Accounting for Impact

Thursday, July 19, 2012


You can learn a lot about a company by the innovations it pursues. For most us, sustainability means reducing our environmental impacts one CFL, organic lettuce, or hybrid car at a time.


 So it seems natural when companies do the same. But do their efforts really add up? Unilever, maker of consumer products like Dove soap, Axe deodorant, and Hellman's mayonnaise, recently released a 2011 Progress Report, detailing the company's progress towards its 2015 Sustainable Living Plan. It shows that, in answering that question, accounting matters.

Many of the corporate giants and, recently, tech stars like Microsoft, Google, Facebook and Apple, have announced their plans to be carbon neutral-meaning their energy either comes from renewables like solar and wind or is offset by planting trees or other similar activities.

That's all good news, right? But how good depends on how we account for these efforts. Is it the same whether a bank goes carbon neutral or a factory?

When companies make these bold announcement, we should ask where their efforts would make the biggest difference. For many, the true environmental impacts aren't coming from their office energy use, or the styrofoam cups in their snack rooms. Instead, the greater impacts lie upstream, in the carbon emissions, water consumption, and working conditions of its supplier's factories and fields, or downstream in the use and disposal of its products by consumers. And that means their greatest opportunities for impact, and their greatest risks, lie outside their direct footprint.

This is what Unilever found when it decided to account for its impacts. A quarter of Unilever's greenhouse gas emissions come from its supply chain, two-thirds from the use of their products, and only 5 percent from its own activities. Half of the its water usage comes from growing the raw materials it uses, half from consumers using its products, and less than 0.1 percent from its own processes. Their greatest opportunities were in innovating will come from changing how palm oil growers irrigate their fields, or how consumers reduce water usage.

This varies by company and industry. For retailers, grocers, and apparel companies, the upstream impacts tend to dominate. Roughly 95 percent of Walmart's carbon footprint comes from upstream: from the suppliers who make the blue jeans, grow the produce, and manufacture the toys that WalMart sells. The same for apparel companies like Nike, Levis, and Patagonia, for whom a 5-10 percent reduction in the impact of their supply chain equals the entirety of their own direct footprint.

For others, the impacts come through their product's use (and disposal). Think auto manufacturers, airlines, energy companies. When Ford announces grass roofs on their River Rouge factory, how should we account for their efforts when Ford Explorers and Expeditions keep rolling off the line? The real footprint of these companies is driven by the efficiency of the planes, trains, and automobiles they make and sell.

Finally, yes, there are companies whose own activities outweigh the upstream or downstream, including the most energy intensive of all manufacturing sectors-cement, bulk chemicals, iron & steel, aluminum, paper, mining, glass. This is where reducing one's own direct footprints can have a significant impact. But also some of the least intensive companies. When banks, internet companies, law firms, and other professional service firms reduce their footprint, such efforts are well-intentioned but relatively minor.

Companies often avoid accounting for their impact upstream and down because doing so reveals your true footprint-your worst side-to competitors, consumers, and corporate watchdogs. But without that knowledge it's impossible to identify the biggest opportunities and most dangerous risks right in front of you, so doing so remains critical.

Don't get me wrong. Reducing your direct footprint is good and responsible business, but it's no more innovation than me buying organic at the grocery store. The next time you hear a company is reducing its carbon footprint, consider whether those actions are really addressing their biggest impacts and you'll see whether they're serious about pursuing truly sustaining innovations.

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AndrewHargadonAndrew Hargadon is the Charles J. Soderquist Chair in Entrepreneurship and Professor of Technology Management at the Graduate School of Management at University of California, Davis. Hargadon's research focuses on the effective management of innovation, particularly sustainable innovation, and he is author of numerous articles, essays, and the book How Breakthroughs Happen: The Surprising Truth About How Companies Innovate (Harvard Business School Press).

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