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August 10, 2005
Arthur D Little Study Identifies Trends in Sustainability Innovation
    by William Baue

The report finds increasing corporate commitment to sustainability innovation, though it demonstrates room for more growth.

Earlier this year, the global consulting firm Arthur D Little (ADL) released a report highlighting innovative corporate sustainability initiatives and surveying corporate attitudes toward sustainability innovation. The report follows up on a 1999 report co-authored by ADL and the World Business Council for Sustainable Development (WBCSD) that surveyed 80 companies on integrating sustainable development into their approach to innovation management.

"This time we wanted to focus even more on the business opportunities presented by integration of sustainability into the innovation process--we call this 'Sustainability-Driven Innovation,' which we define as being the creation of new market space, products & services or processes driven by social, environmental or sustainability issues," states the report.

The new study, entitled Innovation High Ground: How Leading Companies are Using Sustainability-Driven Innovation to Win Tomorrow's Customers, surveys 40 technology companies across Europe, the US, and Japan. The study finds that 95 percent of companies surveyed believe that sustainability-driven innovation has the potential to bring new business value, with 25 percent feeling this will definitely happen.

The surveyed companies consider the benefits to be primarily intangible, with 90 percent of respondents citing reputation as likely to benefit from sustainability innovation, and 80 percent anticipating brand value gains. Tangible benefits exist as well: 60 percent of respondents already see improvements to their top line (or the income statement line devoted to total revenues), and 43 percent expect to see future bottom-line benefits (or the income statement line devoted to net income.) Of respondents already generating sustainability-driven innovation (as defined by ADL), 72 percent are doing so through new products and services, 80 percent through process innovation, and 60 percent entering new markets or developing new business models.

The absence of a methodology section explaining how these 40 companies were chosen and an appendix listing all the companies ("some companies preferred to remain anonymous," the report states) may undermine the significance of these findings somewhat. The study may simply document the tendency of sustainability innovation leaders to self-select for such a survey, and not accurately represent the sustainability climate across the broad global market.

A comparison of the 1999 study findings to those of the current study, conducted in 2004 in collaboration with Hedstrom Associates, demonstrates that companies innovating on sustainability are shifting from simply managing risk to meeting customer demand. In 1999: 39 percent of respondents said their sustainability initiatives were customer-driven, while 70 percent said customer demand would grow. In 2004, interestingly, 70 percent of respondents consider customers "very important" or "critical" drivers of sustainability innovation.

Comparison of the 1999 study with the 2004 findings also illuminates the role of legislation. In 1999, 45 percent of respondents considered regulatory requirements to be the driving force behind sustainability innovation, and 60 percent expected this trend to grow. In 2004, 70 percent of those surveyed consider legislation key, but only 63 percent think it will continue to be important.

In comparing the degree to which corporations integrate sustainability innovation as business strategy to doing so through product and process design, the report dubs four types of corporate actors: leaders, laggards, dabblers, braggers. Leaders integrate sustainability innovations into both business strategy and product and process design, while laggards do neither.

"Those that have pushed social and environmental issues up the priority list in their product and process design, but have yet to strengthen integration in their business strategy might be considered to be 'dabbling' with sustainability," the study states. "Conversely, strong integration into business strategy without sustainability manifesting itself in product and process design might suggest 'bragging' with little action."

Usefully, the study publishes several case studies of sustainability innovation leaders. For example, it documents how Sony (ticker: SNE) is reducing power consumption in portable electronics through miniaturization of components, which minimizes weight while maintaining performance. The report highlights Banco de la Gente Emprendedora (Bangente) in Venezuela, a nonprofit microfinance institution (MFI) that provides loans to low-income individuals who are underserved by mainstream financial institutions.

"Interest rates are low compared to those of informal moneylenders, but high with respect to banks," states the report. "Still, Bangente enjoys a recuperation rate of 99 percent, and a delay rate of 1.36 percent--a ratio that any regular commercial bank would envy."

"Bangente also exhibits an AA+ risk qualification," the study continues.

The study notes some barriers to sustainability innovation, including "a high degree of internal and external skepticism." It also makes recommendations for companies looking to integrate sustainability innovation.

"What we have also seen is that success is usually achieved by being selective: Rather than attempt to push Sustainability-Driven Innovation too hard, too far, too soon, it is better to focus on one or two nuggets of opportunity that look promising and demonstrate some tangible benefits," the report states. "Often, careful engagement of external stakeholders is a great way to identify these opportunities."


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