The environmental revolution

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The environmental revolution has been almost three decades in the making, and it has changed for- ever how companies do business. In the 1960s and 1970s, corporations were in a state of denial regard- ing their impact on the environment. Then a series of highly visible ecological problems created a groundswell of support for strict government regu- lation. In the United States, Lake Erie was dead. In Europe, the Rhine was on fire. In Japan, people were dying of mercury poisoning.

Today many companies have accepted their re- sponsibility to do no harm to the environment. Products and production processes are becoming cleaner; and where sueh change is under way, the environment is on the mend. In the industrialized nations, more and more companies are “going green” as they realize that they can reduce pollu- tion and increase profits simultaneously. We have come a long way.

fer to as its carrying capacity. Increasingly, the scourges of the late twentieth century-depleted farmland, fisheries, and forests,- choking urban pol- lution,- poverty; infectious disease; and migration- are spilling over geopolitical borders. The simple fact is this: in meeting our needs, we are destroying the ability of future generations to meet theirs.

The roots of the problem-explosive population growth and rapid economic development in the emerging economies – are political and social issues that exceed the mandate and the capabilities of any corporation. At the same time, corporations are the only organizations with the resources, the technol- ogy, the global reach, and, ultimately, the motiva- tion to achieve sustainability.

It is easy to state the case in the negative: faced with impoverished customers, degraded environ- ments, failing political systems, and unraveling societies, it will be increasingly difficult for cor-

Strateqies for a Sustainable World But the distance we’ve traveled will seem small

when, in 30 years, we look hack at the 1990s. Be- yond greening lies an enormous challenge-and an enormous opportunity. The challenge is to develop a sustainable global economy: an economy that the planet is capable of supporting indefinitely. Al- though we may be approaching ecological recovery in the developed world, the planet as a whole re- mains on an unsustainable course. Those who think that sustainability is only a matter of pollu- tion control are missing the bigger picture. Even if all the companies in the developed world were to achieve zero emissions by the year 2000, the earth would still be stressed beyond what biologists re-

porations to do business. But the positive case is even more powerful. The more we learn about the challenges of sustainability, the clearer it is that we are poised at the threshold of a historic moment in which many of the world’s industries may be transformed.

To date, the business logic for greening has been largely operational or technical: bottom-up pollu- tion-prevention programs have saved companies

StvoTt L. Hart is a faculty member in corporate strat- egy and the director of the Corporate Environmental Management Program at the University of Michigan Business School in Ann Arbor. His E-mail address is slhart@umich. edu.

ARTWORK BY BRUCE ROGOVIN 67

BEYOND GREENING

hillions of dollars. However, few executives realize that environmental opportunities might actually become a major source of revenue growth. Green- ing has been framed in terms of risk reduction, reenglneering, or cost cutting. Rarely is greening linked to strategy or technology development, and as a result, most companies fail to recognize oppor- tunities of potentially staggering proportions.

Worlds in Collision The achievement of sustainability will mean bil-

lions of dollars in products, services, and technolo- gies that barely exist today. Whereas yesterday’s businesses were often oblivious to their negative impact on the environment and today’s responsible businesses strive for zero impact, tomorrow’s busi- nesses must learn to make a positive impact. In- creasingly, companies will be selling solutions to the world’s environmental problems.

Envisioning tomorrow’s businesses, therefore, re- quires a clear understanding of those problems. To move beyond greening to sustainability, we must first unravel a complex set of global interdependen- cies. In fact, the global economy is really three dif- ferent, overlapping economies.

The market economy is the familiar world of commerce comprising both the developed nations and the emerging economies.’ About a billion peo- ple-one-sixth of the world’s population-live in the developed countries of the market economy. Those affluent societies account for more than 75% of the world’s energy and resource consumption and create the bulk of industrial, toxic, and con- sumer waste. The developed economies thus leave large ecological footprints-defined as the amount of land required to meet a typical consumer’s needs. (See the exhibit “Ecological Footprints.”)

