Market Movers: Lessons from a Frontier of Innovation - IFC

Market MoversLessons froma Frontier of InnovationA companion piece to Developing Value:The business case for sustainability in emerging markets

2market moversACKNOWLEDGEMENTSIFC and SustainAbility have been the stewards of the Market Movers project, but we are indebted to manyothers, notably our project advisory group, the interviewees from the case study companies and our colleagues,without whom the content would have been less rich, if not impossible to write. It is thus with enormousgratitude that we would like to acknowledge:IFC TeamRichard CainesMaria GallegosRachel KyteVanessa ManuelPiotr MazurkiewiczSuSTaInabIlITy TeamKelly CruickshankIvana GazibaraKavita Prakash-ManiMichael SadowskiJodie ThorpePeter ZollingerProjeCT advISory GrouPMelissa Brown, Executive Director,Association for Sustainable andResponsible Investment in Asia(ASrIA)George Dallas, Managing Director,Standard & Poor’sWilliam Frater, independent, formerSenior Analyst of Frater AssetManagementDr. Subir Gokarn, Executive Directorand Chief Economist, CRISILDr. Aileen Ionescu-Somers, DeputyDirector, Forum for CorporateSustainability Management, IMDamanCo HoldInG InC.Andreas Eggenberg, formerExecutive Director, AmancoAgricultural SolutionsJuan Luis Gomez, former BusinessAnalyst, Amanco AgriculturalSolutionsJorge Ramirez, Financial DirectorRoberto Salas, CEObeIjInG deqInGyuanaGrICulTural TeCHnoloGyCo. lTd.Liu Xumin, Environmental ManagerWen Nanying, Human ResourcesManagerZhang Wenjiang, Financial ManagerZhong Kaimin, Chairman and CEOjubIlanT orGanoSyS lTd.Shyam Bang, Executive Director,Manufacturing and Supply ChainShyam S. Bhartia, Chairman andManaging DirectorAshok Ghose, Chief of Environment,Health & SafetyP. Ravishankar, President, HumanResourcesR. Sankaraiah, Executive Director,FinanceRajesh Srivastava, President, FineChemicals and CRAMSmaS HoldInGSAjay Amalean, Managing Director,MAS Corporate SolutionsMahesh Amalean, ChairmanRavi Fernando, Director, CorporateBranding and Strategic CSRKamani Jinadasa, Manager,Women’s Empowerment and GoBeyondDave Ranasinghe, Joint ManagingDirector, MAS IntimatesSharmini Ratwatte, Director, MASInvestmentsDeepthi de Silva, Director, GroupHuman ResourcesIn addition, we gratefullyacknowledge the comments, inputand company nominations from:Rajni Bakshi, freelance writerJeremy Baskin, Programme forIndustry, University of CambridgeCecilia Bjerborn, IFCAndrea Castro, FundaciónPROhumanaAimilios Chatzinikolaou, IFCAnne Copeland Chiu, IFCMaría Emilia Correa, GrupoNuevaDeborah Feigenbaum, IFCNicholas Flanders, IFCAndre Fourie, National BusinessInitiativeMiguel Angel Gardetti, Instituteof Studies for CorporateSustainabilityLouise Gardiner, IFCLucie Giraud, IFCDr. Aditi Haldar, Confederation ofIndian IndustryJonathan Hanks, IncitePaul Kapelus, African Institute forCorporate CitizenshipRitu Kumar, ActisDana Lane, IFCJoan Midthun Larrea, GlobalEnvironment FundClarissa Lins, Brazilian Foundationfor Sustainable Development(FBDS)Mike Lubrano, IFCMalini Mehra, Centre for SocialMarketsViraf Mehta, Partners in ChangeMario Monzoni, Center forSustainability Studies, FundaçãoGetulio VargasJulio Moura, GrupoNuevaKhurram Naayaab, Partners inChangeFei Pei, IFCTarcila Reis Ursini, EkobeSarah Ruck, IFCEnrique Sanchez-Armass, IFCRobin Sandenburgh, IFCKalim Shah, IFCBernard Sheahan, IFCSameer Kumar Singh, IFCSimon Winter, TechnoServe Inc.Finally, we are deeply gratefulto Lijian Zhao, who stepped into help us with the case studyresearch and to Tim Hindle, whoso eloquently turned our thoughtsinto words.

Market Movers3FOREWORDCorporate pioneers are using sustainability to createbusiness opportunities in emerging economiesHow can business combine long-term success with sustainability –with demands for a healthy environment and a just society? Few chiefexecutives would admit that this question was not near the top of theiragenda. And it is not just of concern to boardrooms in London and NewYork. According to a World Economic Forum CEO survey, sustainabilityhas emerged as a challenge for companies globally, with some of themost innovative practices undertaken in developing countries. 1Market Movers tells the stories of a number of firms in emergingeconomies that have managed to find business value in strategiesbased on sustainability. The firms are driven by world-class businessleaders and range across the globe, from Beijing to Sao Paulo – in manycases operating in some of the most challenging environments in whichto foster commercial success. The report goes on to draw some lessonsfrom their experiences and to make recommendations as to how otheremerging-market businesses might create value from sustainability.While we recognise that any measure of the value added either totheir bottom line or to society by businesses’ sustainability strategies isnecessarily imprecise, it is none the less real for that. In all our cases thereis a close correlation between sustainability and business success, evenif there is no irrefutable evidence of causation between the two. Theentrepreneurs who built up these companies invariably attest to it.This report is a companion piece to Developing Value: The BusinessCase for Sustainability in Emerging Markets published in 2002 by theInternational Finance Corporation (IFC), SustainAbility and the EthosInstitute. It was the first large-scale study to examine specifically therisks and opportunities of sustainability for businesses across emergingeconomies. At that time, there was a widespread assumption that goodgovernance and corporate responsibility were the almost exclusivepreserves of western corporations. Yet the report found that manybusinesses in emerging economies were gaining benefits (such as highersales, reduced costs and lower risks) from better corporate governance,improved environmental practices, and investment in social and economicdevelopment.Throughout the case research we have used the same conceptualunderpinnings as in this earlier report. Unlike that report, however, wherewe focused our analysis on specific actions and investments, here we lookat enterprises as a whole, seeking examples where sustainability has beenintegrated into business strategy. The aim is to show by example thatsustainability strategies can work almost anywhere in the world.“Perceiving social responsibilityas building shared value ratherthan as damage control oras a PR campaign will requiredramatically different thinkingin business. We are convinced,however, that CSR will becomeincreasingly important tocompetitive success.”Michael Porter and Mark Kramer (HarvardBusiness Review, December 2006)A note on languageDiscussions around sustainabilityand business strategy arefrequently confused by thelanguage being used. In MarketMovers, we have provided aglossary (see page 46) to helpreduce any such confusion.But in general we use the term‘sustainability’ to refer to abusiness approach that createsvalue by embracing opportunitiesand managing risks derivedfrom environmental, socialand governance issues. Manyinvestors, however, prefer theacronym ‘ESG’. So we use thatterm also, as and when it seemsappropriate.1World Economic Forum, Responding to the Leadership Challenge: Findings of a CEO Survey on Global Corporate Citizenship, 2003.

4Market MoversTABLE OF CONTENTSForeword 3Part I – Executive Briefing 6Recipes for success 8A note for investors 10In closing 12Part II – Cases in Detail 13Introduction 13Amanco: Pipe dreams 14Deqingyuan: A lot more than chicken feed 20Jubilant Organosys: Sweet solutions 26MAS: Going beyond 32Part III – Tools and Guidance 38Step 1: Analyse your business 38Step 2: Identify risks and opportunities 39Step 3: Develop a strategy 40Step 4: Plan and implement the strategy 40Step 5: Monitor and review progress 40Step 6: Communicate 41Appendix One: Research approach 44Appendix Two: Glossary 46“Sustainability has made [us] a market leader, anda market leader will not only survive out of crisis,it will thrive out of crisis.”Zhong Kaimin, chief executive of Deqingyuan“Twenty-first century companies need to integratethemselves much more closely with what ishappening in society in general. Those that don’twill be relegated to Jurassic Park.”Julio Moura, president and CEO of GrupoNuevaRichard Lord

Market Movers 5How to use this reportMarket Movers is not necessarilyintended to be read from cover tocover. It is divided into three sections,and although they are interrelated,each can be read independently,based on the reader’s interests andneeds.Part I (Executive Briefing) providesthe main messages and analysis.While it contains the essence of thereport, it is not a simple summary ofwhat follows. The analysis presentedin it is not repeated elsewhere.Part II (Cases in Detail) profiles thefour companies that are the bedrockof the report. It identifies how sustainabilitycontributed to their businesssuccess, and it points to some ofthe ingredients of that success.Part III (Tools and Guidance)provides practical guidance to helpcompanies identify, understandand analyse sustainability issues,and to see how they are relatedto business success. It aims to helpcompanies communicate theirapproach and strategy to investors,business partners and others.Our main target audience is Ceosand senior executives in emergingeconomies. The report aimsto help them understand thecontribution sustainability canmake to strategy, risk managementand innovation. This audience willprobably be most interested inPart I and some of the cases inPart II (see Figure 1, ‘Index to casestudies’).We also hope that the case studiesin the report will be relevant forthe financial community – investors,lenders and their agents(such as analysts and consultants).This group will be most interestedin Part I and sections of Part III.Finally, we hope the cases willprovide support to sustainabilityspecialists, who are charged withhelping companies to discuss,investigate, measure and communicateelements of sustainability,and who sometimes struggle togain the understanding of thewider business community. Thisgroup will likely be interestedin the whole report.FIGURE 1: INDEx TO CASE STUDIESSectorHQOperationsIllustratesBusiness CaseAmancopipes &constructionSao Paulo14 countriesin LatinAmericainnovation– brand value through sustainability governance– market creation through economic development– cost savings through environmental efficiencyDeqingyuanagribusinessBeijingChinaleadership– sales & market access through good environmental standards– brand value through good environmental standards– access to capital through good corporate governanceJubilantOrganosyschemicals &pharmaceuticalsNoida, UttarPradeshIndiaUSintegration– operational efficiency through environmental efficiency– licence to operate through community development– access to capital through transparency & governanceMASHoldingsapparel &textilesColombomainly SriLanka & Indiadifferentiation– strong client relationships through high labour standards– employee productivity & lower turnover through goodworkforce management– licence to operate through socio-economic development

6Market MoversPART I – ExECUTIVE BRIEFINGINSTANCES OF ExCELLENCEFour companies; five ingredients… and countless valuable lessonsCompanies from emerging economiesare increasingly making theirpresence felt in the global businesscommunity. Not only are they acquiringmore and more companiesin the developed world, but theyare also pursuing strategies thatare highly competitive with thoseof established businesses in westernmarkets. India, for example, is wellknown for its progressive firms indifferent areas of the knowledgeeconomy, including IT and pharmaceuticals,while Brazil has becomea global leader in biofuels. On theevidence of this report, companiesfrom emerging economies are alsointegrating sustainability in theirbusiness strategies in innovative waysthat stand comparison with those tobe found anywhere else in the world.In a recent article in the HarvardBusiness Review, 2 Michael Porterand Mark Kramer argue that toomuch of the debate about corporateresponsibility pits businessagainst society as if they wereseparate entities, “when clearly thetwo are interdependent.” The essentialtest guiding sustainability isnot “whether a cause is worthy, butwhether it presents an opportunityto create shared value – that is, ameaningful benefit for society thatis also valuable to the business.”There are companies in emergingeconomies that have been observingthat test for years before it wasspelled out in the Harvard BusinessReview – developing original businessstrategies that gain competitiveadvantage by being environmentallyand socially responsible. These companiesare creating value both fortheir business and for society, andthis report presents some examples.The implication is not that thesecompanies are representative of allcompanies in emerging economies,but rather that other companiescan, if they try, replicate aspectsof their success.BOx 1: BUSINESS IN EMERGING ECONOMIESSince 2002, the significanceof emerging economies hasgrown rapidly. According toThe Economist, the collectivegross domestic product (GDP)of emerging economiesrecently exceeded that ofdeveloped economies for thefirst time in over a century.What is more, not only hasthe amount of foreign directinvestment into developingcountries grown enormouslyin recent years, but so toohas the amount flowing out.Foreign direct investmentfrom developing countriesamounted to $120 billionin 2005; up from $16 billionin 2002. 3 Witness the recentacquisition of the Anglo-Dutch group Corus, one of theworld’s largest steel producers,by India’s Tata Steel followinga fierce bidding war withanother emerging economyrival – Brazil’s CompanhiaSiderúrgica Nacional (CSN).Thanks to more free trade andcheaper telecommunications,corporations from emergingeconomies are increasinglybeing integrated into theglobal economy. CVRD, aBrazilian mining companyprivatised in 1997, is nowthe second largest miningcompany in the world. Theresult is that such corporationsare increasingly affected bychanging expectations aroundglobal business. They oftenare, or have ambitions tobe, quoted on one or moreof the world’s leading stockexchanges, for example. Theyknow they have to observecontinually rising standardsof disclosure and governanceif they are to gain access tothe planet’s deepest pools offinance.2Michael Porter and Mark Kramer, ‘Strategy and Society: The Link Between Competitive Advantage and Corporate Social Responsibility’, Harvard Business Review,December 2006.3All figures in this report are in US dollars except where otherwise indicated.

