Climate Change, Environmental Auditing, and Corporate/Brand Strategy
Maria Teresa Cuomo, Rosa Maria Caprino, Cinzia Cenovino, and Debora Tortora
The Paris Agreement of 2015 represents a turning point in the fight against climate change (Falkner, 2016; Rogelj et al., 2016), as a new awareness set in of what the physical impacts of climate changes are, such as its ability to jeopardize business activities and economic development (Dahlmann et al., 2019).
Although the economic literature presents economic and social objectives as in apparent contrast to each other (Friedman, 1970), the beliefs that both objectives can coexist and that social objectives can become a source of competitive advantage have spread widely in recent decades (Porter & Kramer, 2002). It was, thus, in the 1990s that sensitivity towards environmental and social issues took on a new value, not only communicative, but also anchored to the actual productive and organizational capacity of companies (Grant, 2008).
The orientation towards social responsibility is closely linked to that towards sustainability, an increasingly essential element in all sectors to operate in the changed competitive scenario (Meyer & Helfman, 1993; Gazzola et al., 2019).
In a broader and strategic sense, the concept of sustainability embraces the search for wellbeing, for a better quality of life and a sense of responsibility towards the community (Ki & Kim, 2016). New business strategies must promote sustainability and try to accelerate the transition process towards a model of sustainable development.
The transition from a traditional sector to a sustainable one involves risks and opportunities, depending on the ability of companies to adapt, rethink their business model and their role within the economy (Wright & Nyberg, 2017). By now, the time has come to consider this process a prerogative for the creation of value (Rosenstock et al., 2020). In this regard, companies interested in a sustainable economic system will see changes in both the demand and supply of goods and services, which, in turn, will be reflected in revenues, costs, industrial assets, investment dynamics, access to credit, investor appreciation, etc., thanks to the growth of the reputation impact (Gasbarro et al., 2017). In particular, the structural changes brought about by climate change and mitigation measures inevitably influence the margins and, even more, sustainability in the medium to long term of the current business models (Wright & Nyberg, 2017; Dahlmann et al., 2019). Companies and investors seek to minimize risks and align their strategies with the expectations of policy-makers, creating a new framework for generating value. Variable wellbeing has become more and more a measure of the wealth (Costanza etal., 2016) that a production system is capable of expressing; the attention paid to sustainability goes in the direction ofbehaviors that do not end with just ethical responsibility and compliance with regulations, but that take on strategic significance (Pavione et al., 2016). Sustainability becomes a strategic asset, which invests companies and their brands (Stein & Untertrifaller, 2020). This economic transition can only be implemented by modifying the perception of the risk associated with environmental degradation, from a merely physical and long-term risk, to a wider one, that is to say an economic one, for which immediate action is required (Carlton et al., 2016; Coletti et al., 2016).
Global warming is a serious, real and already present problem for financial markets and businesses, which requires a timely response aimed at laying the foundations for a stronger, more resilient and sustainable global economy. The effects of climate change, including the measures that are derived from it, should already be considered in industrial and investment decisions, (TCFD, 2017). The risks of this transition, therefore, derive from the ability of companies to adapt their business models and strategies to the objectives of the Paris Agreement (Rogelj et al., 2016). This implies taking competitive advantage of technological innovations by minimizing the loss of value of their assets by policy changes (which push companies to “internalize” the external costs of their emissions), legal changes (which impose new levels of compliance) and the evolution of markets. Achieving a good competitive position would also imply a reduction in the reputational risk, which for some time (with the advent of Corporate Social Responsibility; CSR) has associated environmental and social performance with the operational and financial performance of companies (Stein & Untertrifaller, 2020).
In light of what has been said so far, revisiting products, services, brands and managerial processes with a sustainability orientation and developing new socially responsible business models is becoming the key dimension for creating value for both companies and society. It is also interesting to analyze how eco-sustainability strategies can impact the brand in particular. Thus, social responsibility as a mere marketing tool is becoming an integral element of the value proposition and the driving force of competitive success (Corbellini & Marafioti, 2013).