Despite such intense use of energy and materials, however, levels of pollution are relatively low in the developed economies. Three factors account for this seeming paradox: stringent environmental reg- ulations, the greening of industry, and the reloca- tion of the most polluting activities (such as com- modity processing and heavy manufacturing) to the emerging market economies. Thus to some extent the greening of the developed world has been at the expense of the environments in emerging econo- mies. Given the much larger population base in those countries, their rapid industrialization could easily offset the environmental gains made in the developed economies. Consider, for example, that the emerging economies in Asia and Latin America

Increasingly, companies (and now Eastern Europe and the former Soviet Union) have added nearly 2 billion people to the market economy over the past 40 years.

With economic growth comes urbanization. To- day one of every three people in the world lives in a city. By 2025, it will be two out of three. Demogra- phers predict that by that year there will be well over 30 megacities with populations exceeding 8 million and more than 500 cities with populations exceeding 1 million. Urbanization on this scale presents enormous infrastructural and environ- mental challenges.

Because industrialization has focused initially on commodities and heavy manufacturing, cities in many emerging economies suffer from oppressive levels of pollution. Acid rain is a growing problem, especially in places where coal combustion is un- regulated. The World Bank estimates that by 2010 there will be more than 1 billion motor vehicles in

Ecological Footprints

United States

India

The Netherlands

In the United Slates, it fakes 1 2.2 acres to supply the average person’s basic needs; in the Netherlonds, 8 acres; in India, 1 acre, The Dutch ecological footprint covers 15 times the area of the Netherlands, whereas India’s botprint exceeds its area by only about 35%. Most strikingly, if the entire v^orld lived like North Americons, it v/ould take three planet Earths to support the present world population. Source. Donelia Meadows, “Our ‘Footprints’Are Treading Too Much forf/i,”Charleston (S.C.) Gazette, Apri/ f, 1996.

68 HARVARD BUSINESS REVIEW January-February 1997

the world. Concentrated in cities, they will double current levels of energy use, smog precursors, and emissions of greenhouse gas.

The second economy is the sinvival economy: the traditional, village-based way of life found in the rural parts of most developing countries. It is made up of 3 billion people, mainly Africans, Indi- ans, and Chinese who are subsistence oriented and meet their basic needs directly from nature. De- mographers generally agree that the world’s popula- tion, currently growing by about 90 million people per year, will roughly double over the next 40 years. The developing nations will account for 90% of that growth, and most of it will occur in the sur- vival economy.

The third economy is nature’s economy, which consists of the natural systems and resourees that support the market and the survival economies. Nonrenewable resources, such as oil, metals, and other minerals, are finite. Renewable resources, such as soils and forests, will replenish them- selves-as long as their use does not exceed critical thresholds.

Technological innovations have created substi- tutes for many commonly used nonrenewable re- sources; for example, optical fiber now replaces copper wire. And in tbe developed economies, de- mand for some virgin materials may actually di- minish in tbe decades ahead because of reuse and recycling, ironically, the greatest threat to sustain-

will sell solutions to the world’s environmental problems. Owing in part to the rapid expansion of the mar-

ket economy, existence in tbe survival economy is becoming increasingly precarious. Extractive in- dustries and infrastructure development have, in many cases, degraded the ecosystems upon which the survival economy depends. Rural populations are driven further into poverty as they compete for scarce natural resources. Women and children now spend on average four to six hours per day searching for fuelwood and four to six hours per week drawing and carrying water. Ironically, those conditions en- courage high fertility rates because, in tbe short run, children help the family to garner needed re- sources. But in the long run, population growth in the survival economy only reinforces a vicious cy- cle of resource depletion and poverty.

Short-term survival pressures often force these rapidly growing rural populations into practices that cause long-term damage to forests, soil, and water. When wood becomes scarce, people burn dung for fuel, one of the greatest-and least well- known-environmental hazards in the world today. Contaminated drinking water is an equally grave problem. The World Healtb Organization estimates that burning dung and drinking contaminated wa- ter together cause 8 million deaths per year.

