01 Apr 1996

Stewards of the Seventh Generation

Can being environmentally conscious makes good economic sense as well as good ecological sense? While the experts debate, four alumni demonstrate.
by Marguerite Rigoglioso, Garry Emmons, Linda Goodspeed, and Elaine Gottlieb

"In our every deliberation, we must consider the impact of our decisions of the next seven generations."
—from the Great Law of the Iroquois Confederacy

"In our every deliberation, we must consider the impact of our decisions of the next seven generations."
—from the Great Law of the Iroquois Confederacy

Nineteen ninety-six was only a few days old when the New York Times ran the headline "'95 the Hottest Year on Record." The story discussed mounting scientific evidence of global warming, a potentially catastrophic environmental trend largely believed to be the result of the accumulation of heat-trapping gases such as carbon dioxide that are released into the atmosphere when coal and petroleum products are burned.

That same day, the Wall Street Journal reported that in California and Arizona, General Motors would this year begin selling battery-powered electric cars - vehicles that if widely used would reduce the amount of fossil fuel we ultimately burn.

Taken together, these developments perhaps serve as a snapshot of the environmental landscape today. On the one hand, scientific indicators continue to warn of the long-term effects of air, water, and soil pollution and the destruction of natural habitats such as forests and wetlands. On the other hand, business is gradually beginning to make efforts to reverse those frightening trends by creating new processes, products, and paradigms that take the environment into account.

"Sustainable development" is the term coined to describe the new conjoining of responsible environmental practices with sound business principles. Defined in 1984 by the United Nations World Commission on Environment and Development as business and development activity that "meets the needs of the present generation without compromising the ability of future generations to meet their own needs," it is slowly becoming a part of the lexicon of business leaders around the world.

Easy Being Green?

"One of the problems with turning the idea of environmental sustainability into a viable operating principle for business is that it means different things to different people," says HBS assistant professor Forest L. Reinhardt, who teaches the MBA elective Business Management and the Natural Environment. "For example, many economists, in particular, take the view that harvesters of natural resources who reinvest their proceeds in other productive assets are practicing sustainable development. According to this line of thinking, harvesting trees and using the money generated to build schools would be an example of sustainable development. But others insist that development is sustainable only if natural-resource users reinvest their profits in natural resources of a similar kind - if, say, the money from tree harvesting were used to plant more trees. It's very difficult to achieve consensus on these issues."

Richard H.K. Vietor, Senator John Heinz Professor of Environmental Management, believes that given these kinds of complexities - and the costs sometimes associated with implementing "green" strategies - strong government regulation at home and abroad will continue to be necessary in order to motivate many businesses to become more environmentally accountable. He maintains, however, that "governments need to have a realistic vision of sustainability. Holding on to stringent notions is not going to lead to practical, workable solutions."

Yet Vietor points out that more and more companies are spontaneously coming up with sustainable development strategies that aim for the twin goals of environmental friendliness and greater profitability. He notes that Xerox Corporation, for example, is currently implementing a plan to reclaim its equipment, refurbish it, and resell it - without having any waste leave the plant in the process. "They not only hope to achieve zero product and factory waste by 1997, but they also hope to make money on it," says Vietor. "The problem is that getting back and refurbishing the parts is expensive. So they're hoping for the best."

Michael E. Porter, C. Roland Christensen Professor of Business Administration, believes that it is indeed possible for companies and industries to be both "green" and competitive. In the September-October 1995 Harvard Business Review, Porter (with coauthor Claas van der Linde) argues that by creatively and proactively attending to environmental exigencies, companies are likely not only to eliminate waste and use resources more efficiently but also to streamline production processes, lower costs, produce better quality products, gain a first-mover advantage, and enhance their global competitiveness. Properly designed government regulation, Porter believes, can provide incentives for such corporate innovation.

Porter considers, for example, how the Dutch flower industry has responded to increasingly stringent laws restricting the release of pesticides, herbicides, and fertilizers into the soil and groundwater. The Dutch, he reports, have created a closed-loop greenhouse system in which flowers are now grown in water and rock wool, not soil. This lowers the risk of infestation, thereby reducing the need for fertilizers and pesticides. Chemicals that are required are delivered in water that circulates and is recycled. The system also minimizes variation in growing conditions, thus improving product quality, and reduces handling costs, because the flowers are cultivated on easily accessible platforms.