Market Movers 7BOx 2: FOUR CASES IN POINTAt the heart of Market Moversare four case studies (see PartII), four very different examplesof a successful combination ofprofitability and sustainability inemerging economies.amanco, a Latin Americanpipe maker, has developed anapproach based on innovativeproducts and services, includinga range designed specificallyfor low-income customers. This,coupled with a reputation foran ethical business approach,has built Amanco into a strongbrand and helped create newmarkets with substantial potentialfor growth.Beijing-based deqingyuantook on one of the world’s mostsevere business challenges – theproduction of healthy eggs forthe Chinese market. It led theway, banking on the idea thatChina’s increasingly healthconsciousconsumers would paya premium for a quality brand.And it succeeded. Its brand emphasison health and safety hasbeen popular and its eggs arenow being sold as far afield asHong Kong.MaS is a Sri Lankan apparelmanufacturer whose roll-callof blue-chip customers includesVictoria’s Secret, Gap, Marks &Spencer and Nike. In a marketreplete with low-cost rivals, MASdifferentiated itself based on itsexemplary employment practicesand turned its employeeprogramme into a brand (called‘Women Go Beyond’). This persuadedseveral western firms tochoose it as a strategic partner.jubilant organosys was abulk chemicals producer thatseized the opportunities presentedby the opening up ofIndia’s economy in the 1990sto shift into speciality chemicalsand pharmaceuticals. Inthis new market it discoveredthat its emphasis on environmentalmanagement and localcommunities was a powerfulcompetitive weapon. The companyintegrated the productiveuse of wastes and effluentsinto product development andmanufacturing, and therebyreduced operating costs, builtup relationships with localcommunities and attractedpartners with similar concernsfrom Europe and the US.Courtesy of AGD

8Market Moversrecipes for successThere is no simple formula forensuring that a sustainable businessstrategy will be more successfulthan any other strategy. However,the aim in analysing our chosencase studies was to understand therelationship between sustainabilityand business success, and tounderstand why these four chosencompanies were successful in theirstrategies.In analysing the case studies,the link between each company’senvironmental, social and governanceefforts and its businesssuccess was explored. This analysiswas based on a series of factors thatinfluence a firm’s financial results:– sales and market access –revenue, sales, market share,access to new markets– operational efficiency – theimpact on a company’s costs– access to capital – access todebt or equity capital, the costof capital– risk management and licenceto operate – the control of loss,damage or disruption, ensuringongoing acceptance of thecompany’s operations– talent and human capital – theknowledge, skills and talent ofemployees and contract labour– brand value and reputation –public perception of a company,its products and its brands.Figure 2 summarises the mostimportant ‘business cases’ – theways in which sustainabilityperformance influences businessdrivers and strategy in each of thefour case studies. These are notFIGURE 2: SUMMARy MATRIx OF BUSINESS CASESDQy = DeqingyuanSales &Market AccessJOL = Jubilant OrganosysEnvironmentalPerformanceDQySocialPerformanceAmancoMASGovernancePerformancemeant to be exhaustive – theydo not detail every benefit thatthe companies have found. Ratherthey provide a quick reference ofthe major aspects of each case.An image of this matrix is alsorepeated within each individualcase study in Part II to help orientthe reader.There is no simple formula forensuring that a sustainablebusiness strategy will be moresuccessful than any otherstrategy.Through the research, a numberof ‘ingredients of success’ werealso identified. These were factorsthat contributed to the strongresults in all four case studies andhelped them overcome some of theconstraints that many emergingeconomycompanies face. Othercompanies may find these can helpwith business strategies that createvalue both for themselves and forsociety. The five ingredients aresummarised below.OperationalEfficiencyAccessto CapitalRisk Mgmt &Licence toOperateTalent &Human CapitalBrand Value &ReputationAmancoJOLDQyJOLMASMASDQyJOLAmancoleadership. The role of the chiefexecutive or chairman is oftencrucial in pushing through astrategy based on sustainability.While that is true in any country,it may be particularly true inthe family-run firms common inemerging economies, where abusiness leader who has a clearvision, backed by rigorous marketanalysis, can be a powerful force.Zhong Kaimin, the founder ofdeqingyuan, had a very simplevision: to provide good, healthyeggs, first for his family and friends,then for the people of Beijing. Butthat simple vision is leading tosomething far more profound inChina’s poultry business.

Market Movers 9Integration. Sustainabilityelements were often embedded incorporate strategies from the verybeginning. In the case of jubilant,for example, at the same time asthe company was moving up thevalue chain, developing a range ofspeciality chemicals and researchservices, it was improving its costcompetitiveness with a number ofhighly integrated manufacturingfacilities that allowed for theproductive use of by-products,effluents and wastes.Innovation. The companies studieduse sustainability as a source ofinnovation. amanco, for instance,wanted to move away from beinga commodity-type producer in orderto increase profits. Its sustainabilitystrategy allows it to differentiateitself from the crowd by usingenvironmental and social problemsas a source of ideas. Once a challengeis identified, the company appliescreativity to develop new productsand services to address it, such asfinancing for irrigation systems forlow-income farmers.Colin J. WarrenCompanies that build strong relationships with their constituencies– suppliers, customers, employees – are at an advantage.differentiation. Successfulcompanies have the courageto be different. MaS took onthe daunting task of producinghighly sophisticated garments ina country where they had neverbeen manufactured before. Italso chose to build its factories inthe countryside, away from themost highly skilled labour. Thisstrategy succeeded because MASidentified (and then met) the mainneeds of its employees and thelocal communities – factors whichdifferentiated MAS in the eyes ofits major clients.quality of relationships. Companiesthat build strong relationships withtheir constituencies – suppliers,customers, employees – are at anadvantage. Successfully operatingin poor rural areas of India, forexample, required jubilant toovercome community distrust. Byengaging with its neighbours, listeningand acting on what it hears,and involving and empowering thecommunity, Jubilant has helpedcreate an environment of goodwilland understanding – and avoidedpotential business disruptions. Thiscollaborative approach with thecommunity has also strengthenedrelationships with the local governmentand eased the process ofobtaining environmental clearances,which require community consultation.These ‘ingredients’ could constitutea perfectly good list for generalbusiness success in both developedand emerging economies. After all,sustainability, simply put, is soundbusiness planning which anticipatesand strategically manages changesin a company’s operating environment(which includes changes inenvironmental, social and economicconditions). However, the emphasisin emerging economies may bedifferent. For one thing, manyfirms in emerging economies arefamily-run, and it may be easier forenlightened leaders to pursue along-term goal without shareholderpressure to achieve short-termfinancial targets. Moreover, thepotential for innovation is greater(almost by definition) in emergingeconomies than it is in developedones, where commercial progressis more likely to occur in smallsteps than in big leaps and bounds.And the lack of infrastructure andsystems common in developedcountries means that companiesmay have to seek other advantagesin order to compete. For example,where legal frameworks are weak,the value of trusted relationshipsmay be higher.

10Market Moversa note for investorsA growing body of investors hasbegun to recognise that environmental,social and corporate governance(ESG) issues are material to a company’sperformance. Over 50 financialinstitutions have now adopted theEquator Principles, believing that carefulassessment and management ofESG risks in project financing leads tobetter-quality investments. Researchfrom firms such as Morgan Stanleyand UBS are lending support to theidea that ESG issues affect long-termshareholder value. In May 2007, theMcKinsey Quarterly published aninterview with Al Gore, America’svice-president under Bill Clinton,and David Blood, a former CEO ofGoldman Sachs Asset Management,in which the two intervieweesargued that “sustainability investingis essential to creating long-termshareholder value.” Society’s concernabout climate change, for example,inevitably imposes new responsibilitieson business while at thesame time providing a host of newopportunities. 4Nevertheless there are many keydecision-makers both inside andoutside corporations who havenot yet got the message. There areplenty of investors who still tendto see sustainability as somethingwhich has only an intangible effecton their organisation’s goodwilland reputation. They do not seethe value that can be added byintegrating sustainability morebroadly into corporate strategy.This report aims to help to persuadethem otherwise.A growing body of investors has begunto recognise that environmental,social and corporate governance (ESG)issues are material to a company’sperformance.“Sustainability investing is essential tocreating long-term shareholder value.”David Blood, managing partner of GenerationInvestment Management and former CEO ofGoldman Sachs Asset ManagementJim Pickerell4Lenny T Mendonca and Jeremy Oppenheim, ‘Investing in sustainability: an interview with Al Gore and David Blood’, McKinsey Quarterly, May 2007.

Market Movers11BOx 3: VIEWS FROM ELSEWHERESince Developing Value 5 waspublished in 2002, there hasbeen a substantial amount ofwork on the business case forsustainability. The finance sectorhas been particularly active, ledby asset managers and investorsinvolved in initiatives such asthe United Nations EnvironmentProgramme Finance Initiative(UNEP-FI), the Principlesfor Responsible Investment orthe Enhanced Analytics Initiative.Overall, there is a trend torecognise more fully the materialityof ESG issues and beginto take them into account inlong-term investment decisions– and a need for companies toimprove communication withinvestors on sustainability andthe business case.The investment bank GoldmanSachs, for example, has foundthat ESG issues are likely to bematerial for competitivenessand reputation, and thereforecan have an impact on thecompany’s valuation. In Brazil,ABN Amro Real considered environmentaland social concernsin the forestry industry andconcluded that they are materialand can impact corporatefinancial results. The Associationfor Sustainable and ResponsibleInvestment in Asia (ASrIA) alsoconcludes that ESG factors mayimpact investment valuationdynamic, and that as investorsbecome better versed in ESGanalysis, companies will becomemore strategic on these issues. 6Beyond investors, academics atHarvard, Yale, IMD in Switzerlandand INCAE business schoolin Costa Rica 7 have also identifieda business case for sustainability.They tend to see sustainabilityas a source of innovationand comparative advantage,and they emphasise the reciprocalrelationship between companiesand society – a relationshipwhich creates opportunitiesfor mutual benefit or “sharedvalue,” as Michael Porter andMark Kramer put it in their articlein Harvard Business Review.IMD is perhaps the most cautiousin this respect – supportingthe notion of a businesscase for sustainability, but warningthat it is sector-specific andthat stakeholder support forsustainability efforts is ‘unreliable’.It also emphasises thatthe more that sustainability isembedded as part of businessstrategy, the more difficult it isto measure its effects. That isbecause it is hard to separatesustainability- and non-sustainability-relatedbenefits – afinding borne out by the casestudies in this report.However, despite the increasingnumber of papers highlightingthe rising importance of emergingeconomies and emergingeconomycorporations, 8 the lastfive years has seen relativelylittle analysis of the businesscase for sustainability in emergingeconomies.Contributions from the BrazilianFoundation for SustainableDevelopment, IFC, INCAE andUNEP-FI have generally foundthat the business case forsustainability tends to hold inemerging as well as in developedeconomies. An OECD paperon CSR in emerging-economycompanies also reaches thisconclusion – while emphasisingthat the specific drivers maybe different. The paper finds,as does this report, that companiesin emerging economiesmay often be practising sustainabilitywithout calling it such.But it also warns that the gapbetween leaders and laggardsin emerging economies may begreater than it is in developedcountries. 95SustainAbility, International Finance Corporation and Ethos Institute, Developing Value: The Business Case for Sustainability in Emerging Markets, 2002. It was itselfbased on an earlier publication: SustainAbility, Buried Treasure: Uncovering the Business Case for Corporate Sustainability, 2001.6UNEP-FI, Show Me the Money: Linking Environmental, Social and Governance Issues to Company Value, 2006; Nyenrode Business Universiteit and Boston College,Knowing the Price, but also the Value? Financial Analysts on Social, Ethical and Environmental Information, 2005; Goldman Sachs, Global Energy: Introducing the GoldmanSachs Energy Environmental and Social Index, 2004; UNEP-FI, The Materiality of Social, Environmental and Corporate Governance Issues to Equity Pricing, 2004;United Nations Global Compact, Who Cares Wins, 2004.7Dan Esty and Andrew Winston, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage,Yale University Press, 2006; European Academy of Business in Society, Measuring Corporate Responsibility – Linking Financial and Social Values, www.eabis.org/research/MeasuringCR/ (15 September 2006); Porter and Kramer, 2006; Oliver Salzmann, Aileen Ionescu-Somers and Ulrich Steger, ‘The business case for corporate sustainability:literature review and research options’, European Management Journal, February 2005; Ulrich Steger (ed.), The Business of Sustainability: Building Industry Cases forCorporate Sustainability, Palgrave MacMillan, 2004.8Antoine van Agtmael, The Emerging Market Century: How a New Breed of World-Class Companies Is Overtaking the World, Free Press, 2007; Boston ConsultingGroup, The New Global Challengers: How 100 Top Companies from Rapidly Developing Economies Are Changing the World, 2006; Jeremy Baskin and Kathryn Gordon,Corporate Responsibility Practices of Emerging Market Companies: A Fact Finding Study, OECD Working Papers on International Investment, 2005; Goldman Sachs,Dreaming with the BRICs: The Path to 2050, 2003.9IFC, The Promise of Private Equity: Environment, Society and Corporate Governance – New Criteria for Success in Private Equity Investments, 2006; UNEP-FI, SustainabilityManagement and Reporting: Benefits for Financial Institutions in Developing and Emerging Economies, 2006; Baskin and Gordon, 2005.

12Market MoversIn closingThere is no decree that industrialprogress in emerging economies hasto follow the path it has followedelsewhere. Globalisation – the everfaster and farther movement ofpeople, products, ideas andinformation – is helping businessto leapfrog over stages in theprocess in remarkable (andunpredictable) ways. Places likeBangalore and Shanghai are flyingthrough a totally new trajectory ofdevelopment from that followedby Manchester or Tokyo.Similarly, there are companiesin emerging economies that areintegrating sustainability intotheir business strategies in unlikelyways, thus creating value both forthemselves and for the societiesin which they operate. Thosecompanies are led by people whoappreciate that business needs agood society as much as societyneeds good business. MarketMovers tells the stories of aselected few of them.The four companies we profile arevery different from each other,ranging from some which startedoff with an explicit sustainabilityagenda to those which came torealise that sustainability simplymade sound business sense forthem at a particular time in theirdevelopment. In all cases, though,their focus has been on managingissues material to core business,as part of the overall businessapproach. Small, discreet actionsto tackle specific concerns can addvalue – but significant results aremost likely to arise from strategicventures.As market interest and expectationsgrow, robust sustainability performanceis being viewed as a markof quality management and oftena precondition for doing businessin the eyes of a growing range ofinvestors, business partners andcustomers. By understanding,measuring, managing and thendiscussing the business value ofsustainability with these stakeholders,in terms that are relevant tothem, firms in emerging economiescan be competitive with the verybest anywhere in the world.There are companies in emergingeconomies that are integratingsustainability into their businessstrategies in unlikely ways.Small, discreet actions to tacklespecific concerns can add value– but significant results are mostlikely to arise from strategicventures.Mark Fallander