As it becomes more and more difficult to live off the land, millions of desperate people migrate to already overcrowded cities. In China, for example, an estimated 120 million people now roam from city to city, landless and jobless, driven from their villages by deforestation, soil erosion, floods, or droughts. Worldwide, the number of such “envi- ronmental refugees” from the survival economy may be as high as 500 million people, and the figure is growing.

HARVARD BUSINESS REVIEW [anuary-February 1997

able development today is depletion of the world’s renewable resources.

Forests, soils, water, and fisheries are all being pushed beyond their limits by human population growth and rapid industrial development. Insuffi- cient fresh water may prove to be the most vexing problem in the developing world over tbe next decade, as agricultural, commercial, and residential uses increase. Water tables are being drawn down at an alarming rate, especially in the most heavily populated nations, such as China and India.

Soil is another resource at risk. More than 10% of the world’s topsoil has heen seriously eroded. Available cropland and rangeland are shrinking. Existing crop varieties are no longer responding to increased use of fertilizer. As a consequence, per capita world production of both grain and meat peaked and began to decline during the 1980s. Mean- while, the world’s 18 major oceanic fisheries have now reached or actually exceeded tbeir maximum sustainable yields.

By some estimates, humankind now uses more than 40% of tbe planet’s net primary productivity. If, as projected, the population doubles over the next 40 years, we may outcompete most other ani- mal species for food, driving many to extinction. In short, human activity now exceeds sustainability on a global scale. (See the exhibit “Major Chal- lenges to Sustainability.”I

As we approach the twenty-first century, the interdependence of the three economic spheres is increasingly evident. In fact, the three economies have beeome worlds in collision, creating tbe major social and environmental challenges facing the planet: climate change, pollution, resource deple- tion, poverty, and inequality.

69

1Major Challenges to Sustainability Pollution

-greenhouse gases 1 Developed economies -use of toxic materials 1

-contaminated sites 1

-industrial emissions 1 Emerging economies -contaminated water 1

-lock of sewage treatment 1

-dung and wood burning 1 Survival economies -lack oF sonitation 1

-ecosystem destruction 1 due to development 1

Depletion

-scarcity of materials 1 -insufficient reuse and 1 recycling I

-overexploitation of I renewable resources I

-overuse of water 1 for irrigation I

-deforestation 1 -overgrazing I -soil loss I

r Poverty

-urban and minority I unemployment I

-migration to cities H -lack of skilled workers • -income inequality I

-population growth 1 -low status of women 1 -dislocation I

Consider, for example, that the average Ameri- can today consumes 17 times more than his or her Mexican counterpart (emerging economy) and hun- dreds of times more than the average Ethiopian (survival economy). The levels of material and en- ergy consumption in the United States require large quantities of raw materials and commodities, sourced increasingly from the survival economy and produced in emerging economies.

In the survival economy, massive infrastructure development (for example, dams, irrigation proj- ects, highways, mining operations, and power gen- eration projects), often aided by agencies, banks, and corporations in the developed countries, has provided access to raw materials. Unfortunately, such development has often had devastating conse- quences for nature’s economy and has tended to strengthen existing political and economic elites, with little benefit to those in the survival economy.

their terms of trade have hecome less favorable. Their purchasing power declines while their al- ready substantial debt load becomes even larger. The net effect of this dynamic has been the transfer of vast amounts of wealth (estimated at $40 billion per year since 1983) from developing to developed countries, producing a vicious cycle of resource ex- ploitation and pollution to service mounting debt. Today developing nations have a combined debt of more than $ 1.2 trillion, equal to nearly half of their collective gross national product.

Strategies for a Sustainable World Nearly three decades ago, environmentalists

such as Paul Ehrlich and Barry Commoner made this simple but powerful observation about sus- tainable development: the total environmental burden (EB| created by human activity is a function

Emerging economies cannot afford to repeat the mistakes At the same time, infrastructure development

projects have contributed to a global glut of raw ma- terials and hence to a long-term fall in commodity prices. And as commodity prices have fallen rela- tive to the prices of manufactured goods, the cur- rencies of developing countries have weakened and

of three factors. They are population (P); affluence (A), which is a proxy for consumption; and tech- nology (T), which is how wealth is created. The product of these three factors determines the total environmental burden. It can be expressed as a for- mula: EB = P X A X T.

