Tensie Whelan: Innovation

0:00I hear over and over again from companies, oh, it's going to cost too much for me to convert to this process, to be decarbonized, to produce a sustainable product, blah, blah. What is the cost of inaction? And we don't see companies looking and valuing what the cost of inaction is, right? So for me, as I look forward the next 5-10 years, it's innovation and growth, it's consumer and customer opportunity, it's reduction of risk, it's operational efficiencies, it's engagement with your employees. It's a whole series of benefits that just come along with good management and good innovation. And that's how we should be thinking about sustainability.

0:49Welcome to the Future in Sound podcast. I'm your host, Jen Wilson. This is a podcast where we discuss people, planet, and profit. In each episode, we'll learn from world-leading experts who can help us see the future we want and our role in it.

1:15this is episode 43 innovation

1:23Tansi Whelan is distinguished professor of practice for business and society and the founding director of the NYU Stern Center for Sustainable Business where she's bringