CASE STUDY When Is a Business Sustainable?

It is difficult to find many institutions in contemporary culture that have not become attached to the idea of sustainability. We find sustainable used to modify not only business but also agriculture, architecture, buildings, construction, communities, consumerism, development, economics, ecosystems, forestry, investing, transportation, and on and on. Within business, we find sustainable management, marketing, accounting, operations, and investment. Other areas such as corporate strategy and corporate reporting have almost entirely evolved into corporate sustainability. Thousands of corporations, for example, have replaced the traditional corporate annual report with an annual sustainability report.

But one should be leery when any idea is so ubiquitous, especially when it was originally introduced as a critical alternative to the status quo. Has sustainability lost its meaning? Is it only a passing fad, or worse, is it a public relations smokescreen behind which anything goes? How do we know if, and when, a business is sustainable and adhering to the best practices of sustainability?

As most commonly used today, the concept of sustainability is almost forty years old. It can be traced to a United Nations commission that studied questions of economic development, environmental protection, and future generations in the 1980s. Named for its chairman, former Norwegian Prime Minister Gro Harlem Brundtland, the Brundtland Commission published its findings in 1987 in a book titled Our Common Future, which offered what has become the standard definition of sustainable development: Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs. This definition underlies the three pillars of sustainability mentioned previously: economic activity must be economically sufficient to meet the needs of a growing worldwide population, it must be ethically responsible in meeting those needs, and it must do so in an ecologically responsible manner.

In some ways, sustainability is an intuitively clear idea. A practice is sustainable if it can continue indefinitely. A simple example comes from finance. A sustainable budgeting practice would be to put money into savings and spend only the interest generated from those savings. Spending down the principalspending the principal as well as the interestis unsustainable. Income will decrease as the savings are spent and income will eventually run out. Aesop's fable about the goose that laid the golden egg captures a similar insight. Limiting your consumption to the golden eggs is sustainable; eating the goose itself is not.

Some who are sympathetic to the goals of the Brundtland Commission interpret the universal attention to sustainability and the explosion of businesses who now identify with sustainability as an indication that something is amiss. To understand this skepticism, we should ask, What is being sustained? Some who have jumped on the sustainability bandwagon believe what we should sustain is the status quo. From this perspective, to commit to sustainability means to commit to finding ways to keep doing what we are doing. If the present patterns of consumption, production, and growth are what have led to the current environmental predicament, it should be clear that not everything we are presently doing can be sustained. Some critics, for example, argue that sustainability can not be applied to the consumption patterns of industrial societies such as the United States, or to an energy industry built on fossil fuels. Finding consumer giants such as Walmart, or oil companies such as BP, claiming allegiance to sustainability convinces these critics that the concept has been severely corrupted.

In a similar vein, other critics claim that sustainability is unjust if it implies that the path to economic development enjoyed by Western industrialized countries is no longer open to the developing world. If sustainability means sustaining the status quo for the present alignment of the world's economies, then China, India, Brazil, Pakistan, Russia, and Indonesia decidedly are not in favor of sustainability. These critics interpret the West's call for sustainable development as the rich telling the poor that they should be satisfied with what they have and find another way to prosperity.

This complexity is reflected in attempts to measure sustainability and to compare or evaluate various business activities on sustainability grounds. How do we know if a business is sustainable or not? How could we improve a firm's sustainability performance? An old maxim of business management is that if you can't measure it, you can't manage it. Can we measure sustainability? Are there levels of sustainability? How can we distinguish actual sustainable practices from mere public relations hyperbole? Are there some industries that should not find a home in a sustainable future?

A well-known step in the direction of measuring an individual firm's sustainability performance is triple bottom line accounting, which expands corporate reporting to include environmental and social performance as well as the traditional financial measures. Although there are widely agreed-upon standards and principles for financial accounting, nothing similar exists for environmental or social performance. What is the measure of a company's environmental performance? By what measure would we say that a firm has improved its social performance? In most cases, firms simply list the environmental and social activities they judge to be praiseworthy. Richard Sherman examines the concept of triple bottom line accounting in detail in Reading 12.4.

Similar questions can be raised when comparing sustainable performance among and between individual firms and entire industries. Is Walmart more of less sustainable than Target? Is Walmart more of less sustainable than BP? Is the retail sector more or less sustainable than the energy sector? To address such questions, numerous rankings are regularly published portraying a top 10 or top 100 sustainable corporations.

For example, Corporate Knights, a Canadian publication specializing in business and sustainability, publishes an annual Global 100 list of the world's most sustainable corporations. This list is described as the most extensive data-driven corporate sustainability assessment in existence. Firms are evaluated against their industry peers using eleven key performance indicators: energy, carbon, water, and waste productivity (all measured in terms of revenues per unit produced); leadership diversity; clean capitalism pay link (tying at least one senior executive's compensation to sustainability performance targets); percentage of tax obligation paid in tax; CEO/average worker pay ratio; safety record; revenue spent on research and development; and employee turnover. Rankings among peers are then adjusted based on the relevant industries ranking on a global financial index, assuring that an industry is represented on the Global 100 list proportionately to how it ranks in terms of the world's largest industries.

According to Corporate Knights president Toby Heaps, the goal of such rankings is to help move all companies toward a more sustainable future. If you can objectively score companies on meaningful criteria and those scores can be used to influence market forces, it will be possible to divert capital away from inefficient, irresponsible firms and toward more resource-productive and responsible ones.

Questions can be raised about both the specific metrics and the method of rating and comparing industries. For example, why is tax payment a measure of sustainability? Should any oil and gas companies be on a list of the world's most sustainable companies, let alone at the same proportion that they are represented among the world's largest industries? How can an oil company (Statoil at number 3 in 2012) be ranked higher than a wind turbine company (Vestas, number 31 in the same year)?

Well-known business consulting firm Deloitte also has developed a ranking of sustainable businesses and industries, using an index modeled on a goal of zero environmental impact. Developed in cooperation with John Elkington, originator of the triple bottom line concept, Deloitte's Zero Impact Growth Monitor assesses companies in terms of how their strategies and practices support the idea of zero impact growth. Deloitte's 2012 report concluded that even among the leading companies in the world in terms of sustainability there are really only six that truly excel in itUnilever, Puma, Nike, Nestle, Natura and Ricoh, and even these companies can do better.

Interestingly, only four of those six companiesNatura ranked number 2, Unilever ranked number 82, Ricoh ranked number 93, and Nestle ranked number 94appeared on the Global 100 list for 2012.

1. By what criteria would you judge a company as sustainable?

2. Are some industries simply not sustainable?

3. What, exactly, is the role of social factors such as diversity, tax payments, and CEO/average worker pay ratios in judging sustainability? How do these factors connect to the definition of sustainability?

4. The Bruntland Commission's definition of sustainability was targeted at macro-economic development. How does this definition relate to individual firms and industries? Can unsustainable firms or industries thrive in a sustainable economy?