Porter's ideas, while inspiring to some, remain controversial. "Many people would argue that although pollution prevention is good business in some cases, it is not good business in all cases," says Robert W. Fri (MBA '59), senior fellow at Resources for the Future, a Washington, D.C., think tank dedicated to providing research and policy analysis for environmental decision makers. "And even if returns on environmental investments were always positive, that does not mean these returns are necessarily the best available. A company's resources are limited, and there are more than enough attractive ways to use them - whether for tactical investment in product quality or strategic investments in new market development."

A Global Issue

Fri nevertheless believes that if business is to have at its disposal the resources it needs to thrive in the coming decades, the debate must not end there. A growing number of international business leaders agree. In 1990, nearly fifty heads of major corporations (including several HBS alumni), led by Swiss industrialist Stephan Schmidheiny, created the Business Council for Sustainable Development (now known as the World Business Council for Sustainable Development). Their initial work culminated in the publication of the book Changing Course: A Global Business Perspective on Development and the Environment. They also helped plan the 1992 United Nations Conference on Environment and Development in Rio de Janeiro (also known as the Earth Summit) - an event that brought together thousands of leaders from governments, businesses, environmental groups, and nongovernmental organizations to discuss global environmental concerns.

The conference generated an impressive series of international guidelines on issues such as maintaining biodiversity, conserving forests, and reducing greenhouse gas emissions. "People left the conference feeling enthusiastic and confident," says Fri. "Unfortunately, nagging economic and political problems around the world have distracted many governments and businesses from focusing on environmental work since then."

Progress has also been hampered, he notes, by conflicting values between rich and poor nations that repeatedly surface in the international environmental debate. "One prominent theme is the idea that industrialized countries have used more than their share of scarce environmental resources and therefore must now consume less," observes Fri. "Another is that the developing countries, whose exploding populations threaten to tax the carrying capacity of the planet, must somehow contain their population growth."

Despite these kinds of daunting challenges, a number of corporate leaders continue to push their businesses in the direction of environmental sustainability. Recently, for example, the President's Council on Sustainable Development - a group composed of political, business, labor, civil rights, and environmental leaders that was formed in 1993 - issued a final report that calls for a new regulatory framework to give businesses more flexibility in preventing pollution, long-range steps to stabilize the U.S. population, and American leadership in heading off serious global trends such as climate change.

In the following text, four HBS alumni demonstrate what they and their companies are specifically doing to promote sustainable development. Their efforts show how environmental strategies can both enhance productivity and help to ensure that the earth will be habitable for our children - seven generations and beyond.

Putting a Shine on the Environment

Samuel C. Johnson
S.C. Johnson & Son, Inc.

by Marguerite Rigoglioso

"We aggressively seek out ecoefficiencies - ways of doing more with less - because waste is lost money."

"We aggressively seek out ecoefficiencies - ways of doing more with less - because waste is lost money."

Sam Johnson (MBA '52) loves to tell the story about how his grandfather once sold the family's famed floor wax to a London shopkeeper. One presumably foggy day in 1913, the elder Johnson entered a hardware store and proceeded to polish, buff, and dry the merchant's floor. He then plopped down on his white-suited bottom and coaxed the store owner to drag him several yards by the ankles. When the audacious Johnson jumped up to proudly display a pristine backside, the owner declared, "I'll buy some!"

Samuel C. Johnson, the fourth generation member of the Johnson family to serve as chairman of the privately held S.C. Johnson & Son, Inc. (more popularly known as SC Johnson Wax), thinks of the story as more than a charming anecdote. "In my dreams I fantasize that someday Johnson Wax will be able to conduct a white-flannel test on the environmental landscape in and around our offices and factories in the fifty countries where we operate," says the 68-year-old executive, whose company produces well-known household products such as Future floor cleaner, Pledge furniture polish, Glade air freshener, and Raid insecticide.

Johnson is helping his company bring that vision to life through a massive corporate effort designed to weave environmental thinking into every aspect of the business. "We believe that being environmentally conscious makes good competitive sense," he explains. "For example, we aggressively seek out ecoefficiencies - ways of doing more with less - because waste is lost money. By developing a reputation as a company that produces products that are as safe as possible for people and the environment, we also improve our market share. This is going to become increasingly important as people become more sophisticated and demanding in this regard."

A review of his company's impressive sustainable development efforts over the past five years (which fill a twenty-page brochure) quickly reveals why Fortune magazine has dubbed Johnson "corporate America's leading environmentalist." Since 1990, S.C. Johnson & Son has cut worldwide manufacturing waste and emissions by half, reduced virgin materials in packaging by a quarter, and eliminated nearly one-fifth of the polluting emissions released by its products. The company also conducts ongoing educational outreach on environmental issues to schools and communities around the globe.

