IMD study shows emerging-world firms favour long-term approach to sustainability

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IMD study shows emerging-world firms favour long-term approach to sustainability

A study by the IMD Global Center for Sustainability Leadership has found that businesses from the developing world are producing more innovative ideas on sustainability than Western businesses. The researchers found the same patterns in Brazil, China, India, Mexico and South Korea.

The respective approaches to corporate social responsibility (CSR) are different. Large emerging-market firms are moving beyond the compliance-driven frameworks common in the West. Developing world companies prioritize the social dimension rather than environmental footprint monitoring and the triple bottom line.  There are five characteristics of their fresh thinking. They are: A strategy-driven approach, local relevance, innovation, scale and collaboration.

Strategy-driven approach

Emerging-market leaders, such as Wipro, Natura, Bimbo, or Banco do Brasil, have thought hard about how they shape markets. They see sustainability as a business imperative and create long-term programmes. Brazil’s Banco Itaú Unibanco, has a designated Sustainability Office which turns trends into business opportunities.

Pressures from regulators and NGOs have driven corporate sustainability models in mature markets. As a result, they focus on reducing impacts rather than creating long-term change. But the dominance of Western paradigms for CSR may not last long. Ideas from emerging-world businesses will increasingly influence the debate as they expand globally.

Local relevance

Emerging-market companies need to operate amid political instability, economic uncertainty and resource scarcity. This encourages them to identify radical and systemic responses to sustainability issues. The Mexican bakery giant Bimbo, for example, needed to find a sustainable solution to meet the energy demands of its production plants so it built a wind farm in the area of Oaxaca. Long-term, the farm will produce enough electricity to power all of Bimbo’s operations.

The Brazilian cosmetics group Natura, meanwhile, realized 15 years ago that it could not compete with the big players in the cosmetic industry by “trying to find the right molecule in a lab”. Instead, the company learned to identify natural sources for its ingredients in the Amazon, and has developed new ideas to reduce its environmental impact. Natura’s 2020 Amazon programme provides a sustainable living for rainforest communities. It plans to involve 12,000 small producers and 1,000 local researchers into biodiversity.

Innovation

A majority of emerging-market firms favour a long-term approach to sustainability and do not expect a short-term payback. This makes them more innovative than Western counterparts. The Mahindra group, an Indian multinational with technology operations in more than 100 companies, launched an online platform for entrepreneurs called Spark the Rise in 2011. Readers submit projects for feedback and Mahindra funds the best ideas. By the end of last year, nearly 2,000 Sparks had been approved and 238 projects funded.

Scale: Depth and breadth

Companies are seeking to transform critically important local communities and environments. Braskem, a Brazilian sustainable chemistry firm, is one of the most innovative South American companies. In 2007 the company launched green polyethylene, a plastic used in containers and bottles. Braskem also produces polyethylene from sugarcane-based ethanol. Over three years to the end of 2013, Braskem filed 420 patents and obtained 12% of its revenue from green technologies.

China’s Elion Resources Group demonstrates the breadth of change. Elion has afforested more than 50,000 km2 of the Kubuqi Desert to create a green resort powered by clean energy. About 130,000 people have benefited from the businesses created for the resort. The income of local farmers has increased by 700% over 10 years. Elion also created a 1,500 km2 liquorice farm at the resort and in the process became China’s leading supplier of natural and green liquorice medicine.

Collaboration

Businesses in emerging markets are forming collaborations with NGOs and local agencies to further their goals. In 2010, India’s Britannia Foods decided to tackle anaemia in Indian children by introducing iron-fortified biscuits into free meals in state schools. To distribute the biscuits, it teamed up with the municipalities of Tamil Nadu and Pondicherry. Then, it enlisted the help of GAINii, the Clinton Global Initiative and the World Food Programme, to promote it. In its first phase, the project reached 150,000 children.

Banco do Brasil, Brazil’s largest lender to family farms, wanted to help local farmers to use water sustainably. The bank teamed up with WWF Brazil and the National Water Agency to introduce the Brazil Water Project which gave training on using water more sustainably to tens of thousands of farmers.

These are examples of how emerging-market companies are acting as catalysts for change. Innovative programmes with far-reaching effects are much more common than in mature markets. The Western businesses need to catch up.

Interview with Francisco Szekely, Professor of Leadership and Sustainability at IMD

What is your general impression of the CSR efforts of Western companies?

Sustainability is a topic everyone hears about and everyone uses the definition that suits their interests. But the fact is we are not moving in the right direction. We are not creating a better world, or a lasting business model.

Too many Western companies are using sustainability and CSR as topics to look good on the eyes of society. We need to take a step back and ask why CSR emerged and why we are doing it. Most companies produce annual CSR reports, but the fact is that few people read them. The reason is that a CSR report is just a one-way communication. Companies expose the best they do. It’s like asking me if I am a good professor and I say that I am and just tell you the good things I do. Then I say “bye”, and hang up the phone. CSR is not a dialogue. Companies formulate answers before we get a chance to say what we want to know. Even when companies win CSR awards, it’s usually from business forums run by those businesses.

What is the essence of the problem?

In my view, John Elkington’s concept of the triple bottom line has been an unhelpful framework for sustainability. The triple bottom line says a company has to excel in three dimensions – financial, the environment and society. In principle, it sounds good. But companies love it because it allows them to save face. Most strive to do well financially, which is fine. But as far as the environment is concerned, their interpretation has been to do the minimum, rather than the maximum. It has been to pick the low-hanging fruit. So they boast about reducing carbon dioxide emissions by 10%. But does this make the company sustainable? They have to do it anyway. It’s as if I said: “Well, look at me, I paid taxes this year”. That’s my obligation anyway.

