The (long-time) coming revolution in sustainability

A series of recent articles on fighting climate change have called for “breaking every rule in the free market playbook” (e.g., Another year goes by, Capitalism vs. the Climate). Do we really have to break the system, or can sustainable practices move from the fringe to business-as-usual?

I talked recently with Rick Ridgeway, Patagonia’s Vice-President of Environmental Initiatives, about their founding involvement in the Sustainable Apparel Coalition (SAC).  The coalition's mission:

to lead the industry toward a shared vision of sustainability built upon a common approach for measuring and evaluating apparel and footwear product sustainability performance that will spotlight priorities for action and opportunities for technological innovation.

SAC began with an unlikely hook-up—Patagonia and Walmart—and the goal of creating an industry-wide tool to measure the environmental and social dimensions of apparel and their extensive supply chains. If anyone can mainstream sustainable practices, it’s this coalition.

The SAC launched in Spring of 2010 and already comprises over 50 members (adding 2-3 new members each month)—many of them the biggest retailers, apparel companies, distributors. From its website, members include:

Adidas, Arvind Mills, ASICS, C&A, Columbia Sportswear, Duke Center for Sustainability and Commerce, DuPont, DyStar, Environmental Defense Fund, Esprit, Esquel, Gap Inc., H&M, HanesBrands, Huntsman, INDITEX, Intradeco, JC Penney, Kohl’s Department Stores, Lenzing, Levi Strauss & Co., LF USA, a division of Li & Fung Limited, L.L.Bean, Inc., Makalot Industrial Company, Marks & Spencer, MAS Active, Mountain Equipment Co-op, New Balance, Nike, Nordstrom, Otto Group, Outdoor Industry Association, Patagonia, Pentland Brands, Pratibha Syntex Limited, PUMA, REI, TAL Apparel, Target, Teijin Fibers Limited, Textile Exchange, Timberland, Tiong Liong Corporation, University of Delaware, U.S. Environmental Protection Agency, Verité, VF Corp, Walmart, WL Gore & Associates, and WRI.

That's impressive.  And while it may not seem like a lot of members in so big an industry, collectively they account for roughly 30% of the apparel sold worldwide. 

I’m not bullish on change because this is the first attempt to build a sustainability index—the market is flooded with indices, certifications, ecolabels, etc. And I’m not bullish because this tool perfectly captures all aspects of the sustainable lifecyle—none will. The challenge here isn’t being the first or the best. It's understanding how change happens and then focusing energy to make it happen. This coalition has that understanding and focus.

A whisper not a bang.

To explain why I think so, bear with me for a brief detour into how innovation happens at the scale that makes it interesting. Forget all the names and dates you learned in elementary school, great social and technical revolutions begin with a whisper, not a bang. They take decades to develop and then, when they do, they change everything overnight.

Take the industrial revolution. It started with a whisper: three different technologies slowly emerging in the 1700s. Coal slowly replaced wood as the dominant source of fuel; the steam engine slowly replaced animal and wind power (to pump water from coal mines); and large ironworks slowly replaced local craftsmen and blacksmiths. For decades, these technologies and the businesses and lifstyles that surrounded them grew and evolved. Then, all of the sudden, the last few decades of that century and the first few of the next saw an explosion of innovation across all industries—from textiles to shipping to railroads to iron and metalworks.

The impact didn’t come from any one of these technologies, it came from the interaction between them. Coal-fired furnaces made better steel made more powerful steam engines; better steam engines broadened the applications for steam power; more steam power drove demand for more coal and better steel.

Call it convergence. Each element grows independently for some time until they’re mature enough to drive, and be driven by, the advances of the others. The same happened in the last half-century with the integrated circuit, the computer (hardware and software), and the Internet combining to drive and diffuse the IT revolution. In each case, it took the technologies time to mature until, within a decade or so, advances in one began to drive, or be driven by, advances in the others.

Bold leaps in any one technology don’t trigger a revolution. It’s their convergence with other related ones that do—and lead in turn to bold leaps.

It’s easy to see these convergences when they look like steam engines, computers, or webpages. But the same thing happens when the elements are more abstract: Sex, drugs and rock & roll; Derivatives, lax banking laws, and greed. These social influences aren’t that different from physical ones. They are what Sociologists call institutions—“the more enduring features of social life” as Anthony Giddens says. These institutions structure our lives, implicitly constraining us from doing what we shouldn’t and enabling us to do what we should.

While new technologies and behaviors can appear overnight, turning them into institutions—agreeing on what ideas or objects should and shouldn’t mean and what we should and shouldn’t do with them—takes a lot longer (unless, of course, sex and music are involved—then all bets are off). It took over a hundred years for the steam engine to enter factories and, even then, the first uses were to pump the water that powered the waterwheel. It took the Internet 30 years to go mainstream. But, just as the late economist Rudi Dornbusch said,

Things take longer to happen than you think they will and then they happen faster than you thought they could.

The Sustainable Apparel Coalition such a convergence. A range of technologies, business practices, and market forces that have been slowly emerging for several decades are finally coming together. In a recent HBR article, The Sustainable Economy, Yvon Chouinard, Jib Ellison, and Rick Ridgeway, laid out a strong argument for why sustainable business practices are finally ready to rapidly become business-as-usual. The necessary institutions are emerging and, more important, converging. I see three of them at work here: metrics, market preferences, and managerial practices.

