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B School
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“The opportunities for sustainability are immense”
Prof. Anant K. Sundaram, Faculty of Business Administration at the Tuck School of Business works with Senior Managers of companies on how their financial fundamentals and performance metrics drive market values and P/E ratios. In an exclusive conversation with B&E’s Amir Moin, Prof. Sundaram discusses the issue of sustainability and how companies can effectively implement it.
Issue Date - 15/03/2012
We live in a world that is undergoing rapid transition. For now, our setbacks are more or less financial and economic in nature. But as we further globalise amidst an explosion in population, the world that we know of will find itself encountering a completely different set of problems. It is therefore imperative that corporations around the world take up the issue of sustainability with urgency. In this exclusive conversation, Anant K. Sundaram, Professor of Business Administration at the Tuck School of Business, tells B&E, how companies should perceive sustainability and what they can do do make it an integral part of their business model.

B&E: Sustainability is something which a lot of companies promote now a days. While some are actually pursuing strategies that make sustainability a reality not just in terms of application but also profitability, others use it as a mask to look good. What is your view of sustainability and how is it helping the company’s bottom line?

Anant Sundaram (AS): Step back for a moment and think about what ‘sustainability’ means, since it is misused a lot. In a literal sense, it means ‘making something live forever.’ This, of course, is plainly impossible to do and hence not a terribly useful definition. The definition used in policy and NGO circles goes something like ‘meeting society’s needs today without compromising the needs of future generations.’ This, in turn, is a highly loaded definition: Who is to judge what anyone’s needs are? How can we know what future generations might need relative to today’s? The bottom line is, these traditional definitions of sustainability have a condescending, and frankly, impractical view about the world as it is and what people’s wants are. Corporations live in a practical world. They manage scarce resources and juggle the conflicting needs and imperatives of multiple constituencies, all with a view to create value. From their point of view, sustainability is fundamentally about meeting people’s wants for goods and services by consuming as limited a set of resources as possible, keeping their footprint associated with the side effects of such use minimal.

This means efficiently using air, water, minerals, metals, fossil fuels, and other natural (including biodiversity) resources, in a manner that mitigates – or even zeroes out – the footprint associated with pollution, waste, and emissions. Hundreds of good companies – whether it’s a Walmart trying to drive efficiencies in its supply chain, an Apple in its product design that emphasizes conservation, or an Infosys in its building and data center processes that obsesses over energy efficiency – adopt this view. Surely, there are some that will try to use it “as a mask” to look good. However, those will be short-lived efforts, perhaps even short-lived companies. At the end of the day, the ones that do not see the links between sustainability and efficiency will leave value-creation opportunities on the table, thereby not being able to compete against their more efficient peers. In the process, they will be the first to fall by the wayside.

B&E: Why is it that sustainability, most of the times, comes across as a well written page in annual reports? ??

AS: Yes, it is indeed true that companies sometimes wax eloquent statements in their websites and annual reports on sustainability-related achievements. But I do not find it to be problematic for two reasons. Both reasons have to do with the fact that there is a self-regulating aspect to it.

One, the more someone claims they are ‘sustainable’ and trumpet their successes, the more likely it is that they will be held accountable: i.e., do they do what they say they do? After all, there are people out there – NGOs, investors, auditors, board members, public interest groups, regulators – watching your every move, and looking for the right excuse to pounce on your missteps. If you are going to go the route of shouting from the rooftops about your sustainability successes, you had better follow through. You had better not be seen as dissembling or lying. The long term consequences of breaking trust, in terms of public cynicism it creates about your business, could be devastating.

Two, many of these PR efforts are internally-focused as they are external. While most of us, as individuals, place high personal value on sustainability, we often don’t live up to it ourselves. For both these reasons, most good companies I know are, if anything, somewhat cautious about making public sustainability-related claims. They would rather put out something that is verifiable (i.e., not only true, but can be verified to be true) and can be sustained over time, than run the risk of trumpeting unsupported claims. Or even worse, having to backtrack or pull the initiative a few months later.

B&E: What should companies do to make sustainability an integral part of their business?

AS: As you have already suggested, the way companies make it an integral part of their business is to make sure that it is integrally aligned with the value-creation process. Value-creation is, after all, the primary purpose of business. Where does value come from? That’s no mystery: value comes from producing an extra dollar of revenue for a given cost (revenue synergies), or producing that revenue at a lower dollar of cost (cost synergies), or from efficiencies in how we invest capital to produce value growth for the future.

Next, we want to do a careful audit of whether and how being more sustainable matters with regard to each of the three. For example, are our customers willing to pay more to buy our product if it is seen as more sustainable compared to one that our competitor sells? Can a focus on sustainability lead to, say, more energy efficient processes, thereby not only lowering our costs but also our carbon emissions and other forms of pollution or waste? As to our investment practices, the company needs to ask questions such as: What does sustainability mean in terms of whether and how I need to retool my supply chain? My retail chain? The way in which I make my capital budgeting decisions? Redesign my business processes?

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