this compelling theory has continued to elicit intellectual debate and further study about whether economic growth does indeed lead to environmental stability. Some of the controversy stems from the fact that this relationship is clearer for some pollutants--such as sulfur dioxide, which Grossman and Krueger initially studied. For others, the data is simply not available. And, as is common with these kinds of studies, it's not always the case that correlation implies causation.
Despite all the uncertainty, I do believe that there is a positive relationship between economies and environments. I just think that most economists don't see the whole picture: It's not just that more wealth leads to sustainability. Sustainability also leads to more wealth.
In 2015, investment firm Morgan Stanley issued a landmark report titled "Sustainable Investing's Performance Potential." In the past, the report noted, investors have been leery of putting their money behind companies that adopt strong environmental, social, and governance (ESG) policies, fearing that such progressive businesses would fare worse in the marketplace. But Morgan Stanley's more recent analysis upends that outdated conventional wisdom.
The report analyzed the market performance over a seven-year period of 10,228 mutual funds and 2,874 separately managed accounts. The results are incredible--but not surprising (to me, at least). According to Morgan Stanley, "Investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments." For instance, funds focused on sustainability "met or exceeded the median return of traditional equity funds for 64 percent of the time periods examined." And from 2008 to 2014, "sustainable equity funds met or exceeded median returns for five out of six different equity classes examined, for example, large-cap growth."
But you don't need a study of 10,000 mutual funds to see that sustainability is profitable--individual companies are also capitalizing on sustainability in profound ways. Take United Technologies Corporation (UTC), one of the largest manufacturers in the world, and one of the world's largest companies, period, with $65.1 billion in net sales in 2014. It's the parent company of several famous American brands, including Carrier, Pratt & Whitney, and Otis Elevators. Between 2006 and 2014, UTC reduced its greenhouse gas emissions by 30 percent. It cut its company-wide water consumption by 33 percent. And it reduced total industrial process waste by 35 percent. The markets have rewarded UTC for its efforts. During the same eight-year period in which the company was increasing profitability by focusing on sustainability, its stock price climbed by a whopping 105 percent.
For Natura, a Brazilian cosmetics company founded in the late 1960s, sustainability isn't just their strategy; it's their brand. Over the years, Natura has consulted with everyone from nongovernmental organizations to rural Amazon communities to find better natural ingredients for its products--and newer, more sustainable ways to extract them. According to the Guardian, the company uses data it gets from suppliers--including figures for emissions, water usage, and waste--to calculate the environmental cost of a particular source. Natura then "uses a 'shadow price' for these factors to select suppliers with the lightest footprint, which will also create financial benefits." This sustainable sourcing not only has helped save money and the rain forest but, according to chief executive Alessandro Carlucci, has had a "big influence" on customers across Latin America, and even as far away as France, who are increasingly choosing sustainably sourced products. Natura's business model has paid off big-time. From 2011 to 2014, Natura experienced four straight years of revenue growth and increasing profits. And in 2014, brand consultancy Interbrand named Natura the number one retail brand in Latin America.
The environment may not have a ticker symbol or be listed on any stock exchange. As companies and investors around the world are starting to note, however, that doesn't mean you can't invest in--and profit from--sustainability. Indeed, businesses large and small are beginning to realize that, like a mob boss, Mother Nature calls in her debts unexpectedly, charges steep interest, and makes you take a beating--sometimes with gale force winds.
As a result, many enterprises are doing something different, something new. They're consuming less of nature's bounty and conserving more of it. They're realizing that, as low as the environment can drive a company's P&L, sustainability can lift it even more. Yes, Mother Nature may be a brutal creditor, but she also makes a generous business partner. Sustainability is, you might say, an offer the private sector can't refuse.