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Time to look at product portfolios from the sustainability perspective?

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More and more companies are measuring the environmental impact of their products holistically, through life cycle analysis, and as a result many are making significant changes to the products they sell. There is also a movement towards measuring natural capital in order to have the full account of companies and products. These are great steps in the right direction towards product sustainability. But it’s one thing to make more socially and environmentally friendly products and services available; quite another to get customers to buy these instead of less sustainable options that are often cheaper or more familiar.

What’s the point in a company developing a AAA-rated eco-product that only sells in small quantities while its far more environmentally damaging B-rated product is still on the market and sells 50 times as many units?

It’s often been argued that as long as companies give consumers a choice, then it’s down to the consumers to make the ‘right’ decision. But experience tells us that we can’t rely on consumers to do this. Survey after survey demonstrates that consumers habitually claim they will take social and environmental issues into account when buying goods and services, but sales figures show that these good intentions are often forgotten by the time they get to the checkout.

The ‘ethical consumer’ does exist, but only in small numbers.

product portfolio from the sustainability perspective

This is why governments are increasingly stepping in to edit the choices that consumers are given, by creating rules of the game that favour a transition towards more sustainable products. Often this means cutting out the worst offenders in the market either by directly banning certain products or by setting a minimum standard – as with European measures on incandescent light bulbs or the REACH regulations on chemicals. However, such initiatives only cut out the end tail of the curve.

Governments can also facilitate the adoption of the best products, for example by committing to buy them in their public purchasing programmes. That increases the length of the tail at the other end. Even more interesting is when governments try to push the whole curve towards the right, for example by setting up tax incentives and penalties designed to promote the sale of more sustainable products. The bonus-malus tax on cars in France and the company car taxation scheme in the UK are examples of this. But sometimes just the creation of a legal requirement for labelling of the sustainability performance of products can do the trick. The EU labelling laws on white goods have been successfully pushing consumers towards AAA rated products for a long time.

We should not always, however, be waiting on governments to show the way.

It’s up to companies as well. Businesses that want to push the sustainability agenda cannot be content to delegate leadership to the government or consumers. After all, the ultimate sustainability brief of a company is to drive its entire portfolio towards its most sustainable products. The first step towards doing this is to introduce more sustainable products into a company’s portfolio, which can be a significant feat in itself for some types of products. But the next step is to manage that portfolio by editing consumer choice. That means removing more damaging products and services from the market while progressively convincing customers to buy the more sustainable ones. Unfortunately this idea of companies managing their entire portfolio is hardly heard in the current sustainability debate.

Who can push for portfolio management?

The most obvious actors who can push for portfolio management are the companies manufacturing and supplying products and services, and the retailers who sell them. Either party can lead the way. If retailers show little interest in changing what they sell, then supply companies can force them into it by default by managing their own portfolios and therefore changing what they are offering for sale. But if supply companies are dragging their heels, then retailers can galvanise them into action by refusing to stock certain products. Ideally both parties will take an active role in sustainable portfolio management, with retailers finding that companies are increasingly providing them only with products that have lower impacts, and retailers increasingly deciding to inform companies that they will not stock certain higher impact items.

Corporate portfolio management

If a company is serious about reducing its life cycle impacts, firstly it has to create products with lower impacts and secondly it needs to sell more of those products and less of those with a higher impact. Put simply, it must sell more of the good stuff and less of the bad. Sometimes the damaging effects of a product are clear and immediate. For example, a number of chemical companies, including Henkel, have adopted a socially responsible stance by removing ingredients such as toluene from adhesive products that can be misused by solvent abusers. And of course they then don’t then leave the ‘bad stuff’ on the market – that would defeat the purpose.

Taking such affirmative action usually protects a company’s reputation, prepares it for future legislation and can give them a commercial advantage in some markets. Of course it’s good if a company starts, in this way, to sell more sustainable products. But we need to understand how a business’s entire portfolio behaves. Even if sales of good products do very well, it’s no good if sales of bad products are continuing to increase at the same time.

