Green Giants: How Smart Companies Turn Sustainability into Billion-Dollar Businesses
288 pages, AMACOM, 2015
Green Giants: How Smart Companies Turn Sustainability Into Billion-Dollar Businesses began with the author’s discovery in 2013 that sales at the sustainable, socially responsible burrito chain Chipotle had outpaced those of strip-mall stalwart Burger King. Chipotle’s revenues in 2014 were $4.11 billion. That’s billion with a B. For the eight years the author spent compiling evidence that brands can both maximize profit and be a force for social good, the question she was asked most often was, “What’s the business case for sustainability?”—a question belying a bias that there was none. The discovery that Chipotle and at least eight other companies globally now generate more than a billion dollars in annual revenue from a business line with sustainability or social good at its core, changes that. These companies are the Green Giants. Ranging from entrepreneurial start‐ups to business lines incubated within major multinationals, collectively they generate more than $100 billion in annual revenue from their sustainable business lines and outperform their competitors in the stock market by 11 percent.
THE BUSINESS CASE FOR SUSTAINABILITY
Mine is not the first book to make the business case for sustainability. Evidence of the positive impact of sustainability on business outcomes is now irrefutable; there are at least 54 reports that prove it, and counting. Among them is a 2007 report from Goldman Sachs that found that companies that are the leaders in sustainable, social, and good governance policies have 25 percent higher stock value than their less sustainable competitors. Most recently, a report by CDP (formerly called the Carbon Disclosure Project), released in September 2014, showed that companies that outperform on sustainability metrics are more profitable and return better dividends to their shareholders than those that don’t.
And yet the perception persists that sustainability and business are competing agendas. In 1970, economist Milton Friedman dismissed business with a “social conscience” as “unadulterated socialism.” Since then, the notion that sustainability and social good are fundamentally opposed to profit has hardened into fact in the minds of the majority of business leaders, reinforced by the opinions of Wall Street analysts to whom they are beholden.
This view is changing, but by increments. Sustainable business leaders have called for a new incarnation of business that embraces sustainability and social good—not as the job of sustainability and corporate social responsibility (CSR) departments, a risk to be managed or a cause supported—but as completely integrated into business strategy and the purpose of the organization, and embraced as the path to profits and growth. They view sustainability and social good not just as where businesses spend their money but how they earn it.
Yet the vast majority of companies have not made this shift. Why?
It’s not necessarily for the lack of will. Many business leaders believe they’ll need to change and want to do so. But the sustainable business movement faces specific barriers, both perceived and real.
First, it has been hard to shift away from Friedman’s legacy. Many people believe that its tenets are enshrined in law in countries including the United States. They are not, as Professor Lynn Stout comprehensively proved in her 2012 book The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations, and the Public. But Friedman’s ideas are persistent and have proven remarkably hard to dislodge.
Some don’t believe the need to embrace sustainable business practices is pressing. For example, Jeff Immelt, CEO of GE, was lambasted by one group for “overestimating the urgency of these threats” (referring to climate change) after he launched the Ecomagination strategy in 2005. Meanwhile, Bob Lutz, at the time vice chair of GM, memorably called global warming “a crock of S%$#” in a closed door meeting with journalists in 2008. (This came back to bite him when in 2012 conservative media pundits universally panned the Chevy Volt, GE’s electric vehicle, causing Lutz to lament that “all the icons of conservatism are deliberately not telling the truth” about the Volt because “they assume that if it’s electric it must be a product of the left-wing, Democratic enviro-political machine.”) In addition, there are the long-term, well-funded efforts to deny and sow doubt about climate change backed by private sector players with a heavily vested interest in preserving the status quo.
Frequent use of the future tense doesn’t help. Statements such as “In the future, the most successful businesses will … ” and “Sustainability is the business opportunity of the 21st century” are the clarion calls of the sustainable business movement. But Wall Street thinks in increments of quarters and wants results next week, not maybe some time later this century.
The biggest barrier to adoption of sustainable practices, though, is lack of knowledge of how it can be done profitably. Many businesses have tried and failed with “green” or “eco-friendly” products, and they’ve given up because they assume that “green doesn’t sell.”
That’s why the Green Giants are so exciting. They prove that addressing sustainability and social good need not be in conflict with delivering shareholder value; in fact, sustainability and social good can drive it. The Green Giants bring the debate into the present tense; it’s not just that it could be done but that it has been and is being done—here and now. These companies are growing faster than their conventional counterparts. Most command wider profit margins than their category averages. Several 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, as Chipotle versus Burger King and Tesla versus the U.S. and German luxury automakers attest. GE earned $28 billion from Ecomagination in 2013, which is the size of a Fortune 100 company. (It’s roughly the same size as Halliburton or McDonald’s and nearly four times the size of Peabody Energy, the world’s largest coal company.)
In fact, proprietary analysis conducted for this book by Jason Denner of the consulting group POINT380 found that the annual returns of publicly traded Green Giant companies have averaged 11.7 percent (23.2 percent –11.5 percent) higher than their leading competitors over the past five years. That means that if you had invested $1,000 in a portfolio of the Green Giants and the same amount in a similar portfolio of their direct competitors in June 2010 (after Tesla’s initial public offering), today your investment in Green Giants would be worth $3,251, while the portfolio of competitors would be worth $1,9320. On average, the Green Giants’ stock prices have outperformed the S&P 500 by 6.8 percent per year, which the comparison companies trailed by 4.9 percent.
The selected competitors are high-performing companies. On average, they returned a total of 93 percent over the period 2010- 2015. Green Giants, though, returned 225 percent. Admittedly, this number is boosted by Tesla’s spectacular growth; however, if you remove Tesla from the analysis, the stock values of the remaining companies still outperformed their competitors, growing 153 percent over the period. Not bad for companies not guided by delivering shareholder returns.
With upside opportunity like that, who cares if you believe in climate change or the social obligation of business?
You’d be crazy not to seize it.