Under pressure – the impact of the recession on the sustainability agenda

The recession is having a huge impact on corporate spending, not least on sustainability budgets. The common advice is for businesses to adopt green principles and invest in low-carbon technologies to help them through the downturn. But are companies listening and acting on that counsel, wonders Tom Idle

The UK’s latest recession, brought about by the global credit crisis, is deep. GDP fell by 2.1% at the end of last year and is expected to drop 5% before things improve. Manufacturing output is down 7% with the CBI forecasting a drop to 10% this year. The unemployment figure stands at 1.9 million and by the beginning of next year there could be up to three million – more than 9% of the UK working population – out of work.

Of course, we’ve been here before. People suffered the Great Depression in the 1930s because of a reduced demand for British goods abroad. The oil crisis brought the country to its knees in the mid-70s, unemployment rose by 120% as a result of the early 80s recession which came at the start of Thatcher’s stint as prime minister and ten years later a savings and loans crisis in the US saw GDP drop 8% and it took 13 quarters for the economy to recover.

So, here we are again.

As in all of these bleak economic periods, business takes action; jobs are slashed, salaries frozen, recruitment drives halted, departmental budgets cut, and all staff – from chief exec to tea lady – hang on for dear life until ‘normality’ returns. Less fortunate companies slip off the radar entirely, into administration, never to emerge again.

But never before have corporate sustainability budgets had to be considered. That’s because, in previous recessions, the sustainability budget didn’t even exist.

Companies being concerned about the environmental and social wellbeing of the planet is a relatively new phenomenon; a few exceptions aside, most firms first

started exploring this during the past decade. So, the corporate sustainability budget has never before faced the challenges of an economic downturn.

Sustainable Business has championed those who have continued investing in energy efficiency, renewables and low-carbon innovation throughout this period of doom and gloom. But, what is actually happening in the market? If sustainability is about the triple bottom line of economics, environmentalism and being a good citizen, then the balance of the three ought to be maintained. But, is that the reality?

“Amid the economic chaos, one question looms large for most sustainability executives: can we afford to continue our green efforts in a down economy?” asks Joel Makower, author of Strategies for the Green Economy. “The question itself is telling because it presupposes that environmental activities remain the domain of ‘nice to do’, not ‘need to do’, that only companies that are doing well can afford the luxury of going green.” Just how well sustainability programmes fare during this recession depends on how much companies really believe in their short-term and long-term benefits.

For the firms that see greenhouse gas reduction as merely window-dressing, environmentalism will go out of the window – especially if they are battling to survive. However, if sustainability is about cost reduction and energy efficiency, the recession might even accelerate activity. “The luxury of going green can take on greater urgency during tough times,” says Makower.

A new report by the Economist Intelligence Unit (EIU), Countdown to Copenhagen, offers an excellent snapshot of just how seriously the climate change agenda is being taken by business across the world. More than 500 global C-level executives from a range of different sectors were interviewed as part of the survey to find out if sustainability has dropped off the boardroom agenda. Its findings are inconclusive; it is less of a priority for some businesses, and more important now for others.

Unsurprisingly, when asked how important improving energy efficiency across their operations would be during the next two years, the vast majority (73%) of responding business leaders said it would be a high or moderate priority. Improving the local environment, reducing emissions and developing new products and services that help reduce environmental impacts, have also been penned onto to-do lists, although less emphatically.

Overall, carbon-cutting efforts do remain important. Over half (53%) of businesses consider their carbon impacts to be ‘very’ or ‘quite’ important and 54% have a coherent policy in place to address climate change. But just how impressive the policy is varies wildly – some concentrate purely on their immediate operation and some seek to encompass impacts further down the supply chain. In fact, the majority of corporate climate change strategies tend to drill down on energy efficiency and little else.

“The UK is wholeheartedly embracing the green revolution,” according to an optimistic Tessa Laws, a partner with Rosenblatt Solicitors. The firm recently carried out an online survey that found 20% of companies that have a corporate environmental strategy plan to ramp it up in the next three months, despite the costs involved. “Most companies are being true to their environmental commitments and only a handful have felt the temptation to dispense with any activities that they did not feel were absolutely necessary in the current financial climate,” adds Laws.

According to the study, two in five firms would rather make cost savings elsewhere than let their green credentials slip. So, UK firms are turning off lights, limiting their printing and taking the tube instead of taxis.

All of this stuff is considered the low-hanging fruit of corporate sustainability. But there is hope that, if this activity becomes the business norm of tomorrow, companies will broaden their horizons. Dawn Rittenhouse, director of sustainable development at chemicals firm DuPont, says that climate change journeys “generally begin with your own footprint, then you start to expand to look at the broader impact”.

Unfortunately, broad-minded companies are in the minority. Around 23% of companies have assessed the carbon impact arising from the lifetime usage of their products or services, while just 19% have looked at supplier emissions.

More impressive is the focus on developing new offerings that might help in the global warming battle. Around 40% of firms have developed new products or services in the last two years. Engineering giant GE’s Ecomagination programme, a commitment to build innovative solutions that solve environmental challenges, raised £17B in 2008. A quarter of the revenue generated by Siemens came from its energy-saving products. And Noel Morrin, senior vice president for sustainability at Swedish construction company, Skanska, says that the firm’s sustainability credentials were responsible for their winning two $1B contracts last year.