Sustainability as a prerogative for the creation of corporate/brand and customer value
Recent EU and United Nations (UN) guidelines since 2013 with the Social Impact Investment Task Force, the aforementioned Paris Agreement of 2015 and the UN 2030 Agenda have brought social impact investments to the forefront in national priorities (Nilsson et al., 2016). These efforts have led to a “peaceful revolution” to affirm a long-term sustainable economic model, capable of responding to unsatisfied needs related to the environment, social exclusion, health and inequalities and able to create value for customers, brands and companies that incorporate their externalities (Gupta & Vegelin, 2016). At this point it is necessary to recall the classification system for sustainable activities from an environmental point of view, as approved at the EU level in December 2019. The framework for the classification of eco-sustainable economic activities, in particular, establishes six environmental objectives (www.ec.europa.eu):
- 1. mitigation of climate change;
- 2. adaptation to climate change;
- 3. the sustainable use and protection of waters and marine resources;
- 4. the transition to a circular economy;
- 5. pollution prevention and control;
- 6. the protection and restoration of biodiversity and ecosystems.
The four requirements that economic activities must meet in order to be eligible must make a substantial contribution to at least one of the six environmental objectives listed above, without causing significant harm to any of the other environmental objectives, in accordance with solid and data-based, technical, scientific screening criteria, respecting minimum safeguards on a social and governance level (www.ec.europa.eu).
For completeness, it is necessary to take into account the objectives of the UN’s Sustainable Development Goals (SDGs) or the 17 objectives - No Poverty; Zero Hunger; Good Health and Well-Being; Quality Education; Gender Equality; Clean Water and Sanitation; Affordable and Clean Energy; Decent Work and Economic Growth; Industry, innovation and Infrastructure; Reduced Inequalities; Sustainable Cities and Communities; Responsible Consumption and Production; Climate Action; Life Below Water; Life on Land; Peace, Justice and Strong Institutions; Partnerships - that the 193 member countries of the UN intend to pursue.. The invitation to countries and organizations to adapt, review and remodel their strategies marks a change of course for achieving the SDGs (Bebbington & Unerman, 2018).
All countries are called to contribute to the effort to take the world on a sustainable path, without distinction between developed, emerging and developing countries: this means that each country must commit itself to defining its own sustainable development strategy that allows to achieve the Sustainable Development Goals (SDGs), reporting on the results achieved within a process coordinated by the UN.
The ESG approach presupposes a change of paradigm that sees its ultimate goal as not only profit but also environmental, social and economic wellbeing that supports profit itself and ends up being a necessary condition for longer and lasting growth (Hak et al., 2016; Leal Filho et al., 2018). In a broader sense, the concept of sustainability implies constant wellbeing and the prospect of leaving future generations with a quality of life not inferior to the current one (UN Conference on the Environment in 1972).
The adoption of sustainability as a prerogative for the creation of corporate value requires a system for evaluating the results in terms of reducing emissions and polluting substances, which uses these results to attribute an economic and social value to an investment, a project or brand (Haller et al., 2018). According to this framework, the adoption of the positive impact logic as a change to the desired social and/or environmental system ex-ante, therefore planned and measurable, implies the adoption of a system of evaluation no longer of results but one of changes in terms of emission quality, disease reduction or product quality and design decision-making processes (Bertoni, 2017).
Solutions and recommendations
In this way, impact finance takes on a central role and pursues investments in funds, companies and entities with the aim of obtaining an economic return and a positive social and/ or (potential) environmental impact (Porter et al., 2019). At this point it is fundamental to define socially responsible investment as investment that pursues the ESG criteria as defined above in the research, analysis and selection of securities (Forum for Sustainable Finance) with a long-term approach (Hartzmark & Sussman, 2019). In this way the ESG approach inspires strategies and permeates the operations of companies (Adams, 2017). The integration of ESG criteria into the strategy, objectives and operations of organizations and investments continues the evolution within the major companies that began with the code of ethics, which concerns the values of a company in order to defend its reputation (Cuomo et al., 2018), which then continued with the social report. This consists of sharing “positive actions” with the outside world for communication and marketing activities, up to the non-financial reporting that internalizes ESG criteria in the strategies, objectives and operation (Perrini, 2006). We are therefore witnessing the evolution and expansion of values from the code of ethics, to the CSR of the social report, to the sustainability of the non-financial reporting (Perrini, 2006).
The creation of corporate value is now carried out internally (governance) and externally (environment and society). Sustainability is internalized and enters into strategy, products and communication; it is no longer just a way to produce and operate, it becomes a logic of change so that all products are developed in a sustainable way for the environment, society and economy (Kotsantonis et al., 2016; Fatemi et al., 2018).