On the society side, companies have been doing philanthropic things. That’s good, but it’s not the only thing the world needs. We need good products, services and processes. The problem with the triple bottom line concept is the three dimensions can’t be integrated. So you can’t measure how well a company is doing. They could make a lot of profit, but might be bad for the environmental, or not care for society. It’s hard to judge their performance on CSR because you can’t integrate dollars with environmental compliance and social goods.

It’s possible to tick the CSR boxes, whilst doing harm to society. Take PepsiCo. From an environmental point of view, they produce food in a meticulous way with no pollution, but the product itself is linked to high levels of child obesity in countries like the US and UK.

Do you see a different approach in developing countries?

We found much more of a focus on social needs. To succeed, these companies need to look more systemically at the social environment around them. For Tata, in India, to sell more cars, they need good roads and so they have committed to building a lot of them. Helping to build roads is taking a long-term view of sustainability and not just looking at short-term profit.

Brazilian cosmetics company Natura is using the Amazon as a resource, but it knows it needs to keep the river alive to survive long term. So they don’t exploit it to the end and move on. They use local people with the know-how to extract the resource without depleting it. They are also researching innovative ways of using natural products to make cosmetics and fragrances. It’s about creating a circular economy. You take, you use and you put back.

The bakery company Bimbo in South Mexico realized they were over-dependent on oil as a source of energy to produce bread and they asked themselves why don’t we move to a long-term, sustainable source before we run out of oil? So they built a huge wind power plant to power 100% of their manufacturing. They were not regulated and there were no NGOs breathing down their necks. They had a long-term vision.

Some of the rhetoric in the West and developing world is similar, so what is the real difference?

It can sound similar, but the emphasis is different. Businesses in emerging markets know they are there to stay, whereas companies going into those countries from the industrialized world stay there as long as there are profits. They can extract resources and use the local environment and then leave. Take any mining company which goes to South Africa and extract the ore. Once the mineral is depleted, they can just move on. They don’t care what happens afterwards. Companies in emerging markets will stay there and have to look to the future.

The Western companies are operating in the developed world to make short-term profits. They brag about what they do there because there are NGOs focusing on them when they do the wrong thing. A typical example is Nike. It was using sweatshops in Indonesia where children were working in bad environmental conditions. After they got a boycott in the USA, they started responding and many Western companies saw the dangers for their reputation of using cheap labour in poor conditions. So now they all say they are doing the right thing and using the right outsourcers. The truth is that it’s hard to check.

Most Western companies are going two steps backward from the environmental movement. Most of what they do is reactive, not proactive. They don’t do it because they think “here’s a great idea that can change the world”. They are just reacting to the pressures.

What are the long-term consequences?

It’s no longer possible to continue making profits and just paying lip service to sustainability. There is now an issue about resource scarcity. So, if you are a big company in the West and you need to go to the developing countries to extract resources, you need to worry about your future. Take companies like Coca Cola. They manufacture drinks in the developing world where they’ve been criticized for causing stress on local water supplies. They need to worry about it long term. If they don’t protect the resource base there will be no production in future. A second thing Western companies have to worry about is competition. A new competitor in the developing world is China. They are producing food in Africa and shipping it back to China.

Leaders thinking it’s enough to pay lip service to sustainability will sooner or later be caught out when someone takes the resource they use. Eventually, a country will develop regulations for resource extraction because they are using the water that should be reserved for their cities. When Coca Colas start competing with water for municipalities, they won’t have a long-term future.

Are there Western companies doing great things?

Some companies are thinking beyond short-term profits. Unilever CEO Paul Polman wants to create sustainable tea production, which is ambitious. Everything has to be done within the circular economy, so there are no chemical fertilizers and pesticides. Every time you plant a tree and use it, you plant it again. You only buy from sustainable farms. It’s not easy to achieve, but the ambition is good. Nestlé says that to succeed long term they need to participate in world conservation. They are right. If you want to have the coco-bean to produce chocolate, or coffee, you need to worry about water.

Novartis are also doing good things in Africa. They’ve put together a system to help people on Africa get hold of malaria pills. Many times villagers can’t get access to it. So, Novartis put a system in place so anyone can dial a free number in England to get information about where the nearest pharmacy is with a supply of pills. It’s long-term proposition.

They are people who are thinking differently and that means not just about their money. The US company Tesla is a good example. They are producing an electric car, but also all the parts required, meaning the batteries, charging stations, plus everything related to transportation. Four months ago they announced that all the patents they have developed for their electric cars are public and free to use. Giving patents to all other car companies is thinking big. Older companies Mercedes, Volkswagen would never give away technology. But Tesla says no, we want the industry to go to the next level. Leadership.

Are Western companies consciously learning from developing world?

Not yet because there is too much arrogance. When the topic of business innovation in the developing world came up five years ago, many Western companies talked about “reverse innovation”, meaning it was coming from the developing world. What does reverse mean? It’s still difficult for leaders in the West to think they can learn from the developing world, but it will happen.

The thing is when they see success they will start thinking about how it was achieved. The leaders in the industrialized world don’t have such a long-term vision as some of their counterparts in the developing world.

Why is that? There are a number of issues. First, the economy is still unstable in the industrialized world so they are conservative. Second, because CEOs don’t last more than five years so they think “why the hell should I invest in something that will take 20 years?”

But we need different thinking. Big changes are not made by lots of people, but by a few. Political, economic and technological changes are always made by a few leaders.  If we are seriously thinking about how to create a better world, we need to share, and think big and be generous. All these things have to do with mindset. We desperately need inspirational figures.

Please share your experiences and views in the comment section

 

 

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