70 HARVARD BUSINESS REVIEW January-February 1997

BEYOND GREENING

Achieving sustainability will require stabilizing or reducing the environmental hurden. That can be done by decreasing the human population, lower- ing the level of affluence (consumption), or chang- ing fundamentally the technology used to create wealth. The first option, lowering the human popu- lation, does not appear feasible short of draconian political measures or the occurrence of a major puh- lic-health crisis that causes mass mortality.

The second option, decreasing the level of afflu- ence, would only make the problem worse, because poverty and population growth go hand in hand: demographers have long known that birth rates are inversely correlated with level of education and standard of living. Thus stabilizing the human pop- ulation will require improving the education and economic standing of the world’s poor, particularly women of childhearing age. That can be accom- plished only by creating wealth on a massive scale. Indeed, it may be necessary to grow the world econ- omy as much as tenfold just to provide basic ameni- ties to a population of 8 billion to 10 billion.

That leaves the third option: changing the tech- nology used to create the goods and services that constitute the world’s wealth. Although population and consumption may be societal issues, technol- ogy is the business of husiness.

If economic activity must increase tenfold over what it is today just to provide the bare essentials to a population double its current size, then technolo- gy will have to improve twentyfold merely to keep the planet at its current levels of environmental burden. Those who believe that ecological disaster will somehow be averted must also appreciate the commercial implications of such a belief: over the next decade or so, sustainable development will constitute one of the biggest opportunities in the history of commerce.

Nevertheless, as of today few companies have in- corporated sustainability into their strategic think- ing. Instead, environmental strategy consists large- ly of piecemeal projects aimed at controlling or preventing pollution. Focusing on sustainability re- quires putting business strategies to a new test. Taking the entire planet as the context in which

of Western development. they do business, companies must ask whether they are part of the solution to social and environ- mental problems or part of the problem. Only when a company thinks in those terms can it begin to de- velop a vision of sustainability-a shaping logic that goes beyond today’s internal, operational focus

on greening to a more external, strategic focus on sustainable development. Such a vision is needed to guide companies through three stages of environ- mental strategy.

Stage One: Pollution Prevention. The first step for most companies is to make the shift from pollu- tion control to pollution prevention. Pollution con- trol means cleaning up waste after it has been cre- ated. Pollution prevention focuses on minimizing or eliminating waste before it is created. Much like total quality management, pollution prevention strategies depend on continuous improvement ef- forts to reduce waste and energy use. This transfor- mation is driven by a compelling logic: pollution prevention pays. Emerging global standards for en- vironmental management systems (ISO 14,000, for example) also have created strong incentives for companies to develop such capabilities.

Over the past decade, companies have sought to avoid colliding with nature’s economy (and incur- ring the associated added costs) through greening and prevention strategies. Aeroquip Corporation, a $2.5 billion manufacturer of hoses, fittings, and couplings, saw an opportunity here. Like most in- dustrial suppliers, Aeroquip never thought of itself as a provider of environmental solutions. But in 1990, its executives realized that the company’s products might be especially valuable in meeting the need to reduce waste and prevent pollution. Aeroquip has generated a $250 million husiness by focusing its attention on developing products that reduce emissions. As companies in emerging econ- omies realize the competitive benefits of using raw materials and resources more productively, busi- nesses like Aeroqulp’s will continue to grow.

The emerging economies cannot afford to repeat all the environmental mistakes of Western devel- opment. With the sustainability imperative in mind, BASF, the German chemical giant, is helping to design and build chemical industries in China, India, Indonesia, and Malaysia that are less pollut- ing than in the past. By colocating facilities that in the West have been geographically dispersed, BASF is able to create industrial ecosystems in which the waste from one process becomes the raw material for another. Colocation solves a problem common in the West, where recycling waste is often infeasi- ble because transporting it from one site to another is dangerous and costly.

