Why Sustainability Is Winning Over CEOs

Long a cause célèbre of the eco crowd, sustainable business practices are yielding big savings at companies like PepsiCo and Wal-Mart

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By Duane Stanford

At PepsiCo's (PEP) Walkers potato chip plant in Leicester, England, steam from the fryers rises through exhaust stacks into the open sky. From his office window, Martyn Seal, the company's European director of sustainability, watches the wispy clouds and sees nothing but lost resources and wasted cash. To change all that, Seal and his team are working to develop a manufacturing process that will allow them to suck water out of potatoes and even unplug the plant from the public water system.

Potatoes are 80 percent water, most of which is lost as steam when 350,000 tons of spuds are sliced and fried annually at the factory. Seal hopes to condense the steam, possibly with a system of cooling tubes, and reuse the captured H₂O to clean equipment, help wash potatoes along manufacturing lines, and even irrigate the shrubs outside. The method could save the plant $1 million a year. "Lots of people think we're nuts," says Seal. "We're trying to push the boundaries to make a difference."

At many companies, being socially responsible has typically meant handing out checks to victims of natural disasters, environmental groups, or producers of green TV commercials. Now the corporate sustainability movement has a simple premise: Saving the planet can save big bucks. Executives are trying to realize meaningful cost savings by coming up with innovative ways to go easier on the environment.

Recent volatile price swings in plastic packaging, fuel, cotton, food ingredients such as corn, and a host of other raw materials have added urgency to businesses' efforts to shave costs to keep prices competitive and protect margins.

How fully companies adopt sustainability efforts in this decade could have a real impact on their shareholder value, says Daniel C. Esty, an environmental policy professor at Yale Law School. Esty thinks sustainability will become as transformative for business as the earlier quality and information technology revolutions, once more top executives recognize the huge potential to trim costs.

"Sustainability has emerged as a factor in determining which companies win in the marketplace, and smart CEOs are investing in a more rigorous approach to the environment," says Esty, on leave from Yale to run Connecticut's Environmental Protection Dept., which will have additional energy responsibilities pending approval from the legislature. "A good number of companies begin to see the upside opportunity. The very best companies see the brand and corporate identity opportunity."

Wal-Mart Stores (WMT) is far ahead of Target (TGT) and Sears Holdings (SHLD) when it comes to realizing savings by working with retailers to reduce packaging. That translates into lower freight and warehouse costs. Wal-Mart's Seiyu chain in Japan in 2009 converted packages for its private-label fresh-cut fruit and salads from oil-based to corn-based plastic. That cut the packaging's weight by 25 percent and its cost by 13 percent, saving more than $195,000 a year.

International Paper (IP), a global paper and packaging company, recognized long ago that its future depends on a steady supply of trees, says James McDonald, the company's sustainability manager. IP says it planted more than 4 billion tree seedlings between the 1950s and about four years ago, when it sold its forest lands. More recent efforts have focused on using less water and energy at its manufacturing operations. The company cut fossil fuel purchases by 21 percent from 2005 to 2010—in part by burning limbs and other biomass debris from tree processing—generating $221 million in annual savings at last year's prices.