Market Movers 13PART II – CASES IN DETAILCORPORATE PIONEERSIntroductionDeveloping Value was the firstpublication to highlight the directrelevance of sustainability strategiesfor companies in emerging economies,demonstrating some powerfullinks between sustainability andbusiness success. Market Movers buildson Developing Value by exploring inmore detail how some leading companiesfrom emerging economiesare understanding and respondingto changing social and environmentaltrends as part of their overallbusiness approach. By exploringthe cases of several companies thathave created great value in this waywe hope to help other companiesto identify opportunities, developstrategies, and then measure andcommunicate sustainability and itscontribution to business success.The four case studies included inthis section embrace firms as farapart as Beijing and Sao Paulo,and although their specific detailsvary enormously, they containsome common threads and lessonsthat can be applied in almost anycontext. The cases capture keymoments in the companies’ historiesthat determined their strategicdirection, and the motivationthat lay behind them. They alsoidentify the most important waysin which sustainability has affectedthe drivers of business success –things such as access to markets,operational efficiency, access tocapital or superior reputation.Finally, the cases illustrate the fiveingredients described in Part I:leadership, integration, innovation,differentiation and quality ofrelationships.These companies are not meantto be representative of currentcorporate practice – but ratherrelevant references for companiesin emerging economies. Nor is itimplied that these companies have‘perfect’ environmental, socialand governance performance.They were selected following abroad trawl of possible candidatesnominated by experts, academics,investors and business leadersas examples of companies thathave embedded sustainability andare seeing business benefits as aresult (see Figure 3). The minimumcriteria for nomination were thatcompanies were based in emergingeconomies, that they exhibitedclear business success, and thatsustainability played a role inthat success. In the four cases thatmade the final cut, sustainabilityis clearly integrated into the firms’business approach.Once selected, the companies weresubjected to rigorous research.Senior executives within them wereinterviewed at length, as wereinterested outsiders. The aim wasto identify as far as possible thesecrets of their success, to discover,as it were, ‘how they did it’, howsustainability had helped driveprofitability.Given the focus on cases wheresustainability was embedded intobusiness strategy, rather than beinga separate consideration, it wasgenerally difficult to quantify thespecific impact of sustainability onbusiness results. However, the leaderswe spoke to were convinced ofthe positive role that sustainabilityhas played. The analysis was thusconcentrated on understanding howsustainability strategies influenced keysuccess factors at each company, toprovide lessons on how sustainabilitycan contribute real value. SeeAppendix One for more details on ourresearch approach.To keep the links between businesssuccess and sustainability in readers’minds, the matrix introduced inPart I is reproduced in each case study.It indicates for each case the threeareas where good environmental,social or governance performancehas had the clearest impact onbusiness results.FIGURE 3: RESEARCH APPROACHEstablishuniverse ofcases fromacross emergingeconomiesFilter casesto identify mostpromising forfurther researchCase research:How doessustainabilityimpact businesssuccess?Analysefindingsand identifymessages, toolsand guidance

14Market MoversCASE: AMANCOPIPE DREAMSamanco has grown to belatin america’s leadingmanufacturer of plastic pipesand fittings with a strategythat has built-in sustainability.The Sao Paulo-based company wasbought for $500 million in February2007 by Mexichem, a Mexicanchemicals manufacturer that isquoted on the Mexican stock market.Mexichem was one of at least nineorganisations interested in purchasingAmanco at the time of its sale,attracted, according to CEO RobertoSalas, due to Amanco’s leadingposition in Latin America, its proventrack record of profit growth and itssustainability commitment.“Twenty-first centurycompanies need to integratethemselves much more closelywith what is happening insociety in general. Those thatdon’t will be relegated toJurassic Park.”Julio Moura, president andCEO of GrupoNuevaSustainability – or the triple bottomline (TBL) approach, as it is calledinternally – first became part of thecompany’s competitive strategyunder previous owner, GrupoNueva,“as Amanco searched for the bestway to attain price premiums”notes Andreas Eggenberg, a formersenior executive. Amanco is in amarket that is highly commoditised.A pipe is a pipe is a pipe. Differen-tiation through innovation is theonly way to escape from that typeof low-margin ‘commodity hell’.But the benefits of many forms ofinnovation in the industry oftenprove short-lived; new productssometimes have a competitiveadvantage for just a matter ofmonths.So the company has differentiateditself by developing a brand thatis associated with sustainability inall the countries in which it operates.This is partly reinforced by itsnew products, which systematicallytake account of environmental andsocial impact. For example, the companyhas taken the precautionaryapproach in identifying a substitute,calcium zinc, which can be used toreplace lead-containing compoundsin its PVC piping at an extra costof only 3.5%. Then it developed anew plastic technology for sewagepiping that is more water-tight thanany comparable material, and alsocheaper to install.The company has a wide range ofclients and it develops productsand services specifically for differentgroups. It has, for instance,been developing a scheme basedon the base of the pyramid (BoP)concept, identifying products andservices designed to improve socialconditions for low-income customerswhile creating value for thebusiness. The company invited itsemployees to come up with businessplans for the scheme and itreceived 250 proposals, some ofwhich are now up and running.The initial BoP project was a$100,000 investment in Guatemala.Small farmers there do not haveaccess to reasonably priced financeto buy the agricultural irrigationkits that Amanco was proposingto sell, so the company found partnerswho could help with trainingand financing – including the Inter-American Development Bank andthe NGO Opción. There were soundbusiness reasons for choosing Guatemala– it had some 300,000 smallfarmers who could be potentialcustomers. Despite their limitedresources these farmers haveproved to be a good credit risk.The gradual build-up of the company’sreputation for innovationand sustainability through thedevelopment of this sort of newproduct and service has beenbacked by a concerted attempt tolead discussions across the regionon the sustainable use of waterresources and on transparency.Amanco was a leading supporterof the Fourth World Water Forum,held in Mexico City in March 2006,and it has signed agreements withother firms in the sector to increasetransparency and hence to reducethe opportunities for corruption.The company’s financial performancehas been uneven across the continent.Although it is the leader inits Spanish-speaking markets, it hasa much less dominant position inBrazil, even though Brazil accountsfor over a quarter of the company’stotal sales and is its biggest singlemarket. Nevertheless, Amanco’sefforts to strengthen reputationand brand have been working –and the company has gone frombeing relatively unknown in Brazilto being widely recognised andhighly trusted in only a few years.

Market Movers 15 17Sustainability performanceWhat you measure is what you getAmanco has been a pioneer inmeasuring the impact of its TBLstrategy, building on the ideas ofRobert Kaplan, a Harvard professorof accounting who in the 1990sdeveloped a method of extendinga company’s measure of its performancebeyond the financial. Onthe understanding that what youmeasure is what you get, he set outa concept he called the ‘BalancedScorecard’. 10 This added otheryardsticks of company performance,such as customer satisfaction andlevels of innovation, to the classicprofit and loss account. The ideaaroused widespread interest.Amanco has extended the idea ofthe Balanced Scorecard to embraceboth social and environmentaldimensions. It has begun to producewhat it calls a ‘Sustainability Scorecard’(see Figure 6 on page 41), andits efforts stimulated Kaplan himselfto co-author a Harvard BusinessSchool case study entitled ‘Amanco:Developing the SustainabilityScorecard’. 11 It is a constant challengefor companies to measure theimpact of the sustainability elementof their strategies, and Amanco hasgone as far down this road as any.Amanco first introduced its SustainabilityScorecard in 2003 andit has been continuously refinedever since. Initially it focused on thesocial impact on employees and thecommunities around its factories.But it has since been expanded toinclude business with low-incomecustomers, fighting corruption inthe sector, and indicators on accidentprevention and eco-efficiency.It is difficult to measure the impactof every aspect of Amanco’s sustainabilitystrategy. The specific benefitof efforts to lead the debate onwater resources and transparency,for instance, cannot be quantified.But Jorge Ramirez, the company’sfinancial director, is convinced thatthe extensive media coverage thatthese initiatives receive has a positiveeffect on consumers’ awarenessand attitude towards the company.There is less doubt about the benefitsof the company’s efforts toreduce waste and to lower accidentrates. These are all measured andmanaged, and have a positive impacton costs.The BoP segment, although still small,already generates over $4 million inrevenues and the company believesthe BoP idea has high growth potential,projecting that income from itwill double year-on-year. Since theinitial project in Guatemala, thecompany has developed new ideasincluding a pilot financial servicesprogram for the residential buildingand installation segment in Brazil,launched in 2005. The programprovides credit cards to low-incomeCourtesy of Amancocustomers who lack access to thebanking system – enabling themto purchase building materials.Amanco has also set up a programmeto train plumbers fromlow-income groups, certifyingthose who successfully completethe programme as ‘Doctores deConstrução’, a brand which addsvalue for the plumbers. For Amanco,this is also part of developing thecompany as an alternative to themarket incumbents in Brazil, whowere already working with thewell-established plumbers. “Theonly way to success is with surprise– doing something differently,”says Salas.To some extent Amanco’s distinctiveculture is self-sustaining. Thecompany attracts the sort of employeesthat want to make it work,and who gain satisfaction from theidea. Amanco has frequently beennamed as a Top 100 employer inBrazil, and in 2007 Amanco Ecuadorwas cited as the fifth best employerin all Latin America. 1210RS Kaplan and DP Norton, ‘The balanced scorecard: measures that drive performance’, Harvard Business Review, Jan–Feb 2002.11Ricardo Reisen de Pinho and Robert Steven Kaplan, ‘Amanco: Developing the Sustainability Scorecard’, Harvard Business School Case 9-107-038, January 2007.12Citations by the Great Place to Work Institute, www.greatplacetowork.com/ (27 August 2007).

16Market MoversConclusion21st century businessThe company’s fortunes are closelyallied to those of the region. Thegrowth of Latin America’s GDPper capita over the past 25 yearshas been poor – lower than for allemerging-economy regions exceptsub-Saharan Africa. Moreover, statespending on infrastructure hasfallen sharply in all countries exceptColombia as fiscal controls havebeen tightened. Most spending onwater and sanitation in the regionremains publicly financed.The company has already beenthrough some hard times. Duringthe economic crisis between 1999and 2003, Amanco had to closea number of plants, althoughthe company provided extensiveretraining and outplacementservices to help laid-off employeesfind new work. To succeed inthe 21st century, Julio Moura,president and CEO of formerowner GrupoNueva, has saidthat companies need a differentapproach to that of the last century.In essence, they need to integratethemselves much more closely withwhat is happening in society ingeneral. Those that don’t, he says,“will be relegated to Jurassic Park.”The big opportunities over the nextten years, he believes, will comefrom “the things that society is mostconcerned about”. Among whichhe includes climate change, poverty,conflict and globalisation.Amanco’s new owners seemdetermined to continue with thesustainability strategy that madethe company so attractive whenit came on the market. Mexichemhas confirmed that it intends tocontinue with this approach andhas created a special board ofdirectors for Amanco, to reflectthe company’s wide geographicalspread and support its sustainabilitygoals. But there will be differentchallenges in nurturing such astrategy for a quoted company,with the short-term horizons thatare imposed on it by its investors,as opposed to those that werefaced by Amanco when it wasprivately owned.BOx 4: INNOVATIONLike any business, Amancoseeks to increase profits.However, the company isconstrained by the fact thatpipes are a commoditisedproduct, with traditionallylow margins. Amanco hassolved this challenge bydeveloping a value propositionbased on providing tailored‘water solutions’ to differentconsumer segments. Social andenvironmental problems suchas water leakage or farmers’lack of access to financing arethe source of ideas, and thenAmanco applies creativity,research and developmentto try to solve them. Amancothus turns these problems intoopportunities – innovatingproducts and services to meetneeds at a competitive price.Innovation in productionprocesses to reduce resourceand energy consumption hasalso helped the company keepprices down and contributedto increased profits.Courtesy of Amanco

Market Movers 17Courtesy of Amanco

18Market MoversCompany profileAmanco is a Latin American producer of integrated water solutions for the construction,infrastructure and irrigation industries. It is also involved in the trading of constructionproducts. It produces an annual Sustainability Scorecard, which measures the results ofenvironmental and social management as well as standard financial results.key dataFoundedAmanco Holding Inc. wasformed in 1994 throughthe merger of several pipesystems companies ownedby Swiss entrepreneur StefanSchmidheiny.ownerSHIP STruCTureWholly owned subsidiary ofMexichem since March 2007 –previously part of GrupoNuevaSeCTorPipe systems, constructionproducts and geosyntheticsystemsHeadquarTerSSao PaulooPeraTIonSPlants operating in 14 LatinAmerican countriesMarkeTSMore than 55,000 points ofsale in 29 countries, includingprimarily Brazil, Mexico,Colombia, Argentina andCentral AmericaMaIn CoMPeTITorSCompanies used as benchmarksinclude Wavin (Dutch), Uralita(Spanish), Iponor (Finnish) andTigre (Brazilian)eMPloyeeS7,100MarkeT SHare2005: from 17% (Peru) to66% (Ecuador); 28% acrossthe regionawardS and reCoGnITIon– 2006 and 2007: Amanco(Ecuador) listed in BestCompanies to Work for in LatinAmerica by Great Place toWork Institute (ranked 5th)– 2005: Distinctionfor Corporate SocialResponsibility from MexicanCenter for Philanthropy(CEMEFI)– 2002, 2003, 2004 and 2005:listed in Best Companies toWork for in Brazil by GreatPlace to Work Instituterevenue (uSd Mn)ebITda (uSd Mn)7988009084 85700688807559259260070675126150060FY02 FY03 FY04 FY05 FY06 FY02 FY03 FY04 FY05 FY06Compound annual growth rate (CAGR)from 2002 to 2006: 7.8% 13CAGR from 2002 to 2006: 8.6%.13Here, and elsewhere in the case studies, CAGR has been calculated by the authors, based on revenue, income or EBITDA figures provided by the companies.