Stage Two: Product Stewardship. Product stew- ardship focuses on minimizing not only pollution from manufacturing but also all environmental im- pacts associated with the full life cycle of a product. As companies in stage one move closer to zero emissions, reducing the use of materials and pro-

HARVARD BUSINESS REVIEW |anuary-February 1997 71

Aracruz Celulose: A Sfrat^y for the Survival Economy

“Poverty is one of the world’s leading pol- luters,” notes Erling Lorentzen, founder and chairman of Aracruz Celulose. The $2 billion Brazilian company is the world’s largest producer of eucalyptus pulp. “You can’t ex- pect people who don’t eat a proper meal to be concerned about the environment.'”

From the very start, Aracruz has been built around a vision of sustainable development. Lorentzen understood that building a viable forest-products business in Brazil’s impov- erished and deforested state of Espirito Santo would require the simultaneous im- provement of nature’s economy and the sur- vival economy.

First, to restore nature’s economy, the com- pany took advantage of a tax incentive for tree planting in the late 1960s and began buying and reforesting cut-over land. By 1992, tbe company had acquired over 200,000 hectares and planted 130,000 hectares with managed eucalyptus; the rest was restored as conserva- tion land. By reforesting what had become highly degraded land, unsuitable for agricul- ture, the company addressed a fundamental environmental problem. At the same time, it created a first-rate source of fiber for its pulp-

ing operations. Aracniz’s forest practices and its ability to clone seedlings have given the company advantages in both cost and quality.

Aracruz has tackled the problem of poverty head-on. Every year, the company gives away millions of eucalyptus seedlings to local farm- ers. It is a preemptive strategy, aimed at reduc-

ing the farmers’ need to deplete the natural forests for fuel or lumber. Aracruz also has

a long-term commitment to capability build- ing. In the early years, Aracruz was able to hire local people for very low wages because of tbeir desperate situation. But instead of sim- ply exploiting the abundant supply of cheap la- bor, the company embarked on an aggressive social-investment strategy, spending $125

million to support the creation of hospitals, schools, bousing, and a training center for em- ployees. In fact, until recently, Aracruz spent more on its social investments than it did on wages (about $1.20 for every $1 in wages). Since that time, the standard of living has im- proved dramatically, as has productivity. The company no longer needs to invest so heavily in social infrastructure.

1. Marguerite RigogHosi). “Stewards of the Seventh Genera- lion,” Harvard Husinefis School Bulletin, April 19^6, p. S5.

duction of waste requires fundamental changes in underlying product and process design.

Design for environment (DFE), a tool for creating products that are easier to recover, reuse, or recycle, is becoming increasingly important. With DFE, all the effects that a product could have on the envi- ronment are examined during its design phase. Cra- dle-to-grave analysis begins and ends outside the boundaries of a company’s operations-it includes a full assessment of all inputs to the product and examines how customers use and dispose of it. DFE thus captures a broad range of external per- spectives by including technical staff, environmen- tal experts, end customers, and even community representatives in the process. Dow Chemical Com- pany has pioneered the use of a hoard-level advisory panel of environmental experts and external repre- sentatives to aid its product-stewardship efforts.

By reducing materials and energy consumption, DFE can he highly profitable. Consider Xerox Cor- poration’s Asset Recycle Management (ARM) pro- gram, which uses leased Xerox copiers as sources of high-quality, low-cost parts and components for

new machines. A well-developed infrastructure for taking back leased copiers comhined with a sophis- ticated remanufacturing process allows parts and components to be reconditioned, tested, and then reassembled into “new” machines. Xerox esti- mates that ARM savings in raw materials, labor, and waste disposal in 1995 alone were in the $300-

Without a framework for million to $400-million range. In taking recycling to this level, Xerox has reconccptualized its busi- ness. By redefining the product-in-use as part of tbe company’s asset base, Xerox has discovered a way to add value and lower costs. It can continually pro- vide its lease customers with the latest product up- grades, giving them state-of-the-art functionality with minimal environmental impact.