Forward-looking companies have reached good level of sustainability and incorporated in the company’s values (Lo & Sheu, 2007). A sustainable company has active commitment. What are the key company’s’ challenges? Environmental challenges consist of climate change and all its consequent impacts first, and then the loss of biodiversity, waste management, pollution, hydrogeological instability, etc. Socioeconomic challenges focus on social inclusion, unemployment, new forms of poverty and inequalities in rights. And finally, the most recent challenges turn to new business models in which capitals become patient, rewarding in the long term, the financial system is oriented towards ESG criteria and sustainable strategies, the new economic paradigm evolves towards a circular economy and the product becomes service (Gray, 2006). If these challenges seem to confuse the classic business approach of costs, revenues and efficiency, the opportunity that presents itself focuses on the responsibility and the correct distribution of resources or, better, the prices of factors, even intermediate ones. The importance of these challenges is well represented by the effects that they will have in the coming years. The answer to these challenges certainly represents a cost with a multiyear use, an investment (Figge & Hahn, 2005). The value of this investment is confirmed by the constant attention towards the sustainable environment by millennials, the adults of tomorrow, rather than by adults more sensitive to social equity. So when in 2018 China blocked the import of waste and the EU issued the Disposable Plastic Directive, there was a strong negative impact on the companies exposed in the sector and a positive impact on those “sustainable” companies capable of seizing the opportunity through glass containers, paper products, eco-packaging, etc.
At the present time, companies that have leveraged sustainability and social responsibility since their inception have increased their competitive advantage in creating value for the customer. They just have to integrate their strategies with ESG criteria to reorient financial resources (Carnicer & Penuelas, 2012). The financial system, alongside companies, takes on the role of an actor in sustainable economic development by directing economic activities to those with a positive social and environmental impact.
The creation of corporate value with the product and the sustainable brand continues towards the financial system, which has increasingly measured its commitment to environmental and social issues in recent years. More specifically, the financial system, banks and insurance companies will afford privileges to sustainable businesses as companies capable of generating value over time (Freudenreich et al., 2019). This approach has significant weight in the change of course of the classic economic paradigm based only on profit and the short term, which saw its greatest limits in the financial crisis of 2007-2008. Thus, in the post-crisis period, an increasing number of institutions, governments and businesses have contributed to a finance that is more attentive to environmental and social issues (Silver, 2017). An example is the 2018 European Commission’s Action Plan on Sustainable Finance (Action Plan: Financing Sustainable Growth), in line with the Paris Agreement and the UN’s 2030 Agenda.
Environmental sustainability therefore becomes a strategic lever to develop value and produce internal and external advantages for the company. Internal benefits include concrete benefits in terms of company vision and strategy (Klakegg, 2009), production and management processes and employee motivation; external benefits include an increase in reputation and confidence in attracting capital and new customers (Faria et ah, 2012). So, if we look at climate change, companies could seize opportunities related to the energy transition and focus on systems and technologies that can conserve energy or products and services that require less energy. Batteries such as those in electric vehicles will eventually become an integral part of the electrical systems of businesses and homes, protecting the latter from energy price peaks. These technologies will, in turn, impact the demand for electricity and, adding these effects to those generated by the diffusion of renewable energies, will produce a collapse in the average prices for the production of electricity, from which Italian energy companies have benefited from 2010 to today.
Thus, if we support the ongoing revolution and start from what customers consume, we will introduce innovative products and services (Rettie et ah, 2012; Baumgartner, 2014). The Green Marketing matrix (Grant, 2008) suggests that each company will be able to identify the most suitable strategy for their approach to sustainability and the message or product they want to communicate: (i) green, set new standards for responsible products, services, brands and companies; (ii) greener, sharing responsibilities with customers and (iii) greener, supporting innovation: new habits, new services, new business models.
From the intersection between the objectives of green marketing and the company’s own trends, a 3 x 3 matrix is developed in which each quadrant represents a different strategy that the company can adopt to pursue sustainability.
In each quadrant Grant proposes two possible visions with respect to the same objective, specifying that there no one approach is better than another but is only a more relevant choice for the company, brand or product to be introduced on the market. Sustainability will affect all subjects from investors to companies, from brands to customers (Perrini and Tencati, 2006; Schaltegger et al., 2019) and only in this way can we all change the footprint on our land. It is not easy, but we will succeed!
In daily dialogue with companies it often happens that - depending on the product sector in which they operate - the issues they deal with in the more general framework of sustainability are those that arise from regulatory obligations or are based on the interest shown in the specific topic by individual customers (consumers or companies), in the absence, however, of an organic approach and of a long-term and wide-ranging strategic vision. However, the regulatory scenario is changing. Anyone who does not start to reason (in advance) with these factors, thus managing to gain a distinctive market position - by associating their brand with the concept of “sustainable” - will still be forced by law to adapt. It is a ball on an inclined plane: the most enlightened companies, those that start on this journey before the others, will be those that will have the opportunity to secure a winning position, compared to their competitors, and therefore gain greater visibility in the eyes of stakeholders, with a consequent positive impact on revenue.