Market Movers 19The amanco business case – the three most important factorsHere we highlight the three most important ways in which sustainability performance at Amanco is influencing businessdrivers and supporting business strategy.1. brand value increased throughsustainability governance– Sustainability is an integral part ofAmanco’s brand differentiation.– In Brazil, Amanco has gone frombeing relatively unknown tohaving 50% brand awareness inless than 18 months.– Leadership on transparency withinsector helps make Amanco thepreferred brand to win ‘clean’contracts in an industry prone tocorruption.2. Market creation by helpingcustomer’s own economicdevelopment– Amanco created new markets atthe base of the pyramid.– Substantial potential as newsegment accounts for 80% ofcustomer base but currently only20% of sales.– Pilot projects providing newagricultural products and servicesare now generating $4.1 million inrevenues.– Amanco estimates income fromlow-income segments will doubleyear-on-year, compared with just5–15% growth in other segments.3. Cost savings from supportingenvironmental efficiency– Good environment, health andsafety management saves moneyand contributes to increasedmargins.– There were $850,000 in savingsin 2006 through eco-efficientmanagement of plants (reducingresource and energy consumption).AMANCO BUSINESS CASE MATRIxSales &Market AccessOperationalEfficiencyAccessto CapitalRisk Mgmt &Licence toOperateTalent &Human CapitalEnvironmentalPerformanceSocialPerformanceGovernancePerformanceBrand Value &Reputation

20Market MoversCASE: DEQINGyUANA LOT MORE THAN CHICKEN FEEDA small start-up near Beijing ishelping transform Chinese eggproduction – anticipating a markettrend towards better food qualityand safety.If you set out to find the mostchallenging environment in whichto start a business, you would behard pushed to beat the chickenindustry in China. A series of foodsafety and health issues – SARS,bird flu, the Sudan 1 carcinogen– have undermined confidence inthe ability of the world’s biggestegg consumer (accounting for anextraordinary 40% of total worldconsumption) to monitor thequality of its poultry stock. Thiswas not helped by the fragmentednature of the industry in China.Prices are continually under pressurefrom myriad small producers preparedto cut corners on productionstandards and food safety. Only acouple of farms in the whole countrycan boast more than a million birds.In Europe and America such farmsare commonplace.Nevertheless, in 2000 one mantook on the daunting challengeof producing a quality egg for theChinese market. He was not a serialentrepreneur with a family backgroundin business. Rather, ZhongKaimin was an engineer who hadworked in the Ministry of Defencefor 16 years. But he and his familyknew that it was hard to find adecent egg in Beijing. So, with thehelp and advice of a few friends andfamily, he set out to fill the gap.His company, Deqingyuan, basedsome 90 kilometres outside theChinese capital, is now producingabout 480,000 high-grade eggs aday and accounts for over 70% ofthe (growing) branded egg marketin Beijing. Profits doubled in 2005(to over RMB 10 million), and onlyfell back in 2006 because of heavyinvestment in expansion – thecompany increased its infrastructuresixfold in a single year.In March 2007 Deqingyuan beganto sell its eggs at a premium pricein Hong Kong, a city that has nottraditionally sourced eggs fromWhen an outbreak of bird flu caused egg sales to plummet,Deqingyuan continued to sell everything it could produce at itsfull premium price.mainland China. It now intends toopen two new farms – one in thesouth of the country near HongKong, the other near Shanghai.Within three years Deqingyuanhopes to be producing 6 millioneggs a day. Further plans includethe production of liquid and powderedegg. These products have alonger shelf life than eggs in theirshells and provide an efficient wayof dealing with periods of highand low demand.Meanwhile the egg-distributionsystem in China is shifting inDeqingyuan’s favour, away fromthe traditional wet markets (whichthe health authorities are graduallyclosing down) and into supermarkets,some of them owned byforeign giants such as Wal-Mart,Carrefour and Tesco. World-famousbrands such as these do not wantto risk their reputations by sellingfood products of dubious quality.Enter Deqingyuan, whose eggs arealready available in over 500 Chinesesupermarkets.Mr. Zhong did not plunge into hisventure totally unprepared. Hegained an MBA from the People’sUniversity in Beijing and persuadedsome friends with business experienceto join him. They did doorto-doormarket research and, onceproduction had begun, they gaveaway half a million eggs in order toshow people how much better theytasted than the traditional fare.Deqingyuan brands its eggs withdistinctive packaging, and it stampsthem with the date they were laid,the first time this has been donein China. The company also differentiatesits product by selling eggsby number, as well as the moretraditional approach of selling byweight. When an outbreak of birdflu caused egg sales to plummet(and a large number of producersto go bankrupt), Deqingyuancontinued to sell everything it couldproduce at its full premium price.Local consumers were hungry for aproduct they could trust, a brandthat they could rely on. “Sustainabilityhas made Deqingyuan amarket leader,” says Mr. Zhong,“and a market leader will not onlysurvive a crisis, it will thrive outof crisis.”

Market Movers 21Sustainability performanceWaste not, want notDeqingyuan’s business propositionis based on Chinese consumers’growing willingness to pay for foodsafety. Expenditure on householdconsumption in the country is risingby almost 7% a year, much of itgoing towards better quality food.So the highest environmental andanimal-husbandry standards arefundamental to Deqingyuan’ssuccess. This means protecting theenvironment that birds live in,ensuring adequate cage size andsiting and providing good qualityfeed, thereby reducing the incidenceof disease and the need for antibioticuse in egg production.The company is unusual in aimingto be green in one of the mostpolluting industries of all: in Chinaagricultural waste is reckoned to begreater in volume than industrial andmunicipal waste put together. Butthe result is a higher quality product,which means that Deqingyuan cancharge a higher price for its eggs(Deqingyuan’s eggs sell at almosta 200% premium to the price of astandard egg).Deqingyuan’s sustainability concernsstretch well beyond animal welfare.There are significant worker healthrisks in this industry due to ammoniaand dust concentration in thefacility. Deqingyuan has purchasedadvanced equipment to address thisproblem, and provides a health caresystem for its employees. Otherenvironmental measures includewaste management, energy conservationand rainwater collection forlandscape use.Chickens make a lot of mess, andgetting rid of it can be a problem.So Deqingyuan turns much of it intofertiliser which it sells to nearbyfarmers. But the company nowproduces far more waste than itcan absorb, so the company hasconstructed a biogas plant, whichCourtesy of Deqingyuanwill come on stream in late 2007.This will convert the waste intomethane gas, which can be used toproduce electricity. The electricityproduced will more than meet thecompany’s own needs, so it will exploreopportunities to sell the rest.The company will also benefit froma new revenue stream through thesale of Certified Emission Reductions(CERs).The company’s business goals havealso led it to provide support tothe local community. Above all, itneeds to guarantee good foodstufffor its birds, and it needs to be surethey are not going to be infectedby disease from other local stocks.So it provides high-grade organicfertiliser (made from its own waste)to local farmers to enable themto grow corn, which Deqingyuanguarantees to buy as feedstuff at ahigher-than-market price. In addition,it gives cheap eggs to villagersnearby in return for them notbreeding their own chickens – adeal struck after the avian flu outbreakin 2004.On governance, Deqingyuan hasalso set out to follow good practice,aware that without it foreign investmentis unlikely. An internationalaccounting firm is working onan audit with a future initial publicoffering (IPO) in mind. “They’re notperfect on governance,” says JoanLarrea of the Global EnvironmentFund, an investment fund focusedon clean technologies and emergingeconomies. “The main attractionis that they do take it seriously.”Deqingyuan holds regularshareholder and board meetings,and produces the required financialdocuments. They have an opendiscussion between the board andmanagement, and have just addedan independent board member.

22Market MoversConclusion“Head and shoulders abovethe rest”Setting up an operation likeDeqingyuan’s is expensive. Thebirds’ cages have come from Italy,the fertiliser-making equipmentfrom Germany, and the biogas plantfrom America’s General Electric. Notsurprisingly, for some time moneywas Chairman Zhong’s main challenge.He says he devoted up to 80% of histime to fund-raising.IFC was impressed by the company’s vision of transforming China’segg production at the same time as it pioneered new standards ofsustainability.But he managed to attract someheavyweight foreign investors –including the IFC (which took astake in the company in 2006) andthe Washington-based Global EnvironmentFund. Mr. Zhong believesthat Deqingyuan’s high standardof animal welfare was partly responsiblefor IFC’s interest. Theproject is smaller than wouldusually draw IFC’s attention, butthe institution was impressed bythe company’s vision of transformingChina’s egg production at the sametime as it pioneered new standardsof sustainability. Receiving IFC supportwas crucial for Deqingyuan,bringing not only money but alsoexpertise – in, for example, thebiogas project.The company is now thinking ofa stock-market listing in 2008 or2009 to give it access to the furthercapital it will need if it is to scaleup its operation to a national level.Its good governance and environmentalperformance will stand itin good stead as it approaches themarket. Mr. Zhong says the thingthat keeps him awake at night nowis the challenge of finding enoughsuitably qualified people to managethe company’s rapid expansion. Theindustry has traditionally been runby small family firms; trained poultrymanagers in China are even rarerthan good eggs.The high price of entry may deter competitorsfrom capturing Deqingyuan’smarket share for the foreseeablefuture. Those who do enter will inany case be hard pushed to findthe management skills required tomaintain such high environmentalstandards. The few rivals that existin the branded egg market currentlyoutsource at least some of theirproduction to others, handing overbirds to their suppliers and collectingtheir eggs thereafter. Deqingyuandoes everything itself and is incontrol of its birds all the time. It is,says Joan Larrea, “head and shouldersabove the rest.”BOx 5: LEADERSHIPDeqingyuan’s profitability dependson the company’s abilityto charge a price premium tocover the higher costs of producinghigh-quality eggs. Thisis no mean feat in a countrywhere food quality standardsare inconsistent and many eggproducers have been bankrupteddue to the price competition.However, Mr. Zhong’s visionand leadership allowed him totake the risk. He bet (correctly)that his high-quality eggs wouldmesh with the growing healthconsciousnessof Chinese consumersif he could build a brandthat became associated withquality. He achieved this in severalways, including organisingmarketing activities in residentialcommunities, giving awaymore than 500,000 eggs for freefor people to taste, and developinga unique brand and packaging,with production datesclearly printed. Mr. Zhong’sleadership in pioneering higherquality and ethical standards inthe Chinese market also helpedsecure IFC investment – anothercritical factor that contributedto success.Courtesy of Deqingyuan

Market Movers 23Courtesy of Deqingyuan

24Market MoversCompany profileDeqingyuan, based in Beijing, China, produces high-quality eggs for the Beijing and HongKong markets. Deqingyuan was established in 2000 with the recognition that local eggquality was poor, and it became the first company in China to sell fresh eggs bearing aproduction date and trademark.key dataFoundedBeijing Deqingyuan AgricultureTechnology Co. Ltd wasfounded in 2000 by the currentchairman, Zhong Kaimin.ownerSHIP STruCTureOwned by: Individualshareholders includingZhong Kaimin (14.9%),DQY Agriculture TechnologyCompany (27.7%), GlobalEnvironment Fund (15.9%),Capital Today (15.9%),Innobiz Hong Kong (8.8%),Shanghai Yi Bei (8.6%) andIFC (8.2%)SeCTorAgribusinessHeadquarTerSBeijingoPeraTIonSBeijingMarkeTSBeijing, Hong KongMaIn CoMPeTITorSFollowing Deqingyuan(71% share of brandedegg market in Beijing),competitors are Gegeda (25%),Liuminying (1%), Gazige (1%)and Xiaonong (1%)eMPloyeeS335MarkeT SHare71% of branded egg marketin Beijing3.6% of total egg market inBeijing 14awardS and reCoGnITIon– National High-Tech ModernAgriculture Demonstration site– National Food SafetyDemonstration Enterpriserevenue (uSd Mn)6.18643.376.74neT InCoMe (uSd Mn)1.201.24.900.65.601.1220.371.22.30 0.030.08FY02 FY03 FY04 FY05 FY06FY02 FY03 FY04 FY05 FY06CAGR from 2002 to 2006: 107.3% CAGR from 2002 to 2006: 150.4%US dollar figures for revenue and net income calculated by authors based on renminbi figures supplied by company and average annualRMB:US$ exchange rate from the Economist Intelligence Unit.14Calculation of total market share, based on branded eggs accounting for 5% of all eggs in Beijing. However, this figure is growing fast.

Market Movers 25The deqingyuan business case – the three most important factorsHere we highlight the three most important ways in which sustainability performance at Deqingyuan is influencing businessdrivers and supporting business strategy.1. Higher sales and market accessfrom better environmental andsafety standards– Based on Deqingyuan’s reputationfor quality and safety, sales grewfrom $0.4 million in 2002 to $6.7million in 2006.– Deqingyuan has 71% share of thebranded egg market in Beijing.– Deqingyuan entered HongKong market, which does nottraditionally source eggs frommainland China.2. brand value and reputationbuilt on good environmentaland safety standards– High food safety based on soundenvironmental approach allowsDeqingyuan to create a trustedbrand.– During SARS crisis, which deflatedegg sales throughout China,Deqingyuan’s sales increased -evidence of high level of trustDeqingyuan enjoys with consumers.3. access to capital from goodcorporate governance– Although industry has difficultygaining access to capital,Deqingyuan tapped intointernational investment fromGEF and IFC.– Investors are attracted by thecompany’s pioneering vision,quality and environmentalperformance, and seriousapproach to governance.– Deqingyuan commands higherprices per egg in Beijing (0.9 RMBper egg vs average of 0.3 to 0.4RMB per egg) and Hong Kong.DEQINGyUAN BUSINESS CASE MATRIxEnvironmentalPerformanceSocialPerformanceGovernancePerformanceSales &Market AccessOperationalEfficiencyAccessto CapitalRisk Mgmt &Licence toOperateTalent &Human CapitalBrand Value &Reputation

26Market MoversCASE: JUBILANT ORGANOSySSWEET SOLUTIONSThe opening up of India’seconomy in the 1990s madejubilant’s sustainability strategyeven more valuable.Started in 1978 as a bulk chemicalsproducer, when Indian industry wasprotected behind high tariff walls,Jubilant Organosys found itselfforced to rethink its business modelafter the opening up of the Indianeconomy to global trade and competitionin 1991. The liberalisationincluded a gradual reduction ofcustoms duties on chemical products,the prices of which plungedto 30-year lows in the second halfof the 1990s. The profits of manyfirms in the industry were severelydepleted.Jubilant reckoned that it was goingto be hard to succeed in this new,competitive global market. So itdecided to shift into higher valuegoods and, over the next decade,transformed itself from an essentiallybulk chemicals manufacturer intoa low-volume fine and specialitychemicals producer, with a growingfocus on supplying the pharmaceuticalsindustry. It moved itself strategicallyhigher up the value chain.The company has traditionally reliedon an unusual source for its rawmaterial. Most chemicals firms of itskind rely on crude oil-based feedstocks.But accessing them can posea problem, as their prices are highlyvolatile and their supply sometimesuncertain. So Jubilant decided to usemolasses as its feedstock. Molasses isa waste product from the manufactureof sugar from cane, and Indiais a huge grower of cane, second inthe world only to Brazil. The priceand supply of molasses are significantlydisrupted only by an extraordinarymonsoon. Thus Jubilant wasable to stabilise its cost base.Coincidentally, the choice marked aswitch to a more environmentallyfriendlyway of producing the sameproducts. Molasses is a renewableresource. Its use provides gainfulemployment for the sugar industry’swaste and avoids the need for environmentally-intensiveoil extraction.India is today recognised as a leadingglobal player in generics anda supplier to the pharmaceuticalsindustry. This success has beendriven by its growing skills base, bybig improvements in quality, andby a new breed of entrepreneur.Jubilant has been part of this evolution,and many of its fine chemicalsproducts are now destined for bigpharmaceuticals manufacturers.Revenues from international salesaccount for about 60% of totalrevenues for the Fine Chemicalsdivision. Even purchases by domesticcustomers often end up in internationalmarkets, as customers arefrequently the outsourced operationsof international companies.Jubilant has also developed thecapability to come up with newproduct ideas (it employs 1,200scientists, who account for almosta quarter of its total staff), and tosell them to western businesses.Jubilant carries out the research inIndia, sends samples to potentialcustomers and then manufacturesthem in bulk in India when it hasfound a buyer. Much of this workis done for life-sciences firms andJubilant describes its future strategyas being “to become the firstchoiceoutsourcing partner of thelife-sciences industry.”Courtesy of Jubilant Organosys

