Over the nine years I’ve spent trying to persuade business leaders to embrace sustainability, the question I’ve most often been asked is, “What’s the business case for sustainability?” This question is always delivered in a skeptical tone, carrying the unspoken suggestion that there is no business case, or at least not a very compelling one. And, for those nine years, I’d always wished I had a better answer.
Well, now I do. It’s a billion dollars.
It’s not hard to see why so many people are surprised by the idea that a sustainable business could be profitable. In his 1970 essay, The Social Responsibility of Business Is to Increase Its Profits, Milton Friedman dismissed any business with a “social conscience” as “unadulterated socialism”. Since then, the notion that sustainability or social good and profit are fundamentally opposing forces has hardened into fact in the minds of most business leaders – a fact depressingly confirmed in numerous conversations I’ve had this year with sustainability professionals struggling to persuade their business colleagues of the case for change.
For years, conventional business wisdom has held that sustainability is at best a strategy to save money, through things like energy and water efficiency. More likely it will cost or lose a company money. In other words, if sustainability features on the balance sheet at all, it’s expected to be in the philanthropic category, or attached firmly to the bottom line.
But while the idea of unprofitable sustainability is widespread, it’s not actually borne out. Several green giants are growing faster than conventional business lines – including Unilever’s purpose-driven brands outstripping conventional brands within its own portfolio. Many command wider profit margins than their category averages. They are darlings of the stock market. Some are even knocking stalwarts of the strip mall and titans of industry off their long-held leadership perches. For example, Chipotle’s 2014 revenues were four times those of American icon Burger King.
So what is the green giant secret to success? My research has identified six factors that all these companies share in common, and which have enabled their uncommon success.
1. An iconoclastic leader
In each case, the sustainability journey can be traced back to one individual who started it all. In seven of the nine companies, it’s the CEO. And as my research revealed, these leaders share four common personality traits, which I call the “4Cs of iconoclastic leadership”: conviction, courage, commitment and a contrarian streak. Consider Paul Polman, CEO of Unilever. On his first day as CEO, Polman announced that Unilever would no longer provide guidance to Wall Street, and would eliminate quarterly reporting.
2. A disruptive innovation
Each of the green giant revenue streams is not founded on a slightly greener or more socially conscious version of an existing product, but on an innovation that disrupted a category. For example, the Tesla Model S is not just a zero emission vehicle: it is also the highest-scoring car Consumer Reports ever tested, and it set a new record for safety in tests conducted by the National Highway Traffic Safety Administration.
3. A higher purpose
Paradoxical though it may seem, businesses with a purpose beyond profit tend to outperform the competition on – you guessed it – profit. Research conducted by Jason Denner of the consulting group POINT380 for my book, Green Giants, found that, over the past five years, the annual returns of publicly traded green giant companies have averaged 11.7% higher than their leading competitors.
4. Built in, not bolted on
In many companies, sustainability is a department, but for the green giants, it’s a value that is fully integrated into the core structures of their business – including their organizational structure, cost structure and governance structure. That’s why Chipotle thrives even though its ethical and humane raw ingredients are more expensive; its cost structure is built to accommodate those higher prices, so it still commands profit margins of 12.1%, against a fast food industry average estimated at 4.6%.
5. Mainstream appeal
If your product targets only a super green consumer niche, it’s hard to reach $1bn in revenue; there simply aren’t enough people who take green values seriously enough to get you there. Green giants appeal to mainstream customers or consumers. Consider the Prius, which was 2013’s third best-selling car – not the third best-selling green car, but the world’s third best-selling car, period.
6. A new behavioral contract
Transparency, responsibility, collaboration: today’s business buzzwords are alive and well at the green giants. But, for them, these are more than talk, and they’re behaving their way to billions. Consider Nike, which in 2005 took the dramatic step of publicly disclosing the names and addresses of contract factories producing Nike products – the first company in its industry to do so. More recently, it made this information available on an Interactive Global Manufacturing Map; there, you can click on a factory to view its name, number of workers, percentage of female and migrant workers, and what’s made there. A turnaround from the days when Nike faced accusations of labor rights in its supply chain, it takes transparency to a whole new level.