Metrics: What you measure, you manage.

For a long time, we’ve recognized that the assets of the natural and social environment (clean air, water, forests, biodiversity, climate stability) have value and, conversely, their depletion has costs. But until we could agree on how to measure those assets and costs, it was difficult to make decisions based on that information.

That has begun to change. In everything from clean air to watersheds to forests to biodiversity, we are beginning to reach consensus on how to measure and value these resources. Ernst & Young reported a rise in sustainability reporting, with 76 percent of their survey respondents already reporting such measures (and 93 percent expecting to within the next five years).

Reaching consensus doesn’t mean reaching the one right way—it means reaching a widely-accepted way. Just like there isn’t one right way to pay CEO’s, there just needs to be an accepted way that allows Directors to make those decisions (a way now threatened by a proposal requiring public disclosure of CEO-to-worker pay ratios). Or like the credit ratings agencies that, as the Financial Crisis Inquiry Commission reported in January 2011, were “key enablers of the financial meltdown.”

Reaching consensus around sustainability metrics means enabling businesses to account for their dependence on the natural environment as both an asset and a liability can have significant impact—and markets to make their own choices based on these acounts. It may not be perfect, but that’s necessary to be effective.

The Voice of the Customer

Another element at work in this convergence is market choice—the decisions made by individual consumers, corporate buyers, and—most importantly—investors.

Consumers and corporate buyers are increasingly making purchase decisions around which products they will buy and use. The Energy Star program has shown that consumers will voice their preferences—in one national survey, consumers are, on average, willing to pay an extra $250–$350 for refrigerators awarded the ENERGY STAR label, demonstrating that simple information can have significant impact on consumer choices. And now Good Guide is bringing that information into the store with you, in an iPhone app that delivers sustainability information on over 100,000 products.

Less visible but often more influential are corporate buyers now conscious of and counting their environmental footprint when buying everything from industrial solvents, to toilet paper, to computers and printers, to organic foods. One HP marketing executive told me that, as computers and printers become commodities, their customers were increasingly focused on sustainability measures like energy consumption and carbon footprint.

Finally and perhaps most influential of all are the voices of investors—particularly institutional investors and analysts (and others involved in the capital markets and financial environments of large corporations). For them, the choices are less about ethics then about assets and liabilities. When stock price and the cost of capital become connected to corporate exposure to long-term sustainability issues, you have executives by the short hairs.

Lawyers call this the changing “social contract.” You see it at work with the cigarette companies who, in the 1960s were making decisions that are the subject of billion-dollar lawsuits today. The lenders, insurers, and lawyers of energy utilities are now wondering whether that new coal plan will be an asset or a liability for the next 40-60 years of its life. You see this also driving innovation in the food industry, where industrial ingredients and processes that were cost-savings are now looking like health liabilities. And, of course, when the social contract changes, changing government policies are not far down the road.

When individual and corporate customers start shifting their buying preferences, companies notice. When investors and lenders and lawyers start shifting their preferences, CEO’s start to notice.

Changing managerial practices

Leaders of corporations are legally bound to make, and justify, all of their decisions on the basis of maximizing shareholder value. Without an accepted means of accounting for sustainability—of linking social and environmental costs to the value of their companies—only the most adventurous were willing to try. Usually, the most charismatic of CEOs (like Ray Anderson of Interface or Yvon Chouinard of Patagonia).

The emergence of institutionalized metrics—quasi-legitimate standards of what constitutes social and/or environmental costs—changes how managers manage and, perhaps more importantly, how investors place a value on them. Corporate leaders can now account for, worry about, and manage to a company’s reliance on unsustainable practices. They can task their CFO with responsibility for reporting their sustainability metrics, who in turn task their managers with tracking these metrics at the business unit level, who in turn task their buyers and designers with new criteria for making the critical decisions that, in the end, determine the sustainability of a business’s practices.

Of course, these changes are competing for attention at all levels of the organization. What makes them more important? Here again, the more clearly accepted the metrics, the less individual thought, and risk, goes into following them. At all levels, the easier to measure something, the easier to manage it. And the more directly connected those measures are to customer (and investor) behavior the more priority those decisions get.

When Patagonia was worrying about the sustainability of its supply chain, few people cared (beyond the usual Patagonia fanboys). But when Walmart partners with Patagonia, then Nike, and eventually suppliers, producers, and retailers that account for 30% of the apparely market, you’re seeing convergence.

* * *

The emergence—really, the convergence—of (1) accepted metrics on the value and costs of social and environmental resources; (2) legitimate sustainability-based choices by customers and valuations by investors driven by those metrics; and (3) the resulting decisions by corporate leaders and managers are conspiring to make the corporate pursuit of sustainability something more than a simmering trend. simply business as usual. As Chouinard, Ellison, and Ridgeway point out, among business leaders today:

Even those concerned about only business and not the fate of the planet recognize that the viability of business itself depends on the resources of healthy ecosystems—fresh water, clean air, robust biodiversity, productive land—and on the stability of just societies. (p2)

So is it necessary to break the free-market system in order to bring about revolutionary change?

I don’t think so. Borrowing from Churchill, our free market system may be the worst form of economy, except all the others that have been tried. And I’m not sure any alternatives could bring about the scale and scope of the changes we need in the time we have. It may take a long time to make change happen, but when it does, it will happen faster than we think.