Market Movers 27Sustainability performance“What differentiates us is the EHS”As might be expected from achemicals and pharmaceuticalscompany, Jubilant’s main focus onsustainability has been directedat EHS – environment, health andsafety standards. Many of theseare imposed by legislation, butJubilant has gone far beyond localrequirements. It is a major supplierof carbamazepine 15 to Novartis,for example, which it producesat a facility that has gained theapproval of America’s demandingFDA (Food and Drug Administration).Jubilant’s facilities are also OHSAS18001 certified, and the companyhas been providing training tofoster a stronger safety culture, andstrengthening occupational safetysystems and infrastructure.Shyam Bhartia, Jubilant’s chairmanand co-founder, says that thecompany’s rapid growth has beenfacilitated by its sustainabilitystrategy. It has helped both itsinorganic and its organic growth– the former by making it easierto buy companies in developedmarkets (Jubilant, for example,currently has some 700 employeesin the US), the latter by helping itgain a local licence to operate in asector that is particularly sensitive, inIndia as elsewhere. To raise its localprofile the company has made itsown medical facilities availableto local communities, supportedlocal schools by providing teachingmaterials, and set up women’sself-help groups. This has helpedJubilant avoid the problems othercompanies have faced in India,where there has frequently beenstrife and mistrust between localinhabitants and their corporateneighbours.Jubilant has been a pioneer in encouragingsustainability reporting inIndia, producing its own corporatesustainability report (audited byErnst & Young) since 2003. It wasCourtesy of Jubilant Organosysone of the first companies in Indiato produce such a report alignedwith the Global Reporting Initiative,and has released its 2006-07 reportin line with the G3 Guidelines atapplication level A+. 16 Jubilant believesthat this degree of transparency,which is still rare in emergingmarkets, has helped in attractinginstitutional investors. Their ownershipof the company increased from7% in 2004 to 32% in 2006. Jubilantbelieves that its EHS record is alsohelping to reassure customers thatit can be a reliable partner over thelonger term, and it has seen a rise inthe volume of long-term contracts(those for over one year) in 2007.Sustainability is now built into newproducts right from their conception.As the company produces substantialquantities of effluent, the cost ofeffluent treatment is a prime concern.Businesses in the group cannot putforward new proposals unless theyinclude EHS cost considerations. “Inthe future, customers will come toyou with the expectation that youwill just practise good EHS management,without expecting to payextra for it,” says Rajesh Srivastava,president of the fine chemicalsbusiness. Customers, he says, “areevaluating you against other companiesin India and China who have thecost advantage… What differentiatesus is the EHS.”To deal with effluents, as long agoas 1984 the company set up thelargest waste-treatment plant inthe country for producing biogasfrom distillery effluents. The energycreated now saves the companythe equivalent of 250 tonnes ofcoal a day. Part of the company’sbio-degradable waste is also usedto produce organic manure, whichis being used in progressivelyincreasing quantities by farmerssubstituting chemical fertilisers.And part is also used for cropirrigation after treatment, as itstill contains nutrients helpful forplant and soil. But it took two tothree years to convince the farmersthat the company was not merelytrying to dump dangerous effluenton them. Jubilant employed anagricultural technical universityto train the farmers on newtechniques and to convey that thecompany was genuinely interestedin their welfare. “Jubilant madethe farmers partners,” says AshokGhose, the company’s chief ofEnvironment, Health and Safety.15An active pharmaceutical ingredient related to central nervous system disorders. Novartis holds the patent for this formulation.16For more information on GRI application levels see the Sustainability Reporting Guidelines available at www.globalreporting.org/ReportingFramework/G3Guidelines/

28Market MoversConclusionaiming for the topThere is pressure on health-carecosts in all economies, and thatlooks set to carry on pushingdrug prices down. And there isincreasing demand for faster andmore frequent new products asexisting drugs come off patent andbecome generic. In that challengingenvironment, Jubilant is hopingfor continued rapid growth, basedon its relatively low (though rising)cost base and its ability to retainhighly qualified scientists.It is Jubilant’s aim to be amongthe top three in the world in allits major markets. The company isclose to being the second largestproducer of pyridine 17 and itsderivatives globally, cateringto leading pharmaceutical andagrochemical companies. Givenits strong customer relationshipsand its proven reliability, Jubilantexpects to be the market leaderin the near future. In the marketfor solid polyvinyl it is third in theworld – with 75% of its productionexported, mostly for chewing gumto firms like Wrigley and Cadbury.It holds a similar position in themarket for latex additives to tyres,and it is the world’s second largestproducer of carbamazepine. Thecompany acknowledges, however,that increasing globalisation andinternational competition aregoing to require it to compete withmultinationals not only financially,but right across the triple bottomline of economic, social andenvironmental performance.Increasing globalisation and international competition are going torequire Jubilant to compete with multinationals not only financially,but right across the triple bottom line of economic, social andenvironmental performance.To continue to build its internationalpresence will require morecross-border takeovers – and thepositive image created by Jubilant’ssustainability reporting and itsEHS activities help in making suchmoves. They also help in recruitingand retaining the top-notch scientiststhat are so vital to the company’sfuture.As the company continues togrow and expand internationally,the scrutiny of its activities willalmost certainly increase. Stricterenvironmental regulations arelikely in future, including the EU’snew REACH legislation, 18 whichhas recently come into force.Jubilant is well aware of thesechallenges and knows it will needto innovate constantly to meetnew requirements. As a fullyfledged member of the globalpharmaceuticals community,Jubilant will also have to addresssome of the most advanced andvexing issues facing the industry, inthe areas of bioethics and the useof new technologies in research anddevelopment.BOx 6: INTEGRATIONJubilant’s business model isbuilt on its ability to providehigh value-added specialitychemicals and quality researchand development services toclients in a cost-effective manner.Yet cost-competitivenessis a challenge in India wherecosts are higher than in countrieslike China and whereenvironmental regulation isbecoming more stringent.However, Jubilant has succeededin integrating management ofenvironmental issues throughoutits operations and therebyreducing costs. Effluent treatmentcosts, for example, arebuilt directly into productdevelopment costs. The companyhas also chosen to usemolasses – abundantly availablein India as a by-product of sugarproduction – as its chemical feedstock.Molasses has less cost andsupply volatility than the crudeoil-based feedstocks used byinternational competitors, andis also more environmentallyfriendly.Jubilant reuses wastes,converting some to biogas –saving the company money bymeeting its energy needs inplace of coal. Jubilant also usesbiodegradable effluents forcrop irrigation, which it suppliesto the surrounding communitiesfor free, helping buildgood relations and reduceoperating risks.17Pyridine is a basic organic chemical, a building block and solvent in agrochemical, pharmaceutical and other industries.18REACH is the European Union legislation on the Registration, Evaluation and Authorisation of Chemicals. It is intended to standardise the way chemical substancesare evaluated for impacts on health and environment, and affects chemicals that are manufactured or imported into the EU in quantities of greater than 1 tonne.

Market Movers29Courtesy of Jubilant OrganosysBOx 7: QUALITy OF RELATIONSHIPSSince its origin in bulk chemicals,Jubilant’s existence hasdepended on more thancompliance with increasinglystringent environmentalregulations. To obtain andkeep an informal, societal‘licence to operate’, the companydepends on local supportfrom those who are affectedby issues such as resource use,environmental impacts andlocal traffic increases. This is achallenge, given that Jubilant’sIndian factories are in ruralor semi-rural regions, wherecommunity trust in industry isfrequently low. Proactive engagementwhich involves thecommunity, rather than merelyseeing them as beneficiariesof charity, has been criticalto creating understandingand trust, pre-empting problemsand creating a positiveoperating environment. Thisapproach to the communityhas also sped up governmentenvironmental clearances, forwhich community consultationis a pre-requisite, and strengthenedcustomer relationshipsby providing assurance thatthe company is identifying andmanaging this particular set ofnon-traditional risks.

30Market MoversCompany profileJubilant Organosys is an integrated pharmaceuticals industry player, one of the largestcustom research and manufacturing services companies in India. Jubilant has a presenceacross the pharmaceutical value chain: from drug discovery, functional chemistry and clinicalresearch services to custom research and manufacturing for advance intermediates, finechemicals, active pharmaceutical ingredients and dosage forms.key dataFoundedFounded in 1978 – originallyas Vam Organics. It changedits name to Jubilant OrganosysLtd. in November 2001.ownerSHIP STruCTureListed in India since 1981 –shares are traded in Group B1at the Mumbai Stock Exchangeand at the National StockExchange of IndiaSeCTorPharmaceuticals, agrochemicalsand chemicalsHeadquarTerSNoida, Uttar PradeshoPeraTIonSSeven manufacturing locations:Gajraula (Uttar Pradesh),Nanjangud (Karnataka),Roorkee (Uttarakhand), Nira(Maharashtra) and Samlaya(Gujarat) in India plus Salisbury(Maryland) and Spokane(Washington) in the USMarkeTS130 customers in more than50 countries worldwide,including US, EU, JapanMaIn CoMPeTITorSVertellus (USA), Koei (Japan),Lonza (Switzerland),Chang Chun (Taiwan),Dr Reddy’s (India),Cipla (India),Hisun (China)eMPloyeeS3,425MarkeT SHareAminopyridines – 75%Lutidines & Collidines – 56%Pyridine and Picoline ~ 40%awardS and reCoGnITIon– 2007-08: Golden PeacockAward for CorporateGovernance– 2006-07: Golden PeacockAward for Safety Management(Gajraula unit)– 2006-07: National Awardfor Excellence in EnergyManagement, Pharmaceuticalsector by Confederation ofIndian Industry (Nanjangud unit)– 2006-07: Gold Award forSafety Performance (Nira unit)by Greentech– 2005-06: Golden PeacockAward for Corporate SocialResponsibility (Gajraula unit)revenue (uSd Mn)436400331300265190200 153126100FY02 FY03 FY04 FY05 FY06 FY07neT InCoMe (uSd Mn) 555040302729201710 5100FY02 FY03 FY04 FY05 FY06 FY07CAGR from 2002 to 2007: 28.2% CAGR from 2002 to 2007: 62.1%US dollar figures for revenue and net income calculated by authors based on Indian rupee figures supplied by company and averageannual Rs:US$ exchange rate from the Economist Intelligence Unit.

Market Movers 31The jubilant organosys business case – the three most important factorsHere we highlight the three most important ways in which sustainability performance at Jubilant is influencing businessdrivers and supporting business strategy.1. operational efficiency throughenvironmental efficiency– Measuring and benchmarkingenergy and resource consumption,Jubilant identified gaps andimproved performance – withlinks to the bottom line.– Jubilant’s use of sugarcane molassesas feedstock means lower costand greater reliability of supplycompared with internationalcompetitors.3. access to capital throughtransparency and sustainabilitygovernance– Sustainability, transparency andaudited reports give national andinternational investors confidencein the company.– Major international investors likeCitiGroup and General AtlanticPartners are considering Jubilant’ssustainability credentials beforedeciding to invest.– As confidence increased, institutionalinvestors increased theirstake – from 7% of Jubilant’sshares in 2004 to 32% in 2006.– Jubilant re-uses effluents asproduction inputs and for biogas,which reduces operating costs.For example, biogas saves Jubilantthe equivalent of 250 tonnes ofcoal a day, with corresponding costsavings and lower CO2 emissions.Currently, the payback period forinvestment in biogas plant isthree years.2. licence to operate fromcommunity development– Many facilities are in economicallybackward regions. Disparitiesbetween employees and the localpopulation plus general distrustof the chemical industry couldcause tensions and disruption.– Jubilant’s participatory approachto social investment, however,brings tangible benefits: avoidanceof social conflicts, support fromfarmers and ease in obtainingenvironmental clearances.– Jubilant gained the trust ofgovernment, which started usingthe company as a partner onvarious social projects.JUBILANT BUSINESS CASE MATRIxSales &Market AccessOperationalEfficiencyAccessto CapitalRisk Mgmt &Licence toOperateTalent &Human CapitalBrand Value &ReputationEnvironmentalPerformanceSocialPerformanceGovernancePerformance

32Market MoversCASE: MASGOING BEyONDdespite a violent ethnicconflict and the removal oftrade protections under theMulti Fibre arrangement(MFa), this Sri lankan apparelmanufacturer has thrived inrecent years while championingwomen’s empowerment.In the mid-1980s, Mahesh Amaleanwas excited that his small textilebusiness on the island of Sri Lankahad won an order to manufacturedresses out of synthetic fabric fora subsidiary of Limited Brands, ahuge American apparel company.Then a change in quota restrictionsmeant that he could not fulfil theorder. Mahesh had to look aroundfor something else to manufacture.He and his two younger brothers,Sharad and Ajay, had pooled alltheir savings a few years earlierand bought 40 sewing machines.They needed to keep them busy.On a visit to MAST Industries’office in Sri Lanka, Mahesh spottedNevertheless, Mahesh decided totry and manufacture it, and heand his brothers set out to seehow it was done. They travelledto Hong Kong and China to gaina deeper understanding of themanufacturing process.Mahesh also went to Ohio wherehe managed to persuade seniorexecutives from Victoria’s Secretthat a couple of unknown Sri Lankanentrepreneurs could producebras to the very high standardsthat American consumers demand.With a vote of confidence fromVictoria’s Secret, the brothers’company, MAS Holdings, founditself with access to Americancustomers and Sri Lankan workers.It was a potentially powerfulcombination.Some time later, MAS learnt thata 120-year-old German companycalled Triumph had the toptechnology for manufacturinglingerie and, two years after joining“We took the work to the workers, instead of the workers tothe work.”Mahesh Amalean, chairman, MAS Holdingsa Victoria’s Secret catalogue onthe desk of a senior executivethat he was meeting. Victoria’sSecret was (and still is) one ofAmerica’s biggest retailers offashion lingerie. Although lingeriewas outside the quota system,Sri Lanka had no expertise indealing with the fine needleworkthat such products require.hands with Victoria’s Secret, the SriLankan brothers struck lucky onceagain. Triumph had been looking toset up a plant in southern India, butthe plan had just fallen through.The Amalean brothers appeared atan opportune moment and Triumphagreed to go into a joint venturewith them. “Sometimes things justfall into place,” says Mahesh.At the time, however, westernbuyers were focused primarilyon price. China was just openingup and the cost of garmentswas falling sharply in real termsin both America and Europe.Besides, Sri Lanka was not abuyer’s natural first port ofcall. For one thing, wages thereare higher than in other Asiancountries such as China, Vietnamand Bangladesh. Moreover, thecountry has been embroiled in acivil conflict in the north and east,which has killed over 60,000 andleft close to a million homelesssince 1983.Under such circumstances, it issurprising that the brothers stayedat home. But the Amaleans areof sturdy cloth. From all accounts,Mahesh in particular was driven bya vision that went beyond financialperformance. “He used theopportunity to create somethingmuch bigger than all of us,” saysDeepthi De Silva, the group’shuman-resources director and aman who, prior to MAS, workedfor 20 years in the UK. “He createdthis feeling that we (and Sri Lanka)can be world class.”At the time the company wasbeing set up, good textile workerswere hard to find in Sri Lanka’slarger towns and cities. Moreover,the urban infrastructure couldscarcely cope with a further biginflux of labour – the governmentitself was trying to encourage theapparel industry to move to ruralareas. So MAS decided to locateits plants in the countryside. “Wetook the work to the workers,instead of the workers to thework,” says Mahesh Amalean.