Product stev^ardship is thus one way to reduce consumption in the developed economies. It may also aid the quest for sustainahility hecause devel- oping nations often try to emulate what they see

72 HARVARD BUSINESS REVIEW lanuary-Ftbruiiry 1997

BEYOND GREENING

happening in the developed nations. Properly exe- cuted, product stewardship also offers the potential for revenue growth through product differentiation. For example, Dunlop Tire Corporation and Akzo Nobel recently announced a new radial tire that makes use of an aramid fiber belt rather than the conventional steel belt. The new design makes re- cycling easier because it eliminates the expensive cryogenic crushing required to separate the steel belts from the tire’s other materials. Because the new fiber-belt tire is 30% lighter, it dramatically improves gas mileage. Moreover, it is a safer tire be- cause it improves the traction control of antilock braking systems.

The evolution from pollution prevention to prod- uct stewardship is now happening in multinational companies such as Dow, DuPont, Monsanto, Xe- rox, ABB, Philips, and Sony. For example, as part of a larger sustainability strategy dubbed A Growing Partnership with Nature, DuPont’s agricultural- products business developed a new type of herbi- cide that has helped farmers around the world re- duce their annual use of chemicals by more than 45 million pounds. The new Sulfonylurea herbicides have also led to a 1-billion-pound reduction in the amount of chemical waste produced in the manu- facture of agricultural chemicals. These herbicides are effective at 1 % to 5% of the application rates of traditional chemicals, are nontoxic to animals and nontarget species, and biodegrade in the soil, leav- ing virtually no residue on crops. Because they re- quire so much less material in their manufacture, they are also highly profitable.

Stage Three: Clean Technology. Companies with their eye on the future can hegin to plan for and invest in tomorrow’s technologies. The simple fact is that the existing technology base in many in- dustries is not environmentally sustainable. The chemical industry, for example, while having made

bioengineering of crops rather than the application of chemical pesticides or fertilizers represents a sustainable path to increased agricultural yields. (See “Growth Through Global Sustainability: An Interview with Monsanto’s CEO, Robert B. Sha- piro,” by foan Magretta, in this issue of HBR.)

Clean technologies are desperately needed in the emerging economies of Asia. Urban pollution there has reaehed oppressive levels. But precisely because manufacturing growth is so high-capital stock doubles every six years-there is an unprecedented opportunity to replace current product and process technologies with new, cleaner ones.

Japan’s Research Institute for Innovative Tech- nology for the Earth is one of several new research and technology eonsortia focusing on the develop- ment and commercialization of clean technologies for the developing world. Having been provided with funding and staff by the Japanese government and more than 40 corporations, RITE has set forth an ambitious 100-year plan to create the next gener- ation of power technology, which will eliminate or neutralize greenhouse gas emissions.

Sustainability Vision Pollution prevention, product stewardship, and

clean technology all move a company toward sus- tainability. But without a framework to give direc- tion to those activities, their impact will dissipate. A vision of sustainability for an industry or a com- pany is like a road map to the future, showing the way products and services must evolve and what new competencies will be needed to get there. Few companies today have such a road map. Ironically, chemical companies, regarded only a decade ago as the worst environmental villains, are among the few large corporations to have engaged the ehal- lenge of sustainable development seriously.

environmental activities, their impact will dissipate. substantial headway over the past decade in pollu- tion prevention and product stewardship, is still limited by its dependence on the chlorine mole- cule. (Many organochlorides are toxic or persistent or bioaccumulative.) As long as the industry relies on its historical competencies in chlorine chem- istry, it will have trouble making major progress to- ward sustainability.

