Linking Sustainability and Business Value – Part 2

Dr Adrian Vaida, Independent Sustainability Researcher, considers the financial factors impacting sustainability and asks how the cement industry can strengthen the relationship between sustainability and business value.

The cement world

In cement industry terms, there is work to be done! The many sustainability related breakthroughs achieved so far are yet to deliver their potential business value, as cement companies struggle to find resources to scale them to the level required to make a difference. The misalignment between consumer value and sustainable value is plainly visible in the industry as well, and the effort to change that is yet to fully materialise. Meanwhile greenhouse gas emissions remain high and sustainability is not embedded in cement’s core business to the extent that is necessary. Now, with all the common effort put in the Cement Sustainability Initiative (CSI) over the years and given individual companies’ sustainability and R&D programmes, how can this be the case?

A very important thing to keep in mind is that cement manufacturing is a business and, like any business in the current economic environment, it thrives on growth. Considering the volume of cement produced globally has doubled over 10 years, increasing from 1.8 billion tpa in 2002 to 3.7 billion t in 2012,⁴ one can argue that business performance was good. However, the quantity of absolute greenhouse gas emissions generated by the industry has likewise increased. At the same time the cement sector put forth many highly advertised potential solutions, such as new clinker types, alternative raw materials, improved manufacturing processes, and so on. Bottom line, it appears that our industry is not so different from the rest of the business world after all.

Indeed, much like 76% of the CEOs in the UNGC-Accenture study, the cement industry appears to be satisfied with the execution speed and effectiveness of its sustainability strategy. It is certainly doing a lot. The June 2013 issue of World Cement⁵ presented a non-exhaustive list of 16 sustainability issues that are actively being tackled, including responsible use of resources, energy efficiency, biodiversity, waste and emissions, etc. This is without even mentioning industry-wide coordinated efforts represented by the CSI. Nonetheless, failure to at least maintain absolute carbon emissions at a constant level, if not reduce them, points to the fact that either not enough is being done or that the focus is not on the right areas.

The proposed solutions to the greenhouse gas emissions challenge are a clear reflection of the belief that integrating sustainability in the cement business will drive future growth and opportunities. So far, however, they have mostly failed to deliver business value. With a few notable exceptions, such as the German market where changes in regulation allowed for increased clinker substitution,¹ these alternative solutions have not been scaled enough to reach a point where the business case becomes apparent. And while regulatory framework is a significant obstacle in many countries and regions, limited financial resources are just as important. And this is once again in alignment with more than half of the CEOs who see lack of financial resources as a barrier to implementing sustainability. But is this really true for cement?

Doubling the global production volume in only 10 years indicates excellent business performance for the industry, especially in the context of economies of scale. Granted, when speaking of business in general, performance has been eroded in recent years by the global crisis, in some cases down to a virtual standstill. Despite its massive production growth, performance in the cement industry is actually a mixed bag, depending a great deal on the region and country being considered, with the implicit impact on cement manufacturers operating there. If anything, the news sections in cement industry magazines are an accurate reflection of this situation. A snapshot of news headlines, particularly when related to sales volumes, profits and geographical market variations, provides an intuitive picture of growth and contraction areas for cement on the world map, very much aligned with the dynamic in the global economy. If further proof is needed, a January 2014 research article⁶ listing the latest greenfield cement plants and capacity increases completed in the industry, confirms this image. Allowing for the fact that China remains responsible for more than half of global cement production, new capacity indicates areas of growth on the cement market and vice versa.

That said, even after taking China and India out of the equation, Asia leads by far in terms of new capacity projects, followed by Africa and South America. As expected, Europe ranks last in this hierarchy given its slow and lengthy recovery. All in all, the study supports the fact that economic performance in the cement industry has been a mixed bag of late and financial restrictions are indeed in order, especially for market players operating across a number of world regions.The lingering economic crisis makes for a good discussion point when presented as an argument for the importance of cement availability, quality and price relative to sustainability. While it is certainly debatable whether price, quality and availability will always rank before sustainability for both cement producers and consumers, this is arguably true in the short-term and aligned with the view of 51% of the CEOs in the UNGC-Accenture study. After all, it is a no-brainer that developed or developing countries, while trying to steer their economies back onto a growth trajectory, will opt for the short-term benefits of low price and availability over sustainability if sustainability translates into low volume, untested and more expensive products. This makes for just another important reason to try and firmly establish a clearly visible link between sustainability and business value. It also underlines the critical importance of economies of scale in the context of sustainability.

