Can manufacturing lead the way to a sustainable future?
At least since 1798, when Thomas Malthus identified exponential population growth as a harbinger of humanity’s doom, the concept of sustainability often has been associated with apocalyptic rhetoric. In recent years, however, business leaders and investors alike have begun to embrace sustainability for its upside potential.
There’s a growing awareness that large-scale challenges — such as climate change, resource constraints, urbanization and global demographic shifts — require equally large-scale solutions. That’s why the Sustainability Accounting Standards Board (SASB) aims to harness the power of the capital markets to address these issues head-on.
Our standards will help facilitate the flow of capital to those companies that are not only best positioned to manage sustainability risks, but prepared to capitalize on sustainability opportunities.
At the end of March, SASB issued standards for five industries in the resource transformation sector: aerospace and defense; chemicals; containers and packaging; electrical/electronic equipment; and industrial machinery and goods.
Although our research shows that these industries are exposed to their share of potential risks — most notably in energy, waste and supply chain management — they also face plenty of upside opportunity for innovation and growth.
Resource transformation is a sector responsible for manufacturing consumer and industrial goods at a massive scale — everything from the planes we ride in to the packages we ship things in. Population growth and the expansion of the global middle class has led to greater demand for these products, which means more manufacturing, more energy consumption, more resource use and more waste.
As a result, the sector is uniquely positioned to help tackle some of the greatest challenges the world faces today, from carbon emissions to overstressed water sources to natural resource depletion.
Generally speaking, the resource transformation sector is made up of mature, concentrated (or consolidating) industries with high entry barriers and low competition.
Subsequently, much of its innovation has been reactive in response to emerging regulation and focused on process efficiencies to achieve scale and preserve margins in the face of commoditization. However, SASB research indicates significant opportunities for proactive, product-focused innovation as customer preferences shift and demand grows along with the global middle class.
For example, in the chemicals industry, the green chemistry market is expected to grow from $2.8 billion in 2011 to $98.5 billion by 2020 — a mind-boggling increase of 3,500 percent in less than a decade.
Likewise, in the industrial machinery and goods industry, the global medium- and heavy-duty hybrid truck market is projected to reach 90,000 units by 2022, a 3,600 percent increase in under 10 years.
Meanwhile, in containers and packaging, the global market for sustainable packaging is forecast to grow to $244 billion by 2018, a more modest but still significant increase of 28 percent in just five years.
Answering the call
Some companies already have begun to explore these opportunities, focusing their efforts on product efficiency and lifecycle management — factors that SASB’s rigorous standards-setting process identified as likely to have material impacts across the sector. These innovations focus on efficiency and responsibility in the design, use-phase and disposal of products.
Use-phase impacts are particularly relevant in the aerospace and defense, industrial machinery and goods and chemicals industries. In aerospace and defense, a combination of climate change, resource constraints and population growth is driving demand for more fuel-efficient aircraft.
As a result, Boeing has joined forces with NASA to develop a heavy-lift blended-wing aircraft that is lighter and simpler to manufacture, and achieves greater range, fuel economy, reliability and lifecycle savings, as well as lower manufacturing costs. The company estimates that the design could lead to substantial increases in energy efficiency for cargo aircraft, with fuel cost savings of 18 to 60 percent compared to existing models.
Additionally, companies are starting to recognize the value of closing the loop between product creation and disposal.
For instance, over the next 20 years, an estimated 12,000 aircraft are destined for the junkyard. In response, aerospace and defense industry players formed the Aircraft Fleet Recycling Association (AFRA) to increase the recyclability of aircraft, by using advanced composite fibers, aluminum and other metals. In 2010, AFRA set a target recycling rate of 90 percent by 2016.
In the U.S., the amount of recoverable plastic, steel, glass, aluminum and paper waste sent to landfills annually is estimated to be valued at $11.4 billion, representing a significant loss of potential feedstock for new containers and packaging. The American Forest and Paper Association, which includes several large containers and packaging companies, launched its “Better Practices, Better Planet 2020” initiative to accelerate recycling rates of paper packaging by more than 70 percent by 2020.
In the electrical and electronic equipment industry, Siemens’ health care segment has developed a product take-back program. The program frees customers from the hassle of disposing of their equipment and allows Siemens an opportunity to extract valuable material or refurbish products for resale.
Siemens’ refurbishment process enables the reuse of an average of 90 percent of materials, while the refurbished systems are of the same quality as new systems, yet purchase costs for customers are an average of up to 20 percent lower.
More work to be done
It makes some sense that an increasing number of such efforts are not just about compliance and risk mitigation, but rather about market leadership and improved competitive positioning. After all, these are mostly cyclical industries with relatively elastic demand, and internecine price wars are off the table. But the innovations mentioned here only scratch the surface.
Going forward, SASB’s research shows that innovative products and disruptive technologies have the opportunity to open up new markets by helping address key societal issues.
This is why 77 percent of U.S. senior executives believe that sustainability is “vital to future growth,” and not just a compliance or cost-cutting measure. Indeed, 88 percent of these executives say that sustainability expenditures are an investment, not a cost. But how can providers of capital know which of these companies are walking the walk, and not just talking the talk?
SASB standards are designed to close this information gap, allowing companies to measure, manage and effectively communicate their performance on the sustainability issues most likely to have material impacts on their industry.
Concentrating on material factors has the added benefit of making our standards cost-effective: they average five topics and 13 metrics per industry, 80 percent of which are quantitative. Furthermore, as recent research from Harvard Business School shows, our approach can help companies better focus their sustainability efforts, leading to significantly improved accounting and market returns.
Companies that are serious about integrating sustainability into their core strategy need to understand how to mitigate the associated risks, and also how to create and capitalize on the inherent opportunities.
Visit our website to download the standards, read the evidence behind them and begin incorporating SASB standards into your existing disclosure and performance management processes.
Now is not a time to shrink from the challenges that face us. Rather, it’s a time for action. Roll up your sleeves and join us.