Monsanto is one company that is consciously de- veloping new competencies. It is shifting the tech- nology base for its agriculture business from bulk chemicals to biotechnology. It is betting that the

Companies can begin hy taking stock of each com- ponent of what I call their sustainability portfolio. (See the exhibit “The Sustainability Portfolio.”) Is there an overarching vision of sustainability that gives direction to the company’s activities? To what extent has the company progressed through the three stages of environmental strategy-from pollution prevention to product stewardship to clean technology?

Consider the auto industry. During the 1970s, government regulation of tailpipe emissions forced the industry to focus on pollution control. In the

HARVARD BUSINESS REVIEW [anuary-February 1997 73

The Sustainability Partfolia

Clean technology

Is the environmental performance of our products limited by our existing

tomorrov/ competency bose?

Is there potential to realize major improvements through new technology?

Pollution prevention

Where are the most significant waste and emission streams from

today our current operations?

Can we lower costs and risks by eliminating waste at the source or by using it as useful input?

internal

This simple diagnostic tool can hetp any company determine whether its strategy is consistent with sustainability. First, assess your company’s capability in each of the four quadrants by answering the questions in each box. Then rate yourself on the following scale for each quadrant: 1 -nonexistent; 2-emerging; 3-established; or 4-institutionalized.

Most companies will be heavily skewed toward the lower left- hand quadrant, reflecting investment in pollution prevention. However, without investments in future technologies and markets (the upper half of the portfolio), the company’s environmental strategy will not meet evolving needs.

Sustainobility vision

Does our corporate vision direct us toward the solution oF social and environmental problems?

Does our vision guide the development of new technologies, markets, products, and processes?

Product stewardship

What are the implications for product design and development if we assume responsibility for a product’s entire life cycle?

Can we add value or lower costs while simultaneously reducing the impact of our products?

external

Unbalanced portfolios spell trouble: a bottom heavy port- folio suggests a good position today but future vulnerability. A top-heavy portfolio indicates a vision of sustainability with- out the operational ot analytical skills needed lo implement it. A portfolio skewed to the left side of the chart indicotes a preoccupation with handling the environmental challenge through internal process improvements and technology- development initiatives. Finally, a portfolio skewed to the right side, although highly open ond public, runs the risk of being labeled a “greenwash” because the underlying plant operations and core technology still cause significant environmental harm.

1980s, the industry began to tackle pollution pre- vention. Initiatives such as the Corporate Average Fuel Efficiency requirement and the Toxic Release Inventory led auto companies to examine their product designs and manufaeturing processes in or- der to improve fuel economy and lower emissions from their plants.

The 1990s are witnessing the first signs of prod- uct stewardship. In Germany, the 1990 “take-back” law required auto manufacturers to take responsi- bility for their vehicles at the end of their useful lives. Innovators such as BMW have influenced the design of new ears with their design for disassem- bly efforts. Industry-level consortia such as the Partnership for a New Generation of Vehicles are driven largely by the product stewardship logic of lowering the environmental impact of automobiles throughout their life cycle.

Early attempts to promote clean technology in- clude such initiatives as California’s zero-emission vehicle law and the U.N. Climate Change Conven-

tion, which ultimately will limit greenhouse gases on a global seale. But early efforts by industry in- cumbents have been either incremental-for exam- ple, natural-gas vehicles-or defensive in nature. Eleetric-vehicle programs, for instance, have been used to demonstrate the infeasibility of this tech- nology rather than to lead the industry to a funda- mentally cleaner teehnology.

Although the auto industry has made progress, it falls far short of sustainability. For the vast majority of auto companies, pollution prevention and prod- uct stewardship are the end of the road. Most auto executives assume that if they close the loop in both production and design, they will have accom- plished all the necessary environmental objeetives.

But step back and try to imagine a sustainable vi- sion for the industry. Growth in the emerging mar- kets will generate massive transportation needs in the coming decades. Already the rush is on to stake out positions in China, India, and Latin Ameriea. But what form will this opportunity take?

