By Cary Krosinsky
Here’s an overlooked metric among the hundreds available for evaluating how sustainable a company is: The ability to scale change far beyond its own organization.
The model sustainable company generally looks like this. It has a phenomenal track record of stock growth and a full bucket of cash. It militantly roots out inefficiency from its operations and supply chain and invents new products that take into account social change and resource availability. It increases the transparency of its operations and invites outside scrutiny to make sure it’s in compliance with the highest legal and social standards.
Factor in the ability to scale change and the rankings change dramatically. The model company, in short, might be Apple.
I first taught a graduate-level Sustainability & Investing class at Columbia University’s Earth Institute in 2009. The class was composed of students from diverse backgrounds, including specialists in hedge-fund management, conservation, utilities, fashion, supply chains, and others. We assembled a portfolio of our picks for the most sustainable companies -- those that understand new global risks and opportunities, and innovate accordingly. And we selected companies that were best positioned to push improvements in resource efficiency throughout the global economy. Apple was one of our core 20 holdings; it was trading at $192 by the end of 2009. The portfolio outperformed the market that year and went on to outperform the S&P 500 in 2010 and 2011.
Studies more rigorous than my students’ portfolio experiment suggest that companies that build a “culture of sustainability” perform better in the long-term than those that don’t. More than ever, companies are turning to sustainability to gird against volatility and as a strategy to feed middle-class consumption expanding in China, India, Brazil and beyond.
No company embodies innovation and success more than Apple. The company traded in the $7 to $12 range from 2001 to 2003, has since catapulted to the $500-600 range, and peaked at $644 in April. It's now the only company in the world with a market value of more than a half trillion dollars. There are two types of equity portfolios, those that rode at least some of Apple’s success, and those that missed out. The relative returns of each of these portfolios have largely been driven by this one factor.
Apple has issued annual reports on its supplier relationships since 2007. It publishes product-specific environmental reports, which are more detailed than those of most competitors, covering climate change, energy efficiency, materials use, packaging, avoidance of restricted substances, and recycling. The company's iPad 2 Environmental Report reports that the tablets exceed the strict European Directive on the Restriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment by avoiding mercury in its display, arsenic in its glass, BFRs (brominated flame retardants) and PVCs (polyvinyl chloride).
Critics have no shortage of ammunition to challenge this argument. Apple and other global companies can no longer avoid scrutiny anywhere they operate, from activists, investors, governments, and journalists. Ma Jun, a Chinese environmental activist and founder of China's Institute of Public and Environmental Affairs, pretty much singlehandedly caused Apple to address problems in its supply chain by bringing them into the public spotlight. Worker suicides at Foxconn, Apple's Chinese manufacturing partner, in recent years focused attention on the company's long hours, unsafe conditions and packed living quarters. Apple joined the Fair Labor Association earlier this year, the first technology company to do so. The FLA's subsequent investigation found at least 50 breaches of Chinese labor laws as well as the code of conduct the group signed with Apple.
Many of the most damning critiques of Apple's worker conditions rely heavily on data and examples brought to light by Apple itself. The tough love is to be expected; by housing the bulk of its manufacturing operations in China, the company draws increased scrutiny to a country known for cheap, unregulated labor. What matters more is how the company responds. So far, Apple has improved worker conditions at its Foxconn facilities and, through its transparency and influence, is improving conditions across China. Apple's forthrightness helps shield it from detractors and helps it become a stronger company. Apple’s public disclosure of its suppliers in the last year was welcome transparency and should be seen as an investment confidence-builder akin to buying back shares.
Sustainable companies are mindful of more than just supplier relations and working conditions. Environmental issues -- which many people in the U.S. wrongly assume to be the entirety of sustainability -- offers Apple room for growth. In 2011, the Carbon Disclosure Project noted that Apple and nine other companies with large market caps didn't respond to the group's annual survey. Greenpeace tossed a dart at the company in April, concluding in its environmental assessment of cloud-computing companies, “Three of the largest IT companies building their business around the cloud -- Amazon, Apple and Microsoft -- are all rapidly expanding without adequate regard to source of electricity, and rely heavily on dirty energy to power their clouds.” The report prompted a vociferous response from Apple, which in May announced it was approved to build a 20-megawatt solar power facility across the street from its data center in Maiden, North Carolina. The site will be powered completely by renewable sources by the end of 2012.
Apple ranked 50th in the 2011 Newsweek Green Rankings, assembled in part by TruCost, where I am Senior Vice President. This ranking reflects Apple's substantial energy consumption. What it does not reflect is the company’s potential to scale sustainability innovation, which will drive even more change than their current performance shows.
Can Apple keep it up? Only if authenticity, transparency and responsiveness grow and thrive. Legitimate efforts at sustainability are creating and defending value. Apple needs sustainability -- and sustainability needs examples like Apple’s.
Krosinsky is Senior Vice President of TruCost.
Visit www.bloomberg.com/sustainability for the latest from Bloomberg News about energy, natural resources and global business.
-0- Jun/13/2012 16:58 GMT