Market Movers 33Sustainability performance“Companies that attract the bestpeople perform better – this is trueregardless of where you are in theworld.”From the beginning, MAS set outto be a good employer. In additionto maintaining basic workplacestandards (e.g. a limit on workinghours and overtime, age limits, safeworking conditions), MAS gives itsworkers – over 90% of whom arewomen – benefits including freetransport and a decent breakfastto start their day, insists thatmanagers eat in the same canteenas everyone else and providesonsite health care services. To someextent they did it because, as AjayAmalean, the youngest of the threebrothers, puts it, “it was the rightthing to do. We had absolutely noidea that 20 years down the road,the things we were doing would becalled CSR.”But they did it also because it madebusiness sense. “Companies thatattract the best people performbetter – this is true regardless ofwhere you are in the world,” saysSharmini Ratwatte, director of MASInvestments and a former boardmember. Forbes magazine recentlydescribed its 12-acre ‘campus’ nearChennai in southern India: “Past themanicured lawns and the pleasantsecurity guards is an air-conditionedspacious workplace,” the magazinewrote, where there is “a daynursery and two nurses to watchover the well-being of employeesand their children.” 19Although the company’s turnoveris high by western standards, itis only one-quarter of the localindustry average. Many womenleave to marry and then returnonce their children are at school.To persuade its workers to stayfor longer, however, MAS askedthem what they would most likeit, as a company, to provide. Onething the workers suggested waseducation, in particular educationin information technology and theEnglish language, and the companyis now providing both.The whole programme has becomeformalised into something MAS calls‘Women Go Beyond’, which waslaunched in November 2003, andwhich its customers increasingly seeas a benchmark for ethical sourcingpractices in the industry. The focusis on promoting knowledge, awareness,leadership skills, attitudinalchanges, and the ability to balancework and personal life. It givesworkers the ability to take on moreresponsibility and make decisionson behalf of the company, and helpsthem communicate better with customers.Ultimately, it provides MASwith a deeper pool of talent fromwhich to pick its future managers.Each year, workers’ achievementsare celebrated through the‘Empowered Woman of the YearAwards ceremony’. Those whoreceive this award are seen as rolemodels and, says Mahesh, “Othersare inspired by them.”Courtesy of MASThe programme has gained globalrecognition. In 2005, the programmewas awarded the American Appareland Footwear Association’s Excellencein Social Responsibility Award forwomen’s issues. In March 2006 one ofthe world’s leading business schools(INSEAD) published a case study forits Advanced Management and MBAstudents entitled ‘MAS: Strategic CSRin the Apparel Industry’.Significantly, the company’sexemplary employment practiceshave led its customers to trustit in other areas. In 2006, Gapjoined hands with MAS to launcha ‘Gap Go Beyond’ programme.In 2007, MAS was chosen byMarks & Spencer to be part ofthe flagship British retailer’s PlanA, a programme of sustainabilitythat Marks & Spencer’s CEOStuart Rose has said “will shapeeverything about the way we dobusiness.” MAS was one of only twocompanies in South-East Asia to beselected by the British retailer asa partner in developing an iconicgreen manufacturing plant. MASbelieves it was chosen becausesustainability (in all its forms) wasperceived to be part of its culture.19S. Dinakar, ‘Victoria’s Secret’, Forbes, 23 July 2007.

34Market MoversConclusionTake your partners for the nextadventureThe expiry in January 2005 of theMulti Fibre Arrangement (MFA), along-standing quota system thatgoverned volumes of world tradein apparel, raised fears in countriessuch as Sri Lanka that the cheapestmanufacturers (China in particular)would decimate their business.China has certainly gained fromthe agreement’s demise – withinsix months its exports of apparel toboth the EU and the US increasedby more than 500%. But Sri Lanka’sexports of textiles and apparelincreased by 8% in 2005, the firstyear after the quotas ended, andMAS also thrived in the post-MFAenvironment. Between January2005 and 2007 its number ofemployees increased from 28,000to 40,000, and it is now Victoria’sSecret’s largest single supplier.To some extent the company hasbenefited from a switch in its customers’priorities. From their sharpfocus on price and quality in the1990s, western apparel firms areplacing more emphasis on service,design and innovation. Sri Lanka is“It was the right thing to do. We had absolutely no idea that20 years down the road, the things we were doing would becalled CSR.”Ajay Amalean, Managing Director, MAS Corporate Solutionscertainly not the lowest-cost producer.Average hourly wage rates in theindustry are 35 cents (US), whereasin China they are 25 cents and inBangladesh 16 cents.Western firms too are embracing justthe sort of social and environmentalprogrammes that MAS says are partof its corporate DNA. By correctlyanticipating which way the marketwas moving, and by adjusting itsapproach accordingly, MAS waswell situated to enjoy a first-moveradvantage when customers camelooking for more than price andquality.MAS’ roster of blue-chip customersincludes Marks & Spencer, Gap,Nike and adidas. When, in 2004,Nike was looking for suppliers withwhom the socially and environmentallyconscious American sportswearbrand could link more closely as astrategic partner, MAS was selectedas one of eight, the only one inSouth Asia.The challenge for the brothersnow is to anticipate where theapparel business is heading overthe next few years. Compared withIndia and China, Sri Lanka can onlyever be a niche player. But MASanticipated a switch in the industryfrom a frequently confrontationalbuyer-vendor relationship to oneof ‘strategic partnerships’ and jointventures. Its future is increasinglylinked to those of its customers.And these customers are demandingmore and more that they followgood sustainability practices.BOx 8: DIFFERENTIATIONSuccess in the apparel industryonce depended predominantlyon price and quality, buttoday these are taken as agiven and key success factorsinclude design, service andflexibility. Since it was foundedin 1987, MAS has workedhard to deliver against theserising expectations, includingstaying cost-competitivewhile also applying exemplaryemployment standards – nomean feat in Sri Lanka, wherethe cost of labour is relativelyhigh. The pressure on cost hasbecome all the greater sincethe end of the Multi FibreArrangement. At the sametime, however, MAS has beenable to differentiate itself fromlower-cost producers by raisingawareness with customersof its high labour standardsand the ‘Women Go Beyond’programme. So successful hasMAS been that ‘Women GoBeyond’ has been supportedby major customers like Gapand Victoria’s Secret. MAS hasalso been engaging with theSri Lankan government toencourage it to differentiate thecountry as a source of ethicallyproduced apparel.

Market Movers 35Courtesy of MAS

36Market MoversCompany profileEstablished in 1987 and headquartered in Sri Lanka, MAS specialises in lingerie andsportswear. It is the single largest supplier to Victoria’s Secret, and is a preferred supplierto Gap and Nike.key dataFoundedThree brothers, Mahesh,Sharad and Ajay Amalean,founded MAS Holdings Ltd.in 1987.ownerSHIP STruCTurePrivately owned, involved ina series of joint ventures withindustry leaders (Triumph,MAST Industries)SeCTorApparel and textilesHeadquarTerSColombooPeraTIonSOperations in 10 countries butconcentrated in Sri Lanka andIndiaMarkeTSMain customers are US andEuropean brands includingVictoria’s Secret, adidas, Gap,Marks & Spencer, Nike, Speedoand Reebok. MAS is alsolaunching its own brandin India.MaIn CoMPeTITorSAce, ClovereMPloyeeS41,000MarkeT SHareWhile it is difficult to put asingle figure on it, based onMAS’ position as the preferredvendor for Victoria’s Secret, itis likely to be within the Top 10of all intimates manufacturers.AWArDS AnD rECOgnItIOn– 2007: Amaleans ranked 14thamong the Top 20 AsianProgressive Leaders by WorldBusiness Magazine, whichcited MAS’ “home-growncorporate social responsibilityprogramme”– 2006: Vendor of the Year byVictoria’s Secret– 2005: Excellence in SocialResponsibility Award forwomen’s issues by AmericanApparel and FootwearAssociation‘Women Go Beyond’ has beenhighlighted in the publicationsof several organisations (e.g.Copenhagen Business School,INSEAD, London BusinessSchool, McKinsey and UnitedNations Global Compact).revenue (uSd Mn)700600500400300 225200FY00570680FY05 FY06The net income data for MASHoldings was not available forinclusion in this report.CAGR from 2000 to 2006: 20.2%

Market Movers 37the MAS business case – the three most important factorsHere we highlight the three most important ways in which sustainability performance at MAS is influencing businessdrivers and supporting business strategy.1. Stronger client relationshipsas a result of high labourstandards– Despite competition from othermanufacturers with lower costsand equal quality, MAS becamea strategic partner to brands likeGap, Marks & Spencer, Nike andVictoria’s Secret, in large part dueto its high-quality workforce andhigh labour standards.3. licence to operate fromsocio-economic development– When factories first openedthere was mistrust and concernfrom local communities that MASwould exploit local workers. Someemployees were even attacked.– Community development effortsinclude supporting schools,hospitals and scholarships in ruralvillages, which help generate locallicence to operate.– By ‘taking work to the worker’,MAS also brings investment andstability to rural communities.– Gap and Victoria’s Secret havejoined in ‘Women Go Beyond’.– As part of its ‘Plan A’ programme,Marks & Spencer has selected MASto build a green manufacturingfacility.MAS BUSINESS CASE MATRIxEnvironmentalPerformanceSocialPerformanceGovernancePerformance2. Higher employee productivityand lower turnover from goodworkforce managementSales &Market Access– MAS’ reputation enables it toattract and retain top talent.OperationalEfficiency– Annual staff turnover is 20%, onequarterindustry average.– ‘Women Go Beyond’ contributesto greater engagement andmotivation of women employees,positively impacting productivityand absenteeism.Accessto CapitalRisk Mgmt &Licence toOperateTalent &Human CapitalBrand Value &Reputation

38Market MoversPART III – TOOLS AND GUIDANCEHOW TO MAKE IT HAPPENNo amount of instruction is asubstitute for the entrepreneurialflair of the business leadersdescribed in the case studies:of Roberto Salas at amanco;MaS’ three Amalean brothers;Shyam Bhartia at jubilant; anddeqingyuan’s Zhong Kaimin.Nevertheless, this section tries toprovide some guidance to businessmanagers and entrepreneurs whowant to develop a sustainabilitystrategy. Our experience suggeststhat an examination of the mentalmaps of these leaders (and ofothers like them) would reveal anumber of common ‘landmarks’which had guided them through theuncertainty that is inevitable in anysuch pioneering venture.In Developing Value, a four-stepprocess is described for companiesto follow when developing asustainability strategy. Thatapproach is still relevant, andforms part of the guidance set outhere. However, to these originalfour steps, two new steps havebeen added (Figure 4), reflectingdevelopments in thinking aroundthe business case and businessstrategy. These provide guidancefor companies in identifying andprioritising environmental, socialand governance issues (Step 2), andin communicating their sustainabilityapproach and the business rationalefor it (Step 6). Most of this sectionis devoted to these two steps, withreferences to Developing Value formore information on the originalfour.First, a business needs toconsider what the key factorsfor its success are.Step 1: analyse your businessFIGURE 4: SIx STEPS IN BUILDING A SUSTAINABILITy STRATEGyStep 1analyse yourbusiness- Key business drivers- Opportunities andthreats- Strengths andweaknessesFirst, a business needs to considerwhat the key factors for its successare. What is driving its ability tocreate value? Is it, for example, asharply differentiated product?Or is it tight cost controls, or greatcustomer relations? A classic SWOTanalysis of the Strengths, Weaknesses,Opportunities and Threats that thebusiness faces can strengthen thisassessment.Step 6Communicate- Convey rationale- Listen- Embed incommunications- ReportStep 5Monitor & reviewprogress- Monitor- Measure- LearnStep 2Identify risks &opportunities- Identify issues- Network- PrioritiseThe business value presented bysustainability will differ for eachcompany, since it depends on boththe sector and the geographicalarea in which the company operates.Cost competitiveness, forinstance, is integral to jubilant’ssuccess strategy, and the re-use ofby-products and effluents helps thecompany to achieve a high degreeof operational efficiency.Step 4Plan & implementstrategyStep 3develop a strategySee also Developing Value, page 45.- Roadmap- Clear objectives- ‘Low-hanging fruit’- Training- Operational vs strategic- Compliance vsbeyond compliance