The financial take

Given the way society operates, when considered from the business perspective most of the challenges presented by sustainability are, one way or the other, financial in nature. Overfishing the oceans, mountains of waste, extinction of numerous species, availability of water, etc., all ultimately relate to money, either as the desired end result or as the missing resource in the mitigating effort. And that is not even looking into the economic aspect of sustainability, which deals with the long-term prosperity of the business itself.

Because money is used as a universal unit to measure value, it ultimately becomes an issue of accurately assigning value to the natural resources businesses use and to the products they make, value capturing either the damage or the benefit generated by business activities in sustainability terms. In other words, it is about our ability to realistically monetise the business impact upon natural and social environments, with everything that they comprise. According to The Economist,⁷ however, “although putting numbers on nature is worthwhile, economics cannot quite capture the value of all the living creatures sharing this planet” and, by extension, the value of nature itself. While this view is difficult to argue against, we should nonetheless persevere in our attempts to assign value to nature, and to continuously improve the accuracy of doing so.

As an industry, the cement sector can begin by acknowledging the gap between actual progress and the perception of progress. It can also step up efforts to work with consumers and other stakeholders around the world to advocate sustainability as a must-have criterion for them. This will then trigger a chain reaction, materialising and enforcing the business case for sustainability, culminating in the mandatory requirement for economies of scale when speaking of innovative and sustainable building products. Such an approach has the potential to transform the way profits are made in the cement business with the added benefit of ensuring more funds become available for further improvement. This has the potential to provide cement business leaders with a solid argument for walking the talk on sustainability.

References

1. Woodhead, J., ‘Embracing Sustainable Building Products’, World Cement (November 2013), pp. 103 – 106.
2. United Nations Global Compact – Accenture, ‘Architects of a Better World – CEOs on accelerating the journey from plateau to peak on sustainability’, September 2013. Retrieved from http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture-UN-Global-Compact-Acn-CEO-Study-Sustainability-2013.PDF.
3. IPCC (2013), ‘Climate Change 2013: The Physical Science Basis. Contribution of Working Group I to the Fifth Assessment Report of the Intergovernmental Panel on Climate Change’, [Stocker, T.F., Qin, D., Plattner, G.K., Tignor, M., Allen, S.K., Boschung, J., Nauels, A., Xia, Y., Bex . V., and Midgley, P.M, (eds.)]. Cambridge University Press, Cambridge, United Kingdom and New York, NY, USA, pp. 1535.
4. Armstrong, T., ‘An Overview of global cement sector trends – Insights from the Global Cement Report 10th Edition’, FICEM-APCAC 2013, Retrieved from http://www.ficem.org/boletines/ct-2013/presentaciones2013/1-EXPERTOS/2_THOMAS-ARMSTRONG/ICR-FICEM-Presentation-Handout-30Aug13.pdf.
5. VAIDA, A., ‘Sustainability: A Journey, Not A Destination’, World Cement (June 2013), pp. 77 – 82.
6. ICR Research, ‘Green Light Factories’, International Cement Review (January 2014), pp. 18 – 27.
7. The Economist (2014), ‘Valuing the long-beaked echidna – Setting a price on nature is a useful exercise, up to a point’. Retrieved from http://www.economist.com/news/finance-and-economics/21596943-setting-price-nature-useful-exercise-up-point-valuing.

Written by Dr Adrian Vaida, edited by Katie Woodward.

Part 1 of this article can be accessed here.

Read the article online at: https://www.worldcement.com/special-reports/18082014/linking-sustainability-and-business-value-part-2/