Going Green Means Staying Profitable for Companies

Environmental concern is suddenly all the rage, all around the world. Unless you've been asleep, you've read many articles about this hot trend. In early July, China lifted gasoline subsidies, in part to force consumers and businesses to confront the costs of using more of that ever more costly resource. The central government has also been aggressively forcing the closure of inefficient cement and aluminum factories in an effort to make overall production more cost-effective. Meanwhile, even as the U.S. government recently failed to pass legislation limiting carbon emissions, American companies led by behemoths such as General Electric, Wal-Mart, Google and Du Pont Chemical have been launching new green initiatives. These two realities—of the largest companies in the world adopting environmentally friendly business practices and the largest country in the world aggressively seeking to reduce energy consumption—signal a new seriousness about "sustainability," the word for long-term growth that doesn't deplete natural resources and lowers emissions of greenhouse gases.

The reason: sharply higher prices for oil and raw materials have changed the landscape for countries and global corporations, making reductions in energy use economically viable and strategically important in a way that no amount of green activism ever could. Any company with a supply chain and global operations must either reduce its oil consumption, and so its carbon footprint, or rapidly see its profits eaten up by fuel bills. Think about it: global growth is roughly 4 percent a year, and companies have to grow well above that to be seen as healthy enterprises and attractive investments. Meanwhile, the price of oil has skyrocketed, and the prices of raw materials such as copper, steel, cement, paper and any sort of energy have gone up three or more times in the past two years. While raw materials are usually less than 15 percent of overall expenses, those figures have been growing. CEOs and CFOs are feeling a new urgency to reduce costs, and energy-conservation strategies have suddenly been transformed into an answer.

Consider Wal-Mart CEO Lee Scott, who has quickly turned his controversial retailer into a poster child for environmentally aware business. To maintain its razor-thin margins at a time of record oil prices, which are raising the cost of importing goods from China, Wal-Mart has radically altered how its products are made and how they're transported. One example: making detergent more concentrated, which leads Wal-Mart suppliers to use smaller plastic containers, which in turn use less petroleum to manufacture those containers, which can then be shipped with more containers in each carton, which leads to less cardboard, which makes it possible to transport more units on each ship or truck, which then reduces the amount of gas used to get those units from the factory to Wal-Mart outlets. The result: Wal-Mart maintains margins and reduces its resource consumption as well as that of its suppliers.

Add in the fact that many companies function in multiple national markets, many of which have government regulations dictating carbon emissions. That means it's often more cost-effective for companies to adapt their supply chains to the most stringent market. That's why global corporations have moved significantly faster than the U.S. government in the direction of sustainability.

Other factors are hastening the trend. Recent studies have indicated that companies that score well on various environmental metrics also demonstrate above-average return on investment and stock performance. Other analysis done by groups such as KLD Research has drawn a connection between how capable and innovative a management team is and how eco-friendly its business is. That makes sense. Innovative management teams are one step ahead of the competition and think strategically about the next wave. Companies such as Staples and Du Pont that saw resource and regulatory issues on the horizon a few years ago are now reaping the rewards. Others, such as Google, have long understood that if they used less energy, they could satisfy both their need to do good and their desire to do well. Google has sought more efficient ways to manage the energy drain of its massive server network, and that has been one more secret of its success.

In short, environmental concerns have suddenly emerged as a dominant driver of global corporations, marrying an old impulse to be good stewards of the planet with an equally ancient desire to make money. That marriage may well eradicate the quaint distinction between profit motive and public good, opening up a brand-new world of business practices and investment opportunities.