Market Movers 39Step 2: Identify risks andopportunitiesEvery business needs to know whereinlies its own particular competitiveadvantage before it can come upwith a strategy for creating furthervalue. But at the same time it needsto understand – and anticipatechanges in – the shifting externallandscape, the big picture, to see thebackground against which any futurestrategy is to be played out. Whateversuch an analysis throws up, it isunlikely to suggest that environmentaland social challenges are about todiminish. 20Responding to this shifting landscapeinvolves (a) considering thebig changes that are taking placein society today; 21 (b) Network withthe wider engaging and developingrelationships with externalconstituencies; and, ultimately, (c)setting priorities among those issuesthat do arise, deciding whichhas the greatest potential impact,and when. Many of the entrepreneursin our case studies did thisintuitively, but this section aims toprovide guidance to those seekingto develop their approach moresystematically.a) Identify issues. To start with,companies need to analyse currentsustainability issues and understandhow they might affect their business.For maximum benefit, considerationof the most critical trendsneeds to be embedded in the firm’smain business planning rather thanleft to a separate ad-hoc exercise.In the case studies examined in thisreport, the process used to identifysuch issues was not necessarily explicitbut all of these companies sawtheir business in a broader environmentaland socio-economic context.It was that ‘vision’ that enabled themto add value through sustainabilityboth for themselves and for society.amanco clearly identified watersupplies and bribery and corruptionas critical regional and global issuesfor a company that produces pipesfor major infrastructure projects.It was also aware of the needs andthus opportunities arising from thelow-income customer segment. 22jubilant identified poverty in thecommunities around its facilities,and the high quantities of effluentsand wastes it produced as majorsustainability issues. But it also recognisedthat it could convert thesewastes from a problem into an opportunityby using them to manufactureorganic manure. This wouldhave a double benefit – improvingthe firm’s operational efficiencywhile helping build better relationswith local farmers.MaS focused from the beginningon developing good labour practicesin its factories. It subsequentlybecame aware of the increasingpressure for its clients to deliverproducts made to high labourstandards. The opportunity that thisgave rise to appeared fortuitouslyat more or less the same time as theend of the Multi Fibre Arrangementundermined Sri Lanka’s competitiveposition in the textile and apparelindustry.Finally, deqingyuan identified anumber of food-safety issues whichhad to be addressed to developits high-quality eggs. These relateto animal husbandry, the overuseof antibiotics and the high quantityof waste produced in rearingchickens, as well as the risk of birdflu transmitted from neighbouringcommunities. At the same time, thecompany was aware of the need forgood governance standards in orderto gain international financing.b) network with the widerworld. Understanding the operatingenvironment of any businessinvolves knowing the people andorganisations that interact with itand contribute to its success. Theseobviously include investors, employees,customers and suppliers, butthey also include governments, civilsociety and communities that livenear to the company’s operations.Collectively these groups are oftenreferred to as ‘stakeholders’: theyhave a stake in the outcomes ofdecisions made by the company.Undertaking some form of ‘stakeholdermapping’ helps firms understandwho these stakeholders areand how their needs and prioritiescreate risks and opportunities forthe business. This mapping can alsocreate awareness of the benefitseach of these groups might expectfrom a firm’s activities – what mightbe their ‘share’ of the shared valuethat the business can create.The companies in our case studieshave approached this mappingwith differing degrees of formality.jubilant’s stakeholder map, forexample, is shown in Figure 5. Earlyin its history the company cruciallygained the trust and support oflocal communities and governmentin the regions where it was operating.It now sees sustainability asessential for gaining the support ofthe overseas businesses it has beenpurchasing.Critical stakeholders for amancoincluded its customers, its competitors(with which it set up joint transparencyinitiatives), experts in microfinancing,and the World WaterForum. deqingyuan’s success hasbeen dependent on financing andtechnical advice from investors, thetrust it has built with its customers,and its relationship with the fivevillages around its site. MaS fosteredrelationships with internationalretailers that were demanding highlabour standards, and it linked upwith the German lingerie manufacturerTriumph.20SustainAbility, Raising Our Game: Can We Sustain Globalization?, 2007.21Sources such as United Nations Millennium Development Goals, www.un.org/millenniumgoals/; WWF and SustainAbility, One Plant Business: Creating Value WithinPlanetary Limits, 2007; World Resources Institute, United Nations Environment Programme and World Business Council for Sustainable Development, Tomorrow’s Markets:Global Trends and their Implications for Business, 2002, are a few sources that can help companies identify such trends.22World Resources Institute and IFC, The Next Four Billion: Market Size and Business Strategy at the Base of the Pyramid, 2007.

40Market MoversUnderstanding and building relationshipsis crucial, and it can takeplace in many ways. High prioritystakeholders can be identified andapproached individually in orderto gain insight into their expectationsand concerns. Employees andcustomers can be surveyed directly,while local communities can beconsulted through public meetingsor smaller discussion groups. Investors’opinions can be gauged fromanalysts’ research reports. (See Step6 for more thoughts on communicatingwith stakeholders.)c) Prioritise. As companies developtheir sensitivity to the external landscape,they are likely to identify morepotential risks and opportunitiesthan they can possibly take on boardat once. But not all issues matterequally, and priorities will changeover time. Companies must assesshow material different issues are totheir business – deciding what mattersmost to them at a particular moment.This analysis must be done inthe context of the business strategyand the scale of the risk or opportunityto the business and to society.In the four cases highlighted in thisreport, the companies involvedclearly found benefits from a rangeof different sustainability initiatives.But they directed most of theirefforts at just one or two of them:jubilant at the efficient use ofwaste and by-products, and at buildingrelations with the local community;MaS into its human-resourcesmanagement; deqingyuan towardsproduct safety and quality; andamanco towards product innovationtailored to different customersegments and leadership on waterresources and transparency.Step 3: develop a strategyBased on an analysis of the company’scompetitive advantage and theenvironmental, social and governanceissues which are most relevant,companies are in a position to developa strategy. There is no one-size-fitsallsolution. Each company has toshape its ambitions according to itsown particular circumstances, settingpriorities and developing approachesin line with the degree of control orinfluence that the company has overany given issue.jubilant, for instance, decidedto build on India’s competitiveadvantage in scientific talent andFIGURE 5: JUBILANT ORGANOSyS STAKEHOLDER MAPmove up the value chain to provideresearch and development servicesfor the global pharmaceuticalindustry. However, the successof this strategy depended onconvincing customers in the targetmarkets of the EU and US that thecompany was a reliable supplier.Jubilant’s strong managementof EHS and community issues,communicated through an auditedsustainability report, helped providethat assurance.See also Developing Value, page 46.Step 4: Plan and implement thestrategyThis involves preparing a roadmapof the various stages involved inachieving the company’s ultimategoals. It is advisable to start out withsome quick and easy wins while notlosing sight of the longer-termstrategic objectives.When deqingyuan decided toproduce high-quality eggs, it knewthat the first big challenge was todifferentiate its production andobtain the trust of consumers.Achieving this involved printingproduction dates on its eggs,providing lots of free eggs for peopleto taste, and (eventually) gettingthe eggs onto supermarket shelveswhere quality standards are high.See also Developing Value, page 46.Step 5: Monitor and reviewprogressAt this stage firms come up againstthe problem of what measuresto use in benchmarking theirperformance. They need to thinkcarefully about how to monitor thevalue added to the business and tosociety by their strategy. With itsSustainability Scorecard, amancohas gone farthest down this road(see Figure 6).See also Developing Value, page 46.Source: Jubilant Organosys Corporate Sustainability Report 2005-06

Market Movers41Step 6: CommunicateThe cases in this report all emphasisethe importance of strategicrelationships with other stakeholders,be they financiers, customers,employees, suppliers or communities.But these groups are unlikelyto stumble across a firm’s sustainabilitystrategy entirely by accident,nor can they be expected to intuitivelygrasp the rationale behind it.Many companies miss opportunitiesbecause they fail to realise theextra value that sustainability canadd if stakeholders understandwhat it involves. This is true notjust of businesses in emergingeconomies. But private companies,which predominate in emergingeconomies, are by definition lessinclined to disclose their strategiesto the outside world and thereforeless likely to get across any messageabout sustainability. Communicatingabout sustainability is not amatter of marketing and buildingreputations. By communicatingopenly and honestly, a companycan build trust and create a foundationfor broader relationships withstakeholder groups.By communicating openly and honestly, a company can buildtrust and create a foundation for broader relationships withstakeholder groups.the company’s leaders. Senior executivesneed to be good communicators– particularly when they aretrying to convey the rationale behinda sustainability strategy, wherethe quantitative measures of successare not always immediately obvious.It is important to explain a strategyin terms of the ways in which it willhelp individuals and departmentsachieve their own objectives (bethey strong client relationships, anincrease in brand recognition orhigher staff retention).FIGURE 6: AMANCO GROUP’S SUSTAINABILITy SCORECARDSustainabilityscorecardgoalsSocial valueAt amanco, for example, theSustainability Scorecard that it hasdeveloped has been an importanttool, allowing the company tocommunicate internally and externallyhow sustainability contributesto its business success (Figure6). The company is now ready tolink its managers’ remunerationto variables such as the amount ofbusiness they do with base of thepyramid customers and the extentto which they generate publicdebate about water conservation.Economic valueEnvironmentalvalueOne problem, however, lies withthe language that is used to expressthe ideas of sustainability.The glossary (see page 46) attemptsto throw some light on this murkyarea. But to some extent it merelyhighlights the degree of confusionaround terms such as ‘sustainability’and ‘CSR’. Since there is no oneterminology which is universallyaccepted, organisations will do bestby choosing language that reflectstheir own culture and existingusage for their internal communications.Then, when talking to anexternal audience, companies canaim to reflect the language of thataudience in a format that is familiarto them.a) Convey rationale internally.Critical to communications withstaff is a compelling message fromFinancialperspectiveCustomerperspectiveProcesses andtechnologyperspectiveSocial andenvironmentalperspectiveHumanresourcesperspectiveBrandingEnsureintegratedcommunicationsplansEnsure brandmanagementprocessesAssume leadershipin transparencywithin sectorIncreasesalesBe the preferredbrandDevelopcompetenciesand leaderswithin AmancoEnsure marketintelligenceManage socialimpact in areasof influenceSatisfied andprofitablecustomersEnsureeffectiveness oftrading processesBe a protagoniston water issuesDevelop organizationalcapacities in brand, servicesand innovationInnovationin serviceIncreasemarginVALUE PROPOSITIONBe the best choice in brand differentiation, in win-win relationships,and in product and service innovationCustomermanagementEnsurequality indeliveriesInnovationEnsurecreativeand efficientR&D processInnovationin productsand servicesEVA and financialmanagementEnsure financialflexibilityOptimize purchaseof raw materialsOptimize use ofassetsImprove productivity intransactional processesManageeco-efficiency,occupational healthand prevent accidentsSupportorganizationalchange

42Market MoversAlthough strong leadership hasbeen an important element in thecase studies featured here, sometimesit is the senior leaders of acompany who are the last to beconvinced of the benefits of sustainability.For sustainability practitioners,this is a daunting but notimpossible situation. In such a casecommunication can be focused onshowing how sustainability issuesare of interest to key stakeholders,such as investors, customers andregulators. If sustainability can becommunicated to senior businessleaders as an investment (whichbrings a return for the business)instead of simply as a cost, theyare more likely to become fullyengaged. And if some actions canbe identified that have a relativelyshort payback period, alongsidemore strategic but longer-terminvestments, the message will beeven more compelling. ‘Quick wins’of that kind can rapidly build momentumand encourage a broadercommitment. 23b) embed sustainability in communicationswith the outsideworld. Companies with sustainabilitystrategies also need to bepro-active in communicating theirbusiness case to investors, businesspartners and other external stakeholdersin their language andrelating to their aims. This does notnecessarily require a new communicationsapproach. Rather, improvingthe knowledge that various managershave of sustainability issues canenable them to communicate theirfirm’s strategy by including suchissues in, for example, customer orinvestor presentations, or in theannual report.Despite the amount of time, moneyand effort numerous companieshave invested in communicatingtheir sustainability credentials,much of the information missesthe target. The root cause of thisis two-fold: no clear definition ofthe target audience and no cleararticulation of the message in thetarget’s language. For example,investors respond to conceptssuch as profit forecasts and assetvaluations, while customers mayrelate to messages around productquality and safety. Some otherexamples are provided in Figure 7.From deqingyuan’s earlymarketing, when it distributedfree eggs to demonstrate theirquality, to its distinctive packagingand date stamp as an assurance ofsafety, the company’s entire brandis responding to Chinese consumers’desire for a product they can trust.jubilant has regular visits fromlocal authorities and communityrepresentatives. They are engagedwith discussions of environmentaland community efforts emphasisingissues of relevance to this particularset of stakeholders.More and more investors are acknowledgingthat ESG is materialto the bottom line, and they areseeking information on how companiesare managing these issues.The United Nations Principles forResponsible Investment have beensigned by managers and owners offunds worth over $5 trillion. At thesame time, a group of managers ofEuropean funds with assets in excessof €330 billion have launchedwhat they call an Enhanced AnalyticsInitiative, a scheme to improve“the integration of extra-financialissues and intangibles” into standardcorporate analysis.Nevertheless, many investors arestill not getting the right sort ofdata to help them understand theconnection between ESG issuesand the bottom line (see Figure8 for the ‘wishlist’ of one lot ofinvestors). Where quantification isdifficult (or not even attempted)analysts tend to underestimate orFIGURE 7: TAILORING ExTERNAL COMMUNICATIONAudienceAudience FocusCritical Aspects (illustrative)Example OutputregulatorsLegal complianceEmission levels, taxes paidauditbank (debt finance)Debt serviceIncome vs expenditurebalance sheet and P/lequity InvestorValue creationProfit growth, cash flowsProjectionsnGosBest practiceDevelopment impacts, resource useSustainability report withperformance benchmarkCommunitiesEconomic opportunitiesJobs, cash flowsemployment projections23See also Bob Willard, The NEXT Sustainability Wave, New Society Publishers, 2005, for thoughts on how to build buy-in for sustainability from corporate leadership.