Future research directions
In recent years, several institutional investors have started to evaluate the behavior of individual companies and have begun to divest from those accused of particularly serious violations of environmental impact. This path is now consolidated in most developed countries and the investors are slowly establishing themselves as a tool of economic democracy and for obtaining greater responsibility, sustainability and transparency from businesses. The spread of social impact investing or social impact investments will distinguish the new generation of jobs. Companies will work to generate a measurable social impact compatible with an economic objective. This choice can generate positive results through investments aimed at solving a social or even environmental problem, such as those in urban areas between degradation and exclusion, to create new directions for future research and innovative business models.
The opportunities for companies are not limited to technological development as in the case of renewable energies but extend to the creation of products and services that end-customers perceive as “sustainable” alternatives to others on the market. Customers are increasingly sensitive to the issue of the sustainable use of resources and are willing to pay a surcharge for products with a lower environmental or social impact. Likewise, customers are willing to abandon the beloved brand if it is not transparent or green, as shown by research conducted by IBM with the National Retail Federation, which involved around 19,000 consumers from 28 countries (https://newsroom.ibrn.eom/2020-01-10-IBM-Study-Purpose-and- Provenance-Drive-Bigger-Profits-for-Consumer-Goods-In-2020). On average 70% of buyers are willing to pay 35% more for sustainable products such as environmentally friendly ones and those made from recycled materials. A third of the sample said that if a brand no longer inspired them, they would stop buying its products. Another third, however, said that in 2019 they had already stopped buying from their favorite brands. In the purchasing process, therefore, the priorities are sustainability, transparency and consistency with one’s scale of values. For brands in which consumers recognize themselves most, there is therefore a propensity to pay more and even to change purchasing habits.
Starting from these considerations, we can conclude that sustainability allows businesses to successfully overcome the price war. The brand that is able to guarantee transparency, authenticity and traceability, also by resorting to certifications, collects the value and ends up generating some itself. In this direction, the race for the green brand involves the development of sustainable products and services that give rise to the birth of new markets and suppliers.
Case study: Plant the change! The Timberland route towards sustainability
Founded in 1973 and a fashion symbol of the 1980s with its iconic yellow boots, Timberland® is nowadays a global outdoor lifestyle brand, based in Stratham, New Hampshire, with international headquarters in Switzerland and Hong Kong. Today, the company, belonging to the VF Corporation, offers a full range of footwear, apparel and accessories designed to reflect the energy of fashion and a passion for nature, for people who share the brand’s purpose. Sure that “a greener future is a better future”, Timberland boasts a decades-long commitment to making products responsibly, protecting the outdoors and strengthening communities around the world - Figure 7.1.
FIGURE 7.1 Timberland mission. Source: http://timberlanci.com.
Its whole value chain is shaped to the Timberland purpose of “to step outside, work together and make it better”, by means of employee engagement initiatives, product innovation and community impact work. The long route towards sustainability symbolically started 30 years ago, when Timberland became a partner of City Year Inc., the Boston-based “peacekeepers” made up of young people who performed community service. Since then, Timberland has provided City Year with over $10 million, helping them extend their program to 13 cities across the United States.
Therefore, the Timberland triple bottom-line sustainability imperative (Dhiman, 2008; Lubin and Esty, 2010) consists of sustainable production, environmental empowerment and local community support.
