Is it worth investing in green products and services?
The concept of “greenness”
I’m an accountant, therefore I need to define my terms. You may well ask “what is meant by Green Products” as mentioned in the title? I’m interpreting it as being products created by a sustainable process that also contribute to sustainability in use; from conception, through development and creation, to utilisation and ending in deconstruction (or disposal).
Green doesn’t only refer to the impact on our physical environment, but also on our social and economic environments. Here is a definition of sustainability:
“Sustainable development meets the needs of the present without compromising the ability of future generations to meet their own needs.” Bruntland Commission of the United Nations – Report of the World Commission on Environment and Development, 1987
So a product can’t be considered ‘green’, unless the whole chain of processes in bringing it to market, its application and its eventual demise, are all sustainable in themselves. This is a very, very tall order when you consider the thousands of third party inputs that typically go into the creation of a product, or in delivering a service. But in order to claim that they are green, that is what the vendor must ensure, through quality control, audit and assurance.
The concept of worth
We’re used to the concept of measuring value and worth; the lower of cost and net realisable value; the economic value of an asset or a liability; the net present value of an income stream and the concept of impairment. The most important asset that we own is our brand, which is attached to everything that we sell, so it is indeed an intrinsic part of every product or service. What we know about brand value, its impairment and how fragile it can be, is illustrated by the effects on such companies as the late Arthur Andersen, the chronically sick News Corporation, Enron, BP and Barclays Bank. The list is endless.
So the worth or value of return on investments can be seen to be both quantitative and qualitative. A good investment in your brand standards through the adoption of ethical practices, for instance, is likely to enhance your brand, whilst a bad investment in dodgy or illegal practices can be disastrous. Similarly, honestly reporting how a company has approached the subject of sustainability can also enhance its brand value, even if the results are disappointing. At least you’ve tried and been honest about the outcomes.
So the worth of an investment is not just about the amount of profit per unit sold, there is a more fundamental positive or negative return which affects brand values and the ability to earn future profits, it’s about confidence in the enterprise and also about emotional attachment.
I would prefer to talk about the demand side for green products, rather than their development, although I’ll share some of my experience of demand-led development of products later. I can’t tell you whether it’s worth developing green products and whether there is a satisfactory return on investment, except to say of course that every product is consumed into another product, which is in turn consumed into another. Therefore if you are a producer, you are also a consumer of products and services. Therefore, you are in a position to decide for yourself whether it is worth buying a product which is greener and possibly has a price premium as an investment in your company’s reputation, or as part of an effort to establish your product as sustainable (by that I mean from cradle to grave, or as we now say from cradle to cradle, where your product is produced, consumed, recycled and reborn).
Any potential consumer of a product would be making the same value judgement. Although I’ll discuss my experience of consuming green products and the tangible returns on investment I’ve been able to measure, my main message concerns market forces, risk management and competitive advantage.
I have of course been involved in the development of products, chiefly service-based offerings in the hotel industry. There are those service providers that consider themselves innovators at the cutting edge of development and others who carefully await the emergence of trends in demand before responding. At the root of it all are the tastes of their particular customer demographic. A boutique hotel or a trendy modernist group, may interpret their customers’ preferences to be edgy and challenging and be happy to wear their green (or black) hearts on their sleeves, letting their customers take it or leave it, like their interior design or other minimalist offerings. These aspects of their product have a limited shelf life and will be changed with the seasons of fashion and fad, as will their underlying values and standards. They will be renovated and ‘refreshed’ like wallpaper, to reflect the changing whims of their clientele.
Whereas operators with a more traditional, possibly older and more mature customer base, who rely on tried and trusted values like dependability, these operators are less likely to change their products suddenly and drastically. Instead gradually, over time, they will absorb a more subtle change in attitudes – so as not offend those customers who have come to expect unchanging standards. The difference might be likened to comparing MTV to the BBC ….. or Dolce & Gabbana to a Savile Row tailor.
The first rule therefore, is to ascertain conclusively that there is a genuine demand for a green product, quantify it, and determine who the customers are and how they can be persuaded to buy, before developing a new green product or modifying an existing one.
My second point is that if a product or service is successful and there is no discernible demand from existing customers to modify it or make it greener, then don’t risk messing about with it. However, there may be ways in which the delivery of the product can be made more sustainable without changing it (which can only make good business sense).
Examples of making the delivery more sustainable are: saving money through the elimination of waste; eliminating some injury, absenteeism, recruitment, insurance and legal costs by becoming a better employer and changing business practices; gaining confidence in what you buy-in by engaging with your suppliers; and at the same time giving comfort to a whole range of company stakeholders that your business is becoming more sustainable than it used to be, including your customers.
My second observation is that you can invest in making your business and its existing products and services more sustainable and this will yield benefits in the long run with potential competitive advantages.
As a consumer, is investing in green products worth it?
When my client decided to invest in environmental (or greening) projects there were some 150 to choose from. They ranged from water flow restrictors to variable frequency drives, LED lighting to million dollar chiller sets, solar window film to power factor correction equipment, and building management systems. In addition of course there were biodegradable cleaning products, responsibly harvested foodstuffs, and sustainable building products etc.
There was the inevitable law of diminishing returns and when the projects were ranked from the highest to the lowest IRR, the initial return on the first US$2 million invested was actually 43%. After the first tranche of high return projects had been implemented, the later projects start to fall below the hurdle rate of return and justifications other than economic ones had to be used.
One way to view it is to say it is one big project made up of many parts and that the overall return is about $2.5 million on $15 million invested or 15%. Is that cheating? With projects involving water saving for instance, often the investment is not very large (such as fitting flow restrictors) but there is a long payback period because water is so cheap. So the justification becomes one of creating a marketing advantage (a differentiator) or using the argument that it is a means to achieving a minimum standard expected by the market, in order to validate the expense to the shareholders.
The marketing strategy one would base on these premise, could be considered either defensive or active. Defensive means that the company can claim the moral high ground if challenged on some sustainability issue – it is a risk management strategy. Active means they will actively promote their sustainability practices in positioning the product with the hope of gaining a marketing advantage.
In the case of my client I promoted the argument that, given a level playing field, the greenest operation would win a piece of business and the investment could be made as part of a holistic approach to achieving enterprise-wide sustainability. Therefore all RFPs and RFQs were accompanied by statements listing sustainability achievements, accreditations and success stories and the company produced an annual sustainability report alongside its financial reports.
In other words, part of the decision to buy green and greening products, came down to achieving an unquantifiable marketing advantage rather than a demonstrable ROI percentage. Now there’s nothing wrong with that, is there?
David Williams is an expert on sustainability issues in the hotel industry and reporting on the subject within internationally recognised guidelines. He is a certified Corporate Social Responsibility Practitioner, Chartered Accountant, Hospitality Management graduate and a consultant within the Hotel Solutions Partnership umbrella, based in Hong Kong. He was with the Peninsula Hotel Group for many years, latterly in the capacity of Adviser, Corporate Responsibility and Sustainability.
This article is extracted from an address the author gave to the recent joint Malaysian Institute of Accountants’ and the ASEAN Federation of Accountants’ conference in Kuala Lumpur.