A popular eco-products story has been GE’s ecoimagination – the drive to increase GE’s portfolio on technologies for sustainability, such as wind turbines or efficiency solutions for buildings. GE announced revenue goals for these technologies when it launched ecoimagination. But it also had goals for advancing the sales of other, less desirable technologies – such as piping materials for the oil and gas industries. So it’s not clear whether the average footprint of GE’s entire portfolio will decrease over time.

Another high profile eco-products story has been Philips’ Ecovision, under which they have set themselves a 2015 target of a 50% energy efficiency improvement for their average total product portfolio compared to 2009. This is a much better approach. Showing improvements in sustainability performance of the whole portfolio in this way will be a must for companies in the future. And it won’t be as difficult to achieve as at fist it might sound. At Interface Europe we managed to cut our average product carbon footprint by 27% in just four years from 2008 to 2012.

Retailer portfolio management

Any life cycle analysis carried out by a retailer will reveal that the biggest impacts of its activities are not in its own operations – the running of its stores – but in the embedded footprint of the goods and services it sells. A supermarket can make its lighting and its refrigeration as energy efficient as possible, but it’s the stuff that it puts on the shelves that makes the real difference. This means that to make any significant difference to environmental impacts, retailers must take on some accountability for what they are selling – by making sure they don’t sell the really bad stuff, by pushing their suppliers to give them more sustainable products, and by encouraging customers to buy them. The pre-requisite for this kind of portfolio management – or ‘choice editing’ – is for retailers to demand Environmental Product Declarations (EPDs) from their suppliers for each product they sell.

Because these EPDs are based on life cycle analyses, they allow products to be compared in a meaningful way. But you don’t need full EPDs to see the bigger picture. After all, it’s no good fiddling about at the margins to produce small gains when you can make much more significant progress at the core. According to Tesco, for instance, the carbon footprint of a class 1 carrot is 80g CO2 per 100g of serving, while the impact of a Scottish carrot is 84g. Who cares about that difference when the footprint of a 100g serving of beef is a massive 1,000g CO2? Surely Tesco should be trying to encourage people to eat less beef and more carrots?. And for that matter, shouldn’t they be helping us to shift from high fat, high sugar diets to healthier options? Those shifts should, arguably, should be at the core of a supermarket’s environmental and social responsibilities.

Choice editing can be easy

It’s actually very simple for retailers to begin choice editing. The UK do-it-yourself retailer B&Q has seen this, and it has already begun to edit its product portfolio on sustainability grounds. For example, after life cycle analyses showed the extreme energy inefficiency of patio heaters, it simply took the decision not to sell them any longer. It may have lost some short–term income by withdrawing patio heaters, but it also gained many plaudits. However, in the words of the UK Sustainable Development Council, choice editing is not just about cutting out unnecessarily damaging products; it’s also about ‘getting real sustainable choices on the shelves’.

Providing such choices doesn’t have to be about bringing completely new products to the customer – it can be about making sure the best products are the only ones available. A number of UK supermarkets now stock 100% fairtrade bananas, so customers who want to buy bananas have no choice but to buy fairtrade. The same happened over a number of years with FSC-certified wood, to the point where it has now it’s become European law to stock only such material.

There are plenty of other areas where retailers can show strong, positive leadership. What excuse is there, for instance, for a retailer to be selling anything other than electrical appliances with A+++ energy efficiency ratings? If Walmart decided only to stock the most energy efficient A+++ appliances tomorrow, imagine what difference that would make to the thinking of manufacturers who are its suppliers – and to Walmart’s overall footprint. It would also make it easier for governments to ban all rating categories but the most efficient ones.