Timberland endlessly searches for new standards for production transparency to minimize its environmental impact. Since 2008, it has had product development strategies for increasing the use of recycled, organic and renewable (ROR) materials in footwear, such as plant-based materials, which replace the use of fossil fuels, setting yearly targets to increase the use of these environmentally preferred materials year-over- year. Nowadays the largest use of ROR in footwear is with recycled polyester (PET) and recycled rubber, and the company has incorporated the equivalent of over 380 million plastic bottles into its footwear. In addition, in the stock fit and assembly shoe manufacturing process, Timberland reduces the use of solvent-based chemicals that release volatile organic compounds (VOCs), dangerous to human and environmental health. Contextually, the parent company’s Responsible Sourcing team is looking to expand the scope of its responsible chemistry program (ChemlQ) to include solvent-based adhesives, working with suppliers and adhesive vendors. Timberland is also phasing out PVC in footwear, seeking PVC-free material substitutions (http:// responsiblesourcing.vfc.com/ policies-and-standards). Due to chemical leather processing being water and energy intensive, for its footwear and apparel, Timberland uses leather suppliers that demonstrate environmental best practices and performance in all areas of leather production, from chemical, water and waste management to energy use and hide traceability, classified as gold or silver according to the environmental audit under protocols established by the Leather Working Group (LWG). For the full-year 2019, 96.7% of leather used in all Timberland® products came from gold or silver-rated tanneries. Timberland also prefers to use organic cotton on apparel, since chemicals used to grow cotton can be detrimental to the health of farmers and can seep into run-off water, contaminating lakes, rivers and waterways. When organic cotton is not sufficiently provided, Timberland uses cotton that is Certified Organic, recycled or fair-trade. In 2019, Timberland used 1,894 metric tons of cotton for its direct-sourced apparel, 99% of which was either organic (38%) or sourced through BCI (61%) - Figure 7.2.
FIGURE 7.2 Product — materials. Source: CSR Reporting (2019).
Finally, since 2007, the brand has introduced new ecological boxes for footwear. To signify overall engagement, the brand introduced a “product label”, which describes all aspects related to the ecological footprint of the company.
Timberland has demonstrated a long-standing commitment to sustainability and protecting the world’s natural resources. First of all, by 2025 the company has the goal to source 100% renewable energy for all owned and/or operated facilities, and to reach 95% diversion rate for recycling and composting efforts. The most stimulating project to defend the environment consists of planting trees in areas devastated by wildfires, deserted areas or areas where man’s intervention has destroyed nature (Baertlein, 2020). So from 2001 to 2019, Timberland planted a total of 10,785,743 trees - Figure 7.3.
FIGURE 7.3 Outdoors. Source: CSR Reporting (2019).
In this strand, in 2019 Timberland announced a partnership with the United Nations Convention to Combat Desertification (UNCCD) and World Bank Group’s Con- nect4Climate to support the Great Green Wall. This is an African-led movement to grow an 8,000 km line of trees across the entire width of the African continent to fight climate change, drought, famine, conflict and migration. The Timberland goal consists of planting 50 million trees worldwide by 2024, as a nature-based solution to fight the global climate crisis (Lyons, 2019).
Local community support
Timberland believes in the power of people to transform their communities. Hence, the company launched the “The Path of Service” program, which is a progressive corporate policy that offers employees 40 hours of paid leave each year to provide useful services to their communities. To help employees use their service hours, Timberland organizes two global days of service each year: Earth Day in the spring and the “Serv-a-Palooza” event in the fall, also involving business partners, VF associates, customers and others in the community - Figure 7.4.
FIGURE 7.4 Community service.
Source: CSR Reporting (2019).
In addition, the company ensures the respect of human and employee rights (safety, hygiene, work time, etc.) in its plants all around the word.
Other projects along the way have reinforced the brand’s civil commitment - Table 7.1.
TABLE 7.1 Timberland main civil projects
“Give Racism the Boot” awareness campaign for diversity and against oppression around the world
“2001 Shoe Angel of the Year” - equipment for all the people involved in the recovery and rescue operations at Ground Zero in New York
“Save Darfur” - limited edition of boots to raise awareness of the crisis and inspire civil and political action that helps stop the genocide
Hurricane Katrina - short-term “sabbatical” for employees wishing to contribute to relief efforts in the disaster-affected region
Since 2004, Timberland has been recognized among the 100 “best companies to work for” (Fortune Magazine), “for social responsibility” (Business Ethics), “working mothers” (Working Mother magazine), and also supporting adoptions.
In sum, brand engagement connects consumers with the causes Timberland cares about, by bringing together people, purpose and products, since “small actions can have a big impact, small actions by many can create a movement, and a movement can change the world”. Accordingly, Timberland promotes the circular economy and is testing online shoppers’ willingness to help the environment by slowing down delivery, in contrast with Amazon.coin’s push towards more expensive and more polluting shipments in one day. Also the last global branding campaign “Nature Needs Heroes” involves a community of open and multigenerational “real” people as advocates of change. By means of these efforts, Timberland has positively redesigned the way to make profit, without forgetting to build a better future for the environment and mankind!
- 1. Can Timberland be recognized as a bravery brand? Why?
- 2. What are the main choices of Timberland in terms of responsible strategy and innovation?
- 3. Why do stronger communities help Timberland attain the brand’s purpose?
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