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New Bottom Line Volume 5.17 – The Cost of Environmental Quality and Efficiency: Straw into Gold

August 14, 1996

Over the past few months, we have talked with dozens of companies about opportunities to increase profits, while reducing expenses and environmental impact, with a systematic program of boosting environmental quality and efficiency.

The responses have been varied, and telling. Quite a few say “This makes perfect sense. When can we start?” Some are motivated by the often attractive return on investment (ROI) that ecoefficiency initiatives can generate. Some are relieved that “doing the right thing” doesn’t have to cost them money, but could actually contribute to the bottom line. Some people–especially owners and managers of smaller companies–simply don’t have time. And we fondly remember one gnarly soul who told us he was simply “Not interested” in our ecoefficiency offerings. “Not interested in saving money?” we asked. “Not that way!” he grunted!

The range of responses is not surprising (though the ideological vehemence of the last one was!). Every business faces the daily challenge of productive allocation of scarce, or at least finite, resources. Every allocation decision has consequences, and in this day of cost cutting and downsizing there is enormous pressure for each allocation decision–especially an innovative one– to make good business sense.

So what is the cost of environmental quality? Equally important, what is the opportunity cost of quality and efficiency possibilities not realized, for whatever reason?

Philip Crosby offered an answer in the title of his book Quality is Free–an answer that in fact has been one of the lessons of the Total Quality Management movement, and its descendant Total Quality Environmental Management.

As Daryl Ditz, Janet Ranganathan and R Darryl Banks noted, in the recent World Resources Institute (WRI) book Green Ledgers: Case Studies in Corporate Environmental Accounting, “environmental costs are dispersed throughout most business and can appear long after decisions are made.” Case studies of nine businesses show that environmental costs are often both sizable and “often systematically underappreciated,” with important consequences. If environmental costs are underestimated, they will be undermanaged. If they are improperly allocated, that can’t be well managed. And if they are misunderstood–for example as mere regulatory burdens, the usual bugaboo, rather than a way of interpreting cost structure that offers considerable management leverage–your company sacrifices the opportunity of changing it in beneficial ways. If environmental costs on a product line exceed operating profit, as they did for one S.C. Johnson product, if a cost cutting measure has environmental consequences that jeopardize the viability of a product line, as was the case at Dow, or if exaggerated estimates of environmental costs that actually “provide multiple benefits such as greater occupational safety or enhanced product quality,” then managers lose the opportunity to manage wisely, companies lose competitive advantage and shareholders lose profits.

Beyond cost structure, consider “regulatory immunization.” The Providence (Rhode Island) Journal found that one side effect of an energy efficiency programs that cut energy use 75%–no small benefit in itself–was complete elimination of air emissions. This in turn meant elimination of the need for future investment in air pollution control equipment, the capital reserves that might be required for that, and the headache of worrying how the regulations would change in coming years.

Market entry is another driving factor. As we have often noted, the ISO 14000 series of standards may well become the required entry ticket to many lucrative international markets. What is the value of a cost avoidance strategy that sacrifices market entry? Within markets, environmental factors can significantly influence market share. It’s been reported that qualifying a product for Germany’s Blue Angel ecolabel can be worth a 30% boost in market share. Not a bad “side effect” of practices that can reduce costs and expand operating margins.

The real costs may go still deeper. Karl-Henrik Robert, founder of Sweden’s Natural Step (Det Naturliga Steget), observes that “In this age of global trading and global branding, the value of a brand far exceeds the capital assets of a company. A global brand may take years to build, and only one incident to tarnish.” Just ask Shell, which recently faced the double impact on its brand value of both the Brent Spar incident and the execution of Ken Saro-Wira by its Nigerian government partners. The public regard for your brand identity, from an international public increasingly sensitive to environmental concerns, may be the true measure of the cost of quality.

(c) 1996 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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