Examples of How Sustainability Leaders in the Chemical Industry View Value

It would be presumptuous to attempt to describe the many different ways in which chemical companies have created significant shareholder value through environmental strategies.28 My purpose here is to offer a few examples that illustrate the

26There are a number of summaries of this research. For example, see http://www.figsnet.org, Dinah Koehler, "Capital Markets and Corporate Environmental Performance: Research in the United States," http://opim.wharton.upenn.edu/risk/downloads/03-36-DK.pdf, and Donald Reed, "Green Shareholder Value, Hype or Hit?" World Resources Institute, 1998. http://www.getf.org/file/toolmanager/ O16F3346.pdf

27"Sustainability and Performance," MIT Sloan Management Review, Winter 2003 and C. B. Cobb, "Measuring What Matters: Value Creation Indices in the Utilities and Chemical Industries," CBEY Center for Business Innovation.

28For more on approaches to measuring the shareholder value created by corporate sustainability strategies, see Reed (2001).

potential and the breadth of approaches used at DuPont and Dow, two companies that have often appeared at the top of sustainability ratings of the chemical industry.

DuPont has a long-standing reputation for leadership on environmental issues. One of the hallmarks of that has been the degree to which the company has integrated the concept of creating value through sustainability into key business systems.

Perhaps the best example of this is the widespread use of a metric that relates value and environmental footprint, best known as shareholder value added per pound of material produced (a suitable proxy for environmental footprint in many bulk chemical businesses).29 Perhaps the most powerful aspect of DuPont's use of this metric is the range of applications to which it has applied the metric. These include:

• Measuring overall progress at producing more value per unit of environmental footprint over time in a particular business and across the company;

• Comparing businesses based on their relative value per footprint as one criteria for additional investment; and

• Applying the metric to understanding "knowledge intensity" in determining the best long-term portfolio of businesses.

The on-the-ground impact of the use of this metric has been to drive the idea and practice that many production processes can be improved to reduce environmental impact while improving profitability. A great deal of the value DuPont has created through environmental insight has been by profitably reducing the negative environmental footprint.

Despite the important role this metric has played, DuPont does not routinely assess the financial value of sustainability initiatives as an ordinary part of making operating or product development decisions.

While profitably reducing environmental footprint has become a systematic source of value, DuPont has achieved less success applying the concept of sustainable growth to the innovation and new product development processes. DuPont does have examples of new products for which a major portion of the customer value results from the elimination of environmental problems for the customer. Examples of this include:

• Cyrel FAST, an offering that eliminates the need for solvents in the process of making the plates used in certain printing processes. Because solvents require particular handling, specialty "job shops" or printers primarily owned the earlier equipment and produced the plates. With the new equipment and no need to handle solvents, graphic design businesses and others became a whole new market for the system;

29For a more detailed treatment of DuPont's use of this metric, see Holliday (2001).

• Solution Dyed Nylon (now a product of Invista, which DuPont sold to Koch Industries in 2004). Historically, DuPont's nylon customers purchased raw product and dyed it themselves. More recently, DuPont has offered these customers nylon that is dyed to their specifications in the manufacturing process. This has a number of benefits to the customer including the steadfastness and consistency of the colors. For the environment, this process means more of the overall dying process happens in a centralized location with high environmental controls. From the DuPont business perspective, this adds more value to their customers and raises the cost of switching to another material supplier.

While these examples indicate the potential, DuPont has yet to make such new offerings developed around environmental benefits a systematic product of technology-led innovation rather than happy byproducts of other innovations.

Dow has a long history of viewing social and environmental issues as a key part of their business. The company has also carried out specific work on how to embed value creation through sustainability into key business decision-making.

Among Dow's best-known efforts is its work with stakeholders on the value to be obtained from process changes that would reduce local emissions. This work involved collaborating with local community groups near its facilities, a national environmental group, Natural Resource Defense Council (NRDC), and engineering consultants to explore specific process changes.30 The process yielded several projects that met the criteria of both the community and the company.

Dow has also had some success using environmental benefits as a source of innovation in new product development. These include:

• Stalk Board, an alternative to wood fiber board that is made from wheat stalk and does not use formaldehyde;

• Dow's joint venture with Cargill produces PLA, a biodegradable substitute for plastic that is based on a renewable crop rather than a fossil fuel.

While these innovations are worthy of note, it is not clear that Dow has developed the ability to systematically apply an insight into social and environmental problems in developing new products.

Some argue that this lack of a systematic approach to applying sustainability insights to business decision-making was evident in Dow's acquisition of Union Carbide. It appears that Dow took a legalistic view of the risks associated with acquiring the company closely associated with the 1984 tragedy in Bhopal, India. While it is true that Union Carbide reached settlements with strictly limited ongoing legal liability, this did not change the perception held by many that the company did not make those who suffered whole. In a report prepared on behalf of a group of socially responsible investors, Innovest made the case that the risks associated

30For more on this collaboration, see http://www.nrdc.org/water/pollution/ndow.asp and http:// www.nrdc.org/water/pollution/msri/msriinx.asp

with Bhopal and a host of other developments at Dow justified downgrading the company's environmental rating significantly (Innovest, 2004).

Overall, the chemical industry has approached sustainability as a way to preserve their right to operate in the face of significant environmental challenges. That is obviously an important source of value. While there are a number of examples of applying sustainability to improve margins, there are fewer examples of applying the concept to drive revenue growth.

The majority of sustainability investments to date in the chemical industry have played the role of insurance to guarantee current right to operate until legacy issues pass their statute of limitations (if there is such a thing with such legacies). Had the chemical companies not acted to preserve their right to operate, the value lost could have been enormous, even though we do not normally think of the value of a dodged bullet.

0 0

Post a comment