And then there are those developments that seem particularly ingenious. In the company's Brazilian factory, for instance, sludge from production is removed from the waste stream and used to make building bricks for housing. At the Racine, Wisconsin, headquarters, malodorous methane gas that occurs naturally in the com-pany's local dump site is piped to the factory and burned for fuel. In the Dutch factory, liquid waste has been reduced to nearly zero through an innovative retrieval, recycling, and reuse system.

Johnson acknowledges, however, that some company products such as insecticides and drain cleaners "don't meet everyone's definition of environmental friendliness." Says Johnson, "We're making tough decisions all the time that weigh the human positives of our products against their potential environmental impact," he says. "The best way we can approach it is to eliminate the worst of the problem chemicals and minimize our use of active ingredients - while assuring product effectiveness."

The removal of one such chemical marked the start of the company's serious environmental efforts back in 1975. At that time, Johnson made the landmark decision to remove chlorofluorocarbons (CFCs) from the company's aerosol products - three years before the U.S. government banned CFC propellants from aerosols.

"That was a classic example of making a 'green' decision and creating a win-win situation. When we substituted the naturally occurring gases butane and propane for CFCs," Johnson explains, "we not only ended up with a greener product, we also had one that was cheaper and performed better." He notes that in Europe his company now markets an aerosol product propelled by ordinary compressed air.

Johnson's environmental activism continues well beyond the company gates. He is a founding member of the World Business Council for Sustainable Development, serves on the President's Council on Sustainable Development, and advises a number of environmental institutions, including The Nature Conservancy.

Like his white-suited forefather, Johnson is now a grandfather himself. "When my grandchildren first saw the big snapping turtle in the pond where I used to play and fish as a boy, they glowed with the same wonder and awe as I did," says Johnson, who in his spare time is an avid nature photographer and birder. "Without sustainable development, it's going to be a less satisfactory planet for my grandchildren to live in. For me, those are the stakes."

Planting Hope in the New World

Erling S. Lorentzen
Aracruz Celulose S.A.

by Garry Emmons

"You can't expect people who don't eat a proper meal to be concerned about the environment."

"You can't expect people who don't eat a proper meal to be concerned about the environment."

In the Third World, where the twin pressures of widespread poverty and explosive population growth often overwhelm environmental protection efforts, sustainable development meets perhaps its sternest test — and offers a vivid preview of what prevailing global conditions may be in the not-too-distant future. Amid such daunting constraints, Erling Lorentzen (MBA 6/'48), chairman of the board of Aracruz Celulose S.A., the world's largest producer of eucalyptus market pulp, with 25 percent of global capacity, is setting world-class standards for sustainable development in Brazil.

"Poverty is one of the world's leading polluters," says the rugged, silver-haired Lorentzen. "I've long believed that development was essential to preserving nature, because you can't expect people who don't eat a proper meal to be concerned about the environment."

A forty-year resident of Brazil who first demonstrated extraordinary leadership skills as a youthful commander in the underground resistance against his native Norway's Nazi occupiers, Lorentzen has made development one of his top priorities. And he has proved at Aracruz that pairing it with environmental protection makes good business sense.

Since its first tree seedlings went into the ground in 1967, Aracruz, now a $2 billion company, has replanted some 320,000 acres of denuded forest in southeastern Brazil with fast-growing eucalyptus. The company has also provided employment, schools, clinics, and recreational facilities for thousands of workers in an area that had previously been virtually devoid of employment opportunities.

Aracruz generates 90 percent of the energy needed to run its operations from industrial waste and bark. It has long been a leader in Latin America in employing advanced processing techniques that have eliminated or greatly reduced hazardous waste contaminants. In recent years, for example, the company has invested $100 million to improve fundamental paper pulp processes and eliminate molecular chlorine, steps that greatly reduce pollution.

Aracruz annually plants 1.5 million native trees on the 30 percent of company land it has set aside for conservation, including tens of thousands of fruit trees to foster an increase in the bird population. Every year, it distributes, free of charge, nine million eucalyptus seedlings to local farmers, thereby reducing their need to disturb native forests for firewood and lumber. Aracruz also buys and preserves areas of threatened rain forest and conducts numerous other projects to protect and nurture native flora and fauna. One particularly noteworthy program has protected the coastal nesting sites of endangered sea turtles.