74 HARVARD BUSINESS REVIEW January-February 1997

Building Sustainable Business Strategies

Lower material and energy consumption

\

Reduce pollution burdens

Develop cleon products and technology

Developed economies

Market economy

Emerging economies

Pollution Poverty

Megacities __

, Build the skills of the poor and the dispossessed

Nature’s economy Depletionw Survival economy

Ensure sustainable use of nature’s economy Replenish depleted resources \

Foster village-based business relationships

Consider the potential impact of automobiles on China alone, Today there are fewer than 1 million cars on the road in China. However, with a popula- tion of more than 1 hillion, it would take less than 30% market penetration to equal the current size of the U.S. car market (12 million to 15 million units sold per year). Ultimately, China might demand 50 million or more units annually. Because China’s energy and transportation infrastructures are still being defined, there is an opportunity to develop a clean technology yielding important environmen- tal and competitive henefits.

Amory Lovins of the Rocky Mountain Institute has demonstrated the feasibility of building hyper- cars-wehiclcs that are fully recyclable, 20 times more energy efficient, 100 times cleaner, and cheaper than existing cars. These vehicles retain the safety and performance of conventional cars but achieve radical simplification through the use of lightweight, composite materials, fewer parts, vir- tual prototyping, regenerative braking, and very small, hybrid engines. Hyperears, which are more akin to computers on wheels than to cars with microchips, may render obsolete most of the com- petencies associated with today’s auto manufac- turing-for example, metal stamping, tool and die making, and the internal combustion engine.

Assume for a minute that clean technology like the hypercar or Mazda’s soon-to-he-released hydro- gen rotary engine can be developed for a market

such as China’s. Now try to envision a transporta- tion infrastructure capable of accommodating so many cars. How long will it take before gridlock and traffic jams force the auto industry to a halt? Sustainability will require new transportation solu- tions for the needs of emerging economies with huge populations. Will the giants in the auto indus- try he prepared for such radical change, or will they leave the field to new ventures that are not encum- bered by the competencies of the past?

A clear and fully integrated environmental strat- egy should not only guide competency develop- ment, it should also shape the company’s relation- ship to customers, suppliers, other companies, policymakers, and all its stakeholders. Companies can and must change the way customers think by creating preferences for products and services con- sistent with sustainahility. Companies must be- come educators rather than mere marketers of products. (See the exhibit “Building Sustainable Business Strategies.”)

For senior executives, embracing the quest for sustainability may well require a leap of faith. Some may feel that the risks associated with in- vesting in unstable and unfamiliar markets out- weigh the potential benefits. Others will recognize the power of such a positive mission to galvanize people in their organizations.

Regardless of their opinions on sustainability, executives will not be able to keep their heads in

HARVARD BUSINESS REVIEW January-February 1997 75

BEYOND GREENING

the sand for long. Since 1980, foreign direct invest- ment hy multinational corporations has increased from $500 billion to nearly $3 trillion per year. In fact, it now exceeds official development-assistance aid in developing countries. With free trade on the rise, the next deeade may see the figure increase by another order of magnitude. The challenges pre- sented by emerging markets in Asia and Latin America demand a new way of conceptualizing business opportunities. The rapid growth in emerg- ing economies cannot be sustained in the face of mounting environmental deterioration, poverty, and resource depletion. In the coming decade, com- panies will be ehallenged to develop clean tech- nologies and to implement strategies that dras- tically reduce the environmental burden in the

developing world while simultaneously increasing its wealth and standard of living.

Like it or not, the responsibility for ensuring a sustainable world falls largely on the shoulders of the world’s enterprises, the economic engines of the future. Clearly, public policy innovations (at both the national and international levels) and changes in individual consumption patterns will he needed to move toward sustainability. But corpora- tions can and should lead the way, helping to shape public policy and driving change in consumers’ be- havior. In the final analysis, it makes good husiness sense to pursue strategies for a sustainahle world.

1. The terms market economy, survival economy, and nature’s economy were suRgesttd to me by Vandana Shiva, Ecology and tbe Politics of Sur- vival (New Delhi: United Nations University Press, 1991 ].

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The day Wall Street stopped asking its own questions and started asking Broadway’s questions.

76 CARTOON BY ED ARNO

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