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Bloomberg: Bacteria Work Shows Profit in Openness

By Alex Morales
Companies from beverage maker PepsiCo Inc. to sporting goods maker Puma SE are finding that lowering their impact on the environment can also boost earnings. Their efforts mean lower fuel and water use and savings on waste disposal.

It was an experiment with bacteria that emboldened Novozymes A/S (NZYMB) into stepping up disclosures about its work to pressure groups. The openness paid off, and now the manufacturer is part of a growing club pushing transparency worldwide.

The maker of enzymes for chemical reactions was using microbes that show resistance to antibiotics. Greenpeace and WWF wanted changes, saying genes might escape the lab and make harmful bacteria such as salmonella immune to medicines. The Danish company relented and spent $17 million on a new process.

“We were forced to find an alternative,” Chief Executive Officer Steen Riisgaard said in an interview today. “That proved to be much better, so it turned out to be a good investment.”

Companies from beverage maker PepsiCo Inc. (PEP) (PEP) to sporting goods maker Puma SE (PUM) are finding that lowering their impact on the environment can also boost earnings. Their efforts mean lower fuel and water use and savings on waste disposal, or in the case of Novozymes, just doing things differently.

Executives from those companies are at a United Nations conference in Rio de Janeiro this week, where business lobby groups and non-profits are pushing 130 world leaders to make sustainability reporting standard practice, especially for companies listed on the world’s main stock exchanges.

“What gets measured gets managed,” said Mindy Lubber, president of Ceres, a Boston-based non-profit group that works to make business more sustainable. “When a company puts their position with detail and data and goals all in the public domain, they’re much more likely to meet those goals.”

Pepsi’s Effort

That’s the approach taken by PepsiCo, which has published sustainability reports since 2007 and measures progress against so-called key performance indicators to help drive down fuel, electricity and water use.

The indicators “are critically important so we can run our business in the best, most sustainable way possible,” PepsiCo Director of Environmental Sustainability Robert ter Kuile said in an interview. “The initial spur was the recognition that our reliance on water, energy and fuel was something we needed to have a very clear understanding of to run the business in the best way and to reduce our reliance on those commodities.”

Global Savings

The focus on sustainability is yielding results. PepsiCo’s Frito-Lay North America unit saved (PEP) as much as $120 million over the past decade in reduced fuel, power and water bills, ter Kuile said. In its Asia, Middle East and Africa unit, savings have totaled $30 million since 2007.

A May 23 survey by the consulting company Accenture Plc (ACN) (ACN) of 250 executives in eight countries including the U.S., China, Japan and Germany, found that 78 percent of those interviewed said sustainability was vital to the growth of their business.

Corporate reporting on sustainability is a patchwork of efforts ranging from press releases and glossy brochures to detailed analysis such as Puma’s environmental profit and loss account, presented last year as the first detailed attempt by a corporation to quantify the ecological impact of its operations.

Puma in May 2011 calculated that it had an ecological impact valued at 94.4 million euros ($119 million), split almost equally between its depletion of water and greenhouse-gas emissions. The company valued each ton of carbon dioxide at 66 euros and each cubic meter of water at 81 cents. Only 7.2 million euros was attributable to Puma, with the rest to its suppliers. In November, it said its total impact was 145 million euros, after including 51 million euros of damage from air pollution, land use and waste.

Shares Impact

“If you believe in creating long-term value then you have to ultimately manage your business sustainably,” Jochen Zeitz, Puma’s supervisory board chairman, said in an interview. “Companies that take sustainability into the center of their operation manage their business better. That, we believe, in the long run will have an impact on the share price.”

Deutsche Bank AG last week published a report examining 100 academic studies into sustainable investing. It found 85 percent showed companies with high ratings for environmental, social and governance policies did better financially than other firms.

“These are things that financial analysts need to be studying when they’re deciding to recommend a company as a strong company for investors to buy,” said Lubber.

From Sao Paulo to Johannesburg to Singapore, stock exchanges have begun requiring listed companies to provide information on their environmental and social impacts that may be compared.

Push for Reports

About 3,000 multinational companies now report on sustainability using guidelines from the Global Reporting Initiative, which was set up in 1997 by Ceres, up from virtually none in the mid 1990s, according to Lubber.

“Nearly all companies need to be doing more,” Lubber said. “We’re only seeing early stage uptake for the kind of systemic sustainability performance and governance changes that we think are essential.”

In Rio de Janeiro, the 200-member World Business Council for Sustainable Development along with its Brazilian branch and the Global Reporting Initiative are calling for UN Secretary- General Ban Ki-moon to set a timeline that would lead to wider sustainability reporting.

Summit in Rio

More than 50,000 delegates from 190 nations are due to attend the Rio+20 summit on sustainability marking the 20th anniversary of the first Earth Summit in the city. On the agenda are 50 pages of recommendations on how to preserve plants and animals, eradicate poverty and protect the oceans as the population swells 29 percent to 9 billion by 2050, from about 7 billion now.

The declaration that country delegates are negotiating as an outcome for the Rio summit recognizes the need for “global best practices on sustainability reporting” and encourages companies and “interested governments” to develop them.

For Pavan Sukhdev, a former Deutsche Bank economist who in 2010 led a UN study of the Economics of Ecosystems and Biodiversity, there’s “more greenwash than I’d like to see” in company reporting, a term describing corporate policy that’s presented as environmentally friendly while having little impact.

Companies need to “evolve” into what he calls corporation 2020 by measuring their impacts on the environment and publishing them in statutory annual reports, Sukhdev said.

“If company A and company B are identical on all other accounts -- profit and return on capital and so on -- but one has a higher ecological impact than the other, then the one that has the less impact is the better company,” he said.

Water and Energy

Water scarcity will be an important concern in the next decade for 78 percent of the 141 CEOs surveyed by the accounting firm PricewaterhouseCoopers LLP on May 21. Eighty-nine percent said affordable energy will be a worry, and 78 percent said climate change will be a issue. More than 90 percent of the business leaders said regional and national regulations and taxes are the most effective mechanisms to drive change, according to the survey.

If companies were forced to internalize damage to the environment in their accounts, it would cost 41 cents per dollar of earnings, according to a report this year by the global accountant and consultant KPMG International. For food producers, environmental costs were more than double earnings.

‘Serious Action’

“You will only see serious action on sustainability if we manage to reflect the cost of being unsustainable in the price of products,” Yvo de Boer, global adviser on sustainability at KPMG and formerly the UN’s chief climate diplomat, said in an interview. “Government policy needs to take us there, through taxation, regulations and market-based mechanisms.”

Still, de Boer and PepsiCo’s ter Kuile said corporations need to measure indicators that are relevant to their industry, rather than developing a rigid approach to reporting for all companies. That’s something European Union Climate Change Commissioner Connie Hedegaard agrees with.

“How can you make this feasible for small and medium sized companies, and how can you make it feasible for a startup in Nigeria?” Hedegaard said in an interview. “It should not be extremely prescriptive. It’s important when we do this that we do it where it has the most influence and we don’t create unnecessary administrative burdens.”

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