Market Movers43ignore the financial value of theunquantified item. Firms thereforewill need to search for relevantmeasures of the most material ESGelements in their strategy. This willnot only help external audiencesvalue those elements more fully,it can also act as a benchmark bywhich the firm itself measures thesuccess (or otherwise) of its strategy.Where quantification is not possible– which is often the case when ESGhas been so genuinely integratedinto the overall business plan thatit becomes hard to separate the specificeffects of sustainability alone– firms can focus on communicatinginstead the fundamental contributionthat ESG elements make tothe business model and corporatecompetitiveness.c) report. In order to address theinformation needs of stakeholders(including investors), more andmore companies are beginning topublish a broader account of keyESG and sustainability issues (andof the actions they have taken) ina sustainability report. This is sometimespublished as a standalonereport, sometimes as part of theannual report, or sometimes as asection on the company’s website.This fuller disclosure of sustainabilityactivities helps the company tobuild broader awareness, and itdemonstrates its willingness to beopen and accountable for its actions.In addition to building trust,such reporting can help differentiatethe company, enable it to steerthe public debate towards issuesthat are important to it, and helpsupport broader sustainability workand advocacy.Both amanco and jubilant currentlyproduce a standalone sustainabilityreport, which is based on the GlobalReporting Initiative’s reportingguidelines. Jubilant describes thebenefits of this type of transparencyas leading to increased employeesatisfaction, and helping developmutual trust with customers, regulators,investors and in internationalacquisitions. 24These six steps are not unique tosustainability. They are part of anygood business planning. Indeed,several of the business leaders wespoke to described their approachnot as sustainability but “just soundbusiness sense”. Others were aiming toaddress sustainability more directly.Either way, the finding was thesame: that a thorough awarenessof the operating environment,and the development of a businessstrategy to respond to it, was necessaryfor success.In this section, we have tried to showhow companies can make sustainabilityan integral part of businessexcellence and success through astructured and pragmatic identificationof what matters most to thebusiness and its stakeholders. Anytemptation to ignore sustainabilityaltogether or, alternatively, toover-emphasise it rhetorically in anattempt to please all stakeholdersis a recipe for disappointment. Realvalue comes when an entrepreneurengages with the outside worldconsciously and systematically inorder to listen, learn and understand,as well as to explain, enlistand inspire.A thorough awareness of the operating environment, and thedevelopment of a business strategy to respond to it, was necessaryfor success.FIGURE 8: WHAT INVESTORS REALLy WANT 251Time horizons which extendwell beyond 12 months2Meaningful raw data sets,reported consistently overtime and comparable atleast within sectors3Limited, focused commentary,explaining the materiality ofissues in financial terms4Information on processes foridentifying and managingrisks5Targets and forward-lookingstatements6Focused commentary onpast performance24Presentation by Jubilant Organosys at ‘Sustainability Reporting Training Workshop’, sponsored by TERI-BCSD India, New Delhi, 21–22 May 2007, www.teri.res.in/core/documents/activity/workshop/day1/Presentation%20by%20Jubilant%20Organosys.pdf (31 August 2007).25Findings of panel of investment experts to discuss how sustainability reports can better meet the information needs of investors and analysts. See SustainAbility,United Nations Environment Programme and Standard & Poor’s, Tomorrow’s Value: The Global Reporters 2006 Survey of Corporate Sustainability Reporting, 2006,for more information.

44Market MoversAppendix one:reseArch ApproAchThe idenTificaTion andanalysis of The foURcase sTUdies feaTURed inMarket Movers involvedThe following sTeps.1. establish universe of cases:A wide number of business examplesfrom across emerging markets werecollected, based on the suggestionsand nominations of experts,academics thought leaders andbusinesses from Asia, Africa andLatin America. The minimum criteriawere that:– the company exhibits clear business(financial) success in relation to itsindustry and peers– sustainability performance hasplayed a key role in this success– the company’s operations are basedin emerging markets.2. filter cases: This full universe ofcases was filtered to identifycompanies with a strong businesscase, which was clearly linkedto business strategy. The casesthat made the initial shortlistwere further analysed throughmedia searches and conversationswith specialists, to understandperceptions of the company’sbusiness success and its sustainabilityperformance. In deciding onthe final group of companies toresearch, a good geographical andsectoral spread was also sought.3. Research cases: The case studieswere researched to understandthe nature of the company’ssustainability performance, andhow this has impacted financialperformance and underlyingfinancial value drivers. This tookplace via some desk research and,primarily, interviews with executivesat the company and externalstakeholders (e.g. investors, clients,NGOs) to understand how businessand societal value was createdby sustainability performance.Although quantitative informationand indicators were soughtwherever possible, qualitativeinformation on these linkages wasalso collected.we consideRed Thefollowing financialfacToRs:i. sales and market access:impacts on a company’s revenue,including increased sales, impactson market share and access to newmarkets. It may result from:− product/service innovation:changes to an existing product or theintroduction of a new product− the ability to charge premiumprices based on features of theproduct/service− market access: greater and/or moresecure access to international anddomestic markets/customers− market creation: innovatively fillingan unmet need.ii. operational efficiency:impacts on a company’s costs. It mayinclude:− operational costs, for example:• production costs• disposal fees• material and transport costs− productivity: amount of productor service produced per employee,contract labour, capital, related forexample to:• material use and waste generation• employee turnover andabsenteeism• staff satisfaction and employeemotivation− fines and penalties due tocompliance breaches.iii. access to capital:company’s ability to gain access tocapital (debt or equity), as well asthe cost of capital. It is influenced by:− balance-sheet health− risk profile− stability of cash flows− internal rates of return (IRR).iv. Risk management and licence tooperate:company’s ability to control loss,damage or disruption. It may includeability to manage:− business disruption− supply chain reliability− vulnerability to changing regulations− political risk− company’s licence to operate,either formal (granted by regulator)or informal (through acceptance bysociety).v. Talent and human capital:knowledge, skills and talent of thecompany’s employees and contractlabour, which are important indetermining its ability to innovateand compete. This factor mayinclude:− ability to attract and retainemployees− staff satisfaction and employeemotivation− employee empowerment andability to innovate.vi. Brand value and reputation:public perception of a company, itsproducts and brands. This wouldinclude the reputation of thecompany, the personal reputationof the company manager/owneras well as the brand value ofthe company. Brand value andreputation are difficult to measure,but can be indicated by:− customer satisfaction surveys,indicating improved customer service− ranking in lists (e.g. most admiredcompany)− perception in public opinion polls− formal valuation of the company’soverall brand.

Market Movers 45we consideRed The followingsUsTainaBiliTy aspecTs:i. environmental performance:addresses company’s use of naturalresources, production of pollutionand overall impact on eco-systemsand biodiversity. Indicators mayrelate to any part of the value chain,from ‘cradle to grave’ and mayinclude:− energy consumption− fossil fuel consumption− fresh water consumption− emissions and effluents, includinggreenhouse gas emissions− environmental investments− material use− waste production (total andhazardous)− spills and accidents− biodiversity impacts− environmental impacts relatedto site selection and site closure,including planning for siteremediation or restoration.ii. social performance:addresses company’s commitmentto social development and deliveringeconomic benefits to the societywhere the company is operating.It may include:− direct or indirect jobs created− siting of facility in an underservedor emerging community− technology transfer− recognition of human rights− benefits to local suppliers throughbackward linkages− benefits to local distributors andretailers through forward linkages− making available a product thatmeets previously unmet needs− physical infrastructure development− other institutional infrastructuresuch as legal, financial and accountingsystems; banking capacity; activitiesthat support local private sectordevelopment− social capital development− community investment.Social performance also addressesthe company’s commitment toproviding a safe, high-quality workenvironment for its employees –including management, staff andcontract labour. This may include:− employee average compensation(compared with local cost of living ornational average)− providing fair wages and benefitsto contract labour− lost time injury and total injury rate− employee training− employee health management(health and safety, HIV/AIDS)− minimising and offsetting impactof restructuring, down-sizing− diversity – number of employeesby level of responsibility (skilled,non-skilled, executive, Board,permanently outsourced) persignificant community segment(minority, gender, disabled,indigenous).iii. governance performance:addresses the importance of soundgovernance, principles, ethics andmanagement systems in governinga company. It is defined to includea company’s engagement with itsstakeholders, such as consumers orcivil society, as an important elementof good management. Indicators mayinclude:− leadership commitment tosustainability issues:• policies or codes of conducton business ethics, bribery andcorruption, human rights, etc.• public endorsement ofsustainability-related codes ofconduct (e.g. UN Global Compact,Principles for ResponsibleInvestment)− Board structure and effectiveness:• Board composition (skill mix,diversity)• Board independence frommanagement structure• adequacy of controlenvironments, including relatedto environmental and socialcommitments• executive compensation• protection of minorityshareholders− increased transparency throughfinancial and non-financial disclosure− financial ratings/risk profile− environmental, social or economicmanagement systems, includingnational or international standardsand certification (e.g. ISO 14000, SA8000)− quality of stakeholder relations− management of crisis situations.4. Report:The results of the research werewritten up in the four case studiesthat form Part II of this report, andthe common lessons and guidancefor companies that form Parts I andIII were distilled from these cases.

46Market MoversAPPENDIx TWO:GLOSSARybalanced ScorecardA strategic management systemdeveloped by Robert Kaplan andDavid Norton of the HarvardBusiness School in the early 1990s,centred on the idea of measuringfour elements of performance:financial, customer, learning andgrowth, and business process. It is aconcept for measuring a company’sactivities in terms of its vision andstrategies, in order to give managersa comprehensive view of businessperformance.base of the Pyramid (boP)Base of the pyramid, or bottom of thepyramid, is a term for the largest andpoorest global socioeconomic group,generally classified as those livingunder $2 per day. The term was firstused in this way in 1998 by ProfessorsCK Prahalad and Stuart L Hart. TheBoP has been estimated to be some4 billion people around the world.biogasUsually refers to a gas produced bythe fermentation of organic matterincluding manure, municipal solidwaste and biodegradable waste. Itis comprised mainly of methane andcarbon dioxide. 26business CaseThe extent to which sustainabilityimproves business value, asconventionally defined.Corporate GovernanceImproving board structures andprocedures to make a companymore accountable to shareholders,covering issues such as financialreporting, transparency andaudit, remuneration of directors,separation of powers and minorityshareholder rights. At its broadestit is the full set of relationshipsbetween a company’s management,its board and stakeholders.Corporate Social responsibility(CSr)The term corporate socialresponsibility is used to conveythe responsibility companieshave towards society, beyondstatutory obligations to complywith legislation. According to onecommon definition, CSR is thecontinuing commitment by businessto behave ethically and contributeto economic development whileimproving the quality of life ofthe workforce and their familiesas well as of the local communityand society at large. 27 The term issometimes used interchangeablywith sustainability (see below), andsometimes used to refer more tocorporate philanthropy and socialinvestment.environment, Health and Safety(eHS)Corporate function responsiblefor legal compliance and othercommitments around a company’senvironmental impacts, as wellas the health and safety of theirworkers. Often the departmentmay have wider responsibilities forsustainability performance.emerging economiesAlso referred to as developingcountries – defined as countrieswith a gross national income (GNI)per capita of $11,115 or less. 28environmental, Social andGovernance (eSG)This term is used particularly in theinvestment community to refer tonon-financial corporate activitiesor performance. It can be usedmore or less synonymously withsustainability.equator PrinciplesA financial industry benchmarkfor determining, assessing andmanaging social and environmentalrisk in project financing.See www.equator-principles.com.Global reporting InitiativeAn international network ofbusiness, civil society, labour andprofessional institutions that havejointly created the most commonlyused framework for sustainabilityreporting. The third generation ofthis framework (known as the G3Guidelines) was launched in 2006.See www.globalreporting.org.ISo 14001An environmental managementstandard that aims to helporganisations minimise theirnegative impact on theenvironment. Certification isperformed by a third party.MicrofinanceThe practice of providing financialservices to low-income groups.Microcredit consists of makingsmall loans, of usually less than$200, to individuals, often women,especially to establish or expand asmall business. 29 Microsavings andmicroinsurance are other examplesof such services.Multi Fibre arrangementA system of quotas on textiles andgarments that governed globaltrade between 1974 and 2004.26Wikipedia, http://en.wikipedia.org/wiki/Biogas (23 August 2007).27World Business Council for Sustainable Development, Meeting Changing Expectations, 1999.28Based on World Bank classifications.29Grameen Foundation, www.grameenfoundation.org/what_we_do/microfinance_in_action/ (31 August 2007).

market movers47IFC Corporate RelationsIt was a measure originally meantto help developed countries adjustto cheap imports from developingcountries by imposing restrictions onthe amount that could be exported.It officially ended on1 January 2005.oHSaS 18001An occupational health and safetymanagement standard, created tobe compatible with the ISO 9001(quality) and ISO 14001 managementsystems standards. It is meant to helporganisations establish a health andsafety system that minimises risks toemployees and business operations.Stakeholder engagementThe process of communicatinginformation, and listening to andlearning from stakeholder concernsand feedback. It includes variousforms of dialogue aimed at buildingtrust between a company andselected stakeholders based on issuesof mutual interest.StakeholdersStakeholders are defined as anyindividual or group – internal orexternal – that may affect or beaffected by a company’s activities.Stakeholders include (but are notlimited to) shareholders, employees,communities, government,customers, business partners and civilsociety organisations.SustainabilityA term that embraces financialintegrity, corporate ethics anddimensions of economic, socialand environmental value added.Sustainability refers to a businessapproach embodying open andtransparent business practices, ethicalbehaviour, respect for stakeholdersand a commitment to add economic,social and environmental value.Triple bottom lineTriple bottom line (TBL) is a termcoined by John Elkington, founderof SustainAbility, in 1994. 30 It isused to describe a broadenedspectrum of criteria for measuringbusiness success: economic, socialand environmental. The termcan be used interchangeably withsustainability.united nations Principles forresponsible InvestmentA voluntary set of principles forincorporating ESG considerationsinto mainstream investment decisionmaking.The principles emerged in2006 following a nine-month UNconsultation process with a 70-personmulti-stakeholder group. Theprinciples include incorporating ESGmeasures into ownership policies andpractices, and seeking disclosure onESG issues. See www.unpri.org.30Later expanded in John Elkington, Cannibals With Forks, New Society Publishers, 1998.

© 2007 International FinanceCorporation and SustainAbilityISBN 978-1-903168-21-9Market Movers: Lessons from aFrontier of InnovationFirst Edition 2007All rights reservedThe material in this publication iscopyrighted. IFC and SustainAbilityencourage the dissemination of thecontent for educational purposes.Content from this publicationmay be used freely without priorpermission, provided that clearattribution is given to IFC andSustainAbility and that content isnot used for commercial purposes.Cover photos courtesy of Amanco,Deqingyuan, Jubilant Organosysand MASWriter: Timothy HindleDesigner: Gimga GroupPrinter: Balmar, Inc.This publication is printed withvegetable, soy-based inks on FinchFine paper. This paper is FSC certifiedby SmartWood.The Forest Stewardship Council(www.fsc.org) is an internationalnetwork to promote responsiblemanagement of the world’s forests.International Finance Corporation2121 Pennsylvania Avenue, NWWashington, DC 20433USAT +1 202 473 3800F +1 202 974 4384www.ifc.org/enviroSustainAbility Ltd.20-22 Bedford RowLondon WC1R 4EBT +44 (0) 20 7269 6900F +44 (0) 20 7269 6901london@sustainability.comSustainAbility Inc.1638 R Street, NWSuite 301Washington, DC 20009USAT +1 202 315 4150F +1 202 315 4178washington@sustainability.comwww.sustainability.com