Meanwhile, most carmakers have an all-electric or hybrid vehicle now available, or at least in production and firms like Boeing are making good strides in the development of low-carbon airplane models.

This type of activity looks set to continue – introducing innovative new products will be a high priority for 30% of the companies polled by the EIU – but probably not at the rate it might have done if the recession had not hit. Scott Wicker, sustainability vice president at logistics firm UPS, argues that customers ask about carbon use across their supply chains, but are reluctant at this stage to spend money on neutralising it. While, Rittenhouse believes “people will purchase a product that is better for the environment, but they won’t pay extra”. In fact, just 15% of businesses believe customers are willing to pay more for green products.

So, with a significant minority of businesses looking to profit from the market potential of carbon reduction, few still are going further to consider actual adaptation to changes in the environment. Three-quarters of companies agree that they have been slow to respond to the likely long-term impact of global warming on their business. Disruptions to agricultural productivity will affect food and beverage companies. Unusual weather patterns will send ripples throughout all sectors, with a direct impact on the insurers.

There has not been no effort made, just very little. One in four firms have made some degree of preparation, while 18% say they have worked to bolster their supply chains for possible disruption. But such activity is bottom of the priority list for the next two years, with many seeing adaptation as something that can be put off – a move they can ill afford, according to Bergstrom of supply chain management business, Li & Fung.

“There will be changes that companies will need to factor into strategy in terms of resource availability, increased costs, taxes and liabilities,” he says. “Many still need guidance to fully evaluate the risks and opportunities as part of their adaptation strategy.”

Such a strategy is two-pronged: managing risk and considering the business opportunities. The first is about supply chain resilience and the ability of company operations to continue in the face of extreme weather events, like drought or flooding. Firms like Unilever, which rely on agriculture for 70% of its raw materials, is already having to deal with the effects of changing rainfall patterns in certain parts of the world.

The second is about finding markets that might be created by a warming planet. DuPont has developed drought-resistant seeds. Unilever’s Surf Excel Quick Wash product needs half as much water as competing brands. Skanska has started building homes with thicker walls that are naturally cooler in hot weather and warmer in cold temperatures.

It is clear the current importance of climate change strategies varies hugely. Companies seem split over whether carbon reduction makes money or represents a cost. Business likes the quick-wins associated with energy efficiency, but there will come a time in the not-too-distant future when larger investment is needed to make further gains.

For some companies that are struggling with cashflow or liquidity problems, investment of any kind is off the cards. At the moment, it is all about access to capital and the speed of return on investment.

For businesses that are not in economic dire straits, some energy-cutting projects make obvious sense, particularly when the payback period is so short. HSBC installed efficient light bulbs in its New York head office and the $750,000 spent was returned in efficiency savings in under a year. For companies that are just setting off on their carbon-cutting journey, easy wins like this are simple to find. But progress on carbon reduction will inevitably slow and substantial investment will be required, with longer payback periods.

Business rarely welcomes regulation or taxation, but 56% of the executives polled by the EIU argue that more rules are necessary if business is to change its ways and become more sustainable. Less than one in ten believe more regulation would impair economic progress and growth.

The US Climate Action Partnership and the Europe-based Corporate Leaders’ Group on Climate Change have been pushing governments for some time now for action on carbon output. According to the survey, this sort of lobbying is now becoming the norm, with business pushing for tighter rather than more lax domestic and international carbon emissions targets. Recognising that government action is inevitable, companies want to know up front what the regulatory changes will look like. “Companies want to push governments to make clear decisions so that, for the next couple of years, there can be more certainty,” says Dr Eckhard Plinke, head of sustainability research at the Swiss-based Sarasin Bank.

“You are only going to spend money if you are pretty certain you will get a return,” adds Francis Sullivan, HSBC’s environmental advisor. Skanska’s Morrin agrees: “We want to know what the rules are, and we don’t want the rules to keep changing otherwise you can’t plan.” In fact, two-thirds of business leaders say that existing uncertainty in government policy is making it difficult to plan climate change strategies – especially for industries that are capital intensive and work on lengthy project cycles.

However, the specifics of the regulation seem to matter less than the way it is applied. Business requires a levelling of the playing field – both domestically and internationally – which is why the UN climate change negotiations in December are so important. The fear is that strict social and environmental legislation in the developed world will hinder competitiveness relative to rival firms in the likes of China and India. Carbon leakage might also be a problem – where carbon intensive companies set up operations in countries with less stringent standards.

The journey towards a low-carbon economy is a long one. Some firms are at the very start, while some are making good progress. As the UK, and the world, enters what is shaping up to be the toughest economic environment since the second world war, businesses have mixed priorities – from taking simple energy efficiency measures to large-scale investment in new technology.

And these decisions will be tested. “Businesses know they need to keep up their efforts to recognise their social and environmental responsibility,” says Colin Crooks, CEO of Green-Works, a furniture recycling firm. “The challenge now is to continue to do so when cost has become a prime concern.”

Those companies unsure of what to do next might do well to remember last year’s Carbon Trust report. Climate Change – A Business Revolution claimed that tackling global warming could create opportunities for a business to increase its value by up to 80%. But if it became a laggard, 65% of its value would be under threat.

And governments the world over have a responsibility to ensure their industries find it as easy as possible to make progressive and positive moves on carbon reduction. Because, as the Stern Review so clearly argued, not completing the journey is not an option, economically, socially or environmentally.

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