But portfolio management is also about what you don’t yet sell. If supermarkets have expanded to adjacent markets such as mobile phone contracts or motor insurance, then surely they can expand into products that are solutions to social or environmental challenges? IKEA, for instance, has just become the first large retail chain to start selling solar panels – with the express purpose of trying to transform consumers’ attitudes to energy (as well as making money). With the same aims in mind, Sainsbury’s is providing loft and cavity wall insulation to customers, as well as solar panel installations.

Asset portfolio management

Portfolio management isn’t just about products and retailers; they are just the most obvious examples. A similar model can be applied to services, and indeed investment and asset management. Many asset managers already edit their investment portfolios by avoiding controversial investments in companies that manufacture cluster munitions, for example. Apart from specific ethical investors, the list of ‘no go’ areas remains pretty limited for most mainstream investors, but this model could be extended to a less black and white approach, actively promoting more sustainable investments and choosing not to invest in less sustainable activities. For assets such as property, for instance, the environmental options are very clear.

Where do we go from here?

None of this is rocket science – we just need the willpower. But it does mean changing mindsets: moving away from measuring performance at corporate level to measuring the company’s entire portfolio on a life cycle analysis basis. And it means shifting from the idea of producing a few high-profile green products designed to catch the public’s eye and towards mainstreaming of those green products. It also means taking on the moral responsibility of trying to influence the behaviour of consumers.

To help us on our way, we must remember that this kind of portfolio management already goes on all the time. Companies change their product ranges continually; they drop old models and bring in new ones. Department stores choose to put 15 different types of kettle on sale, not the full range of 515 available to them. So the only radical thing about sustainability portfolio management is the ‘sustainability’ part. That’s what we need to get to grips with, and the quicker we do so, the more dramatic will be the results.

Of course there are some potential pitfalls, but these are not insurmountable. If retailers or manufacturers are earning lots of money by selling or making higher impact products, then they need to be careful about how they make the switch. When Iceland, the UK frozen food retailer, tried to move overnight to selling organic food, large numbers of its customers walked away – and it had to reverse its decision. But the lesson here is not that portfolio management doesn’t work – it’s that it has to be carefully managed. Companies and retailers should know their customers and introduce changes over a period of time, helping to educate them about what they’re doing and using all the marketing resources at their disposal.

Key to all this will be transparency of environmental performance, which will help consumers choose products on sustainability factors. People used to buy light bulbs based on wattage; now, increasingly, they are buying them on energy performance. That switch has been achieved by good labelling and by good education. Some of changes will be driven by regulation, others by B2B demand, some by companies and retailers themselves, competing against each other. But the sustainability movement as a whole needs to push in that direction. It provides fertile ground on which to compete, and that is what companies love.

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The elephant in the room is managing the portfolio

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How far have we come when thinking about sustainability strategically?

It used to be about finding one or two feel-good activities like recycling the paper in the office. Then reporting a biased account of a few issues with some cherry picked case studies. Then it became the time of the public commitments: carbon neutrality, zero waste factories. Now we are entering into the territory of product sustainability, since most of the impacts of products are outside companies’ boundaries, in many cases 90%.

The key lies in product re-design.

You can redesign a car or a vacuum cleaner so that it uses less energy, and you can redesign cement or carpet so that it uses less embodied energy. Both are design challenges. Now if you come up with a product with super low impact, you still need to convince your customers to switch to that product.

In many cases, a technical product innovation does not solve the problem if it does not get accompanied with a commercial strategy for wide adoption of the new green product. Similarly, companies can identify the products with the highest impact products and try to either come with alternative products that provide the same function or convincing customers to buy products with less footprint. In both scenarios, they will be commercial opportunities for those companies that crack this code.

Managing portfolios will become a huge issue on the sustainability agenda.

Many companies will deny this at first and a few leaders will look for opportunities but Government interventions will push for greener (genuinely greener) products. So if you are a retailer this will be your biggest issue. And yes, it will be difficult to face but it is likely to be your biggest issue by far. So understanding the footprint of your products and moving consumers towards the more environmentally friendly ones will be seen as vital.

This expectation of retail will happen faster than we think.

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