The life sciences multinational has won multiple awards for sustainability. But it’s not just about doing the right thing for Royal DSM. Companies with a strong focus on sustainability make more money, explains IMD entrepreneurship professor Benoit Leleux.
In the 19th century, British naturalist Charles Darwin noted that it was not the strongest of the species that survived, but the most responsive to change. In the rapidly evolving economic landscape of the 21st century, successful international companies will also be those that adapt best to the challenges posed by emerging megatrends. The latter include population growth, a seismic shift in wealth from developed to formerly developing countries, climate change and surging energy demands.
Since 2010, Royal DSM, a Dutch multinational life sciences and materials sciences company, has been developing a strategy to capitalize on these trends. The strategy has four main drivers: A focus on high-growth economies, innovation, sustainability, and the use of acquisitions and partnerships.
For Feike Sijbesma, company CEO since 2007, businesses cannot wait for government legislation to contain the insatiable human appetite for consuming more resources than the planet can afford. Companies must act.
“The modern world man has helped to create isn’t always ideal for sustaining a stable and prosperous future. This is precisely why sustainability is now our fundamental business driver. It’s not just a condition for doing business, but it is an objective in itself,” said Sijbesma.
‘Harvard Business School’s Professor Robert Eccles published a paper providing evidence that companies with longstanding cultures of sustainability outperform peers. He put the difference at about 4.8% per year.’
Adaptability has always been part of the company’s DNA since its origins in 1902 as a state-owned coal mining company. It first evolved into a commodity chemicals manufacturer. With its heavy focus on innovation, it developed groundbreaking chemical products and synthetic polymers, including the world’s strongest fibre. By 1996 the company had been fully privatized, which set the scene for its transformation into a giant life sciences and materials sciences concern. Annual sales now top €9 billion.
Sustainability as a driver of innovation
For the UN, sustainable development means meeting the needs of the present generation without putting future generations at risk. But after the 2007 crash, the sense of urgency on environmental issues took a back seat. Against this background, could sustainability be turned into an effective driver of innovation? DSM had to make the case to investors and financial markets that sustainability meant higher long-term profits.
In 2006, DSM created an Innovation Centre to encourage entrepreneurship and launch new businesses. The centre has a strong open innovation agenda, which focuses on collaboration with customers, short product life cycles and high market dynamics. Using open innovation ensures the company develops products adapted to changing customer requirements.
The company also embraced the Triple P concept for business sustainability: People, Planet and Profit. Under the first part, known as PEOPLE+, DSM aimed to improve lives through activities and products. The second, ECO+, set out to improve its environmental footprint, including that of suppliers. The third highlighted the need to create profitable businesses and value for shareholders.
The Triple P idea is incorporated into the annual report and is reflected in how DSM does business. For example, the share of ECO+ products in DSM’s business portfolio rose to 43% in the first half of 2012 from 39% a year earlier, on track to meet the goal of 50% by 2015. The percentage of ECO+ solutions in its innovation pipeline was 80%, which meets the 2015 target. DSM’s growth, however, was never going to be just organic. In the 24 months following the launch of the new strategy in September 2010, DSM made more than 10 acquisitions worth more than €2.8 billion.
“Sustainability is not only about compliance or corporate social responsibility. It has become a business driver based on our core values. Throughout DSM, sustainability is integrated in how we do business. Our products and solutions positively contribute to the world’s current and future challenges,” Sijbesma said.
The investment case
Getting investors to buy in to the new approach is not always easy. Investment horizons have decreased dramatically over the last few decades, undermining companies’ ability to confront long-term challenges such as climate change. Some attempts have been made to tackle this conundrum, including through voluntary adherence by institutional investors to the UN’s Principles of Responsible Investing (PRI). A number of benchmarks have been created to track the progress of companies on sector-specific economic, environmental and social drivers, among them the Dow Jones Sustainability Index (DJSI). Since 2004, the DJSI has named DSM the worldwide sustainability leader in the chemicals sector six times.
‘Sustainability is now our fundamental business driver. It’s not just a condition for doing business, but it is an objective in itself,’ Royal DSM CEO Feike Sijbesma.
In 2012 Harvard Business School, Professor Robert Eccles published an academic paper based on 18 years of data that provided the first solid evidence that companies with longstanding cultures of sustainability outperformed their peers. He put the difference at about 4.8% per year. The paper also supported the view that these companies generated better ROA and ROE than their “low sustainability” peers.
For DSM it is an ongoing process. Being a good corporate citizen means taking sustainability to the next stage where people and planet metrics become accepted tools for company valuation, contributing visibly to profits.