Lorentzen, a member of the World Business Council for Sustainable Development (WBCSD), was a leading figure at the 1992 Earth Summit in Rio de Janeiro. His message then and now is that "the discipline imposed by environmental concerns can help a com-pany's productivity and create competitive advantage. In today's world, in my industry," he continues, "if we are not considered environmentally progressive, no one will buy our product, particularly in Europe and North America." In Lorentzen's view, this market pressure, combined with government environmental regulations that often promote the use of the most technologically advanced and cost-effective equipment, and the ever-present internal requirements of running a well-disciplined organization all help contribute to greater competitiveness. "The resulting enhancement of pride and morale within the company is also an important factor contributing to better performance in our organization from top to bottom," he notes.

In recent years, the international forest products industry has become an area of particular environmental focus because of its impact on water quality and plant and animal habitats. As a WBCSD member, Lorentzen is chairing a two-year study - conducted by the London-based International Institute for Environment and Development and considered a model for other industries — called "Toward the Sustainable Paper Cycle: The Role of Sustainable Forestry, Pulp and Paper Production, Paper Usage, Recycling, Energy Recovery, and Final Disposal." Says Lorentzen, "We have to get the facts — whether good or bad — on the table to elevate the debate about paper to the highest level."

For its part, Aracruz Celulose, the first Brazilian company to be listed on the New York Stock Exchange, requires that its contracted suppliers and providers adhere to Aracruz's environmental principles. The company is also involved in both the public and private sectors in fostering legislation and policy that will enhance sustainable development.

That proactive attitude is similarly reflected in Lorentzen's larger view of the international order. "We in the developing world have to go out and make our own way," he says. "We can't wait for doors to be opened for us — we must open them ourselves."

Taking a Position of Power

John W. Rowe
New England Electric System

by Linda Goodspeed

"The challenge was to find ways to conserve energy and make a profit."

"The challenge was to find ways to conserve energy and make a profit."

Few industries would seem to be more at odds with resource conservation issues than the electric utility business, where profitability has traditionally been pegged to increased energy use — and to the increased consumption of natural resources such as coal and oil that are burned to generate that energy. But at New England Electric System (NEES), the second-largest electric utility in New England, president and CEO John Rowe (92nd AMP) has proven that sustainable development is not only a viable business practice, it can be quite profitable.

A leader in the utility industry, NEES has earned plaudits for its work with public-interest groups and regulatory authorities to change the traditional frameworks that inhibit energy conservation. "The first reason for adopting sustainable development practices is to comply with the law," says Rowe. "The second is to get out in front of the law, which is only going to get more complicated as attention is turned increasingly to environmental issues."

NEES was first turned on to the benefits of conservation after the 1970s oil shocks forced all major utilities to review their established capacity-based strategies. "My predecessor, Guy Nichols, became persuaded by the arguments of a number of engineers and environmentalists who contended that the incremental cost of building new power plants was higher than the average cost to run existing ones," Rowe explains. "The challenge was to find ways to conserve energy and make a profit."

In the mid-1980s, New England Electric initiated pilot programs for its commercial and small industrial customers to help them conserve energy and thus forestall the probability that NEES would have to build new plants. The company offered these customers incentives to invest in energy-efficient lighting systems, replace old electric motors with more efficient variable-speed systems, and improve the efficiency of heating, ventilation, and air-conditioning systems. "It was a very positive program," notes Rowe. "Our customers enjoyed real savings, and the environmental community applauded our efforts to reduce air pollution." However, the company was spending, not making, money on the concept.

When Rowe — the former president and CEO of Central Maine Power Company and a veteran executive of various regulated industries — joined New England Electric in 1989, he immediately recognized that the public's demand for energy conservation would have to be met as a business opportunity. For that to happen, regulations would have to change so that utilities could benefit monetarily from the increased savings they generated.

That year, in an unprecedented partnership, New England Electric joined forces with an historic adversary — the Conservation Law Foundation, a leading environmental group — to develop a proposal whereby utilities could increase their investment in energy conservation and be awarded a share of the generated savings. The innovative plan received approval from all three regulatory agencies in the states New England Electric serves: Rhode Island, Massachusetts, and New Hampshire.

Putting the new plan in place, in 1990 New England Electric spent (and subsequently recovered) $71 million on energy conservation projects, cutting generation demand by 116 megawatts and saving 194,300 megawatt-hours of electricity, compared with the forecasts. The net value of the energy saved was $90 million, of which New England Electric retained 9 percent, or $8.4 million. The company's customers split the difference. Several other states subsequently adopted similar incentive programs.

Currently, the fourth version of "NEESPLAN," the company's resource management plan, includes a wide array of conservation projects, including using renewable energy sources such as wind power, landfill methane, municipal solid waste, and waste heat, and stabilizing or offsetting greenhouse gas emissions. "NEES's continuing commitment to conservation is part of an overall environmental strategy to reduce our net air emissions by 45 percent between 1990 and 2000," Rowe reports.

One effort toward that end was a timber conservation program that NEES conducted in Malaysia in 1992. By helping local harvesters to develop tree-felling techniques that left more of the flora intact, NEES was able to offset an estimated 580,000 tons of carbon dioxide. "The logic behind the project was that since carbon dioxide emissions affect the atmosphere globally, not just regionally, reducing them anywhere in the world can help," explains Rowe. "We chose to do it in Malaysia, because it was cheaper than reducing them at our plants in New England.

"While the intensity of environmental pressures may ebb and flow with time," Rowe concludes, "these issues will remain fundamental to any utility's success or failure."

Charging Up for the Future

Frank L. Schweibold
General Motors Corporation

by Elaine Gottlieb

"One of the most important advantages of the EV1 is that because it doesn't require gasoline, it will ultimately reduce America's dependence of important oil."

"One of the most important advantages of the EV1 is that because it doesn't require gasoline, it will ultimately reduce America's dependence of important oil."

In 1991, General Motors adopted a comprehensive policy designed to guide the company's efforts toward protecting human health, natural resources, and the global environment. As part of that effort, GM has now become the first major auto manufacturer in modern times to bring to market the first true electric vehicle. In January, the company announced that its new electric passenger car, the EV1, will be sold this fall through select Saturn dealers in California and Arizona.

"The EV1 represents GM's commitment to technological and environmental leadership," says Frank Schweibold (MBA '73), a 25-year GM veteran who, as director of finance and strategic planning for GM Electric Vehicles, has been heavily involved in the development of the company's electric vehicle program for almost four years. "We're creating technologies unmatched by anybody else. The EV1 is the first in a portfolio of advanced technology vehicles that GM will be bringing to market in the years ahead."

The new electric car is being introduced with lead-acid batteries that may be recharged at home with a special charging system. "One of the most important advantages of the EV1," says Schweibold, "is that because it doesn't require gasoline, it will ultimately reduce America's dependence on imported oil." He also notes that the EV1 will be the most emission-free vehicle on the road today, surpassing even the newest gas-powered cars that feature state-of-the-art emission-control technology.

Analysts point out, however, that while electric cars do not produce tailpipe emissions, the fact that they need electricity to be recharged — and that electricity generation usually requires the burning of some kind of fuel — means that they will still not be totally emissions-free. Yet even on this count, maintains Schweibold, the electric vehicle will provide environmental advantages.

In states where electricity is produced using "cleaner" geothermal, hydroelectric, or nuclear energy, he explains, the electric car "will certainly be as clean a vehicle as you can get." In places such as the Northeast, where a higher proportion of electricity comes from less clean coal- or oil-burning plants, the electric vehicle will provide the opportunity for emissions to be treated at the level of the power plant. "This will be much more effective and cheaper to society in the long run than putting emissions controls directly on automobiles," Schweibold says.

At the very least, Schweibold points out, the electric car will provide air quality benefits in congested downtown areas. The EV1 will further improve the quality of life in cities, he says, because it is quieter than a regular car. Schwei-bold estimates that it will take at least a decade for enough electric vehicles to be on the road in order for their true environmental impact to be measured.

The futuristic EV1 sports coupe accelerates from 0 to 60 miles per hour in 8.5 seconds. Currently, however, lead-acid batteries that power electric cars provide a driving range of only seventy miles in the city and ninety miles on the highway before they must be recharged. "GM is investing heavily to develop an affordable nickel metal hydride battery that would offer nearly double the driving range," says Schweibold.

GM made its commitment to developing a marketable electric car in early 1990. But later that year, when California mandated that electric cars constitute 2 percent of all car sales by 1998, the company, along with the rest of the auto industry, protested vigorously. "The role of government should be to provide incentives for people to embrace sustainable development practices in a market setting, not to dictate that market," argues Schweibold, whose work at GM has included attending to regulatory issues. California has since backed down on its position; modified rulings now require that electric cars comprise 10 percent of the market in that state by 2003.

Over the next decade, Schweibold expects electric car technology to evolve dramatically and prices to drop. When that happens, he says, electric vehicles will become a viable second car for most households. "We believe that someday there can be an electric vehicle marketplace, and we at GM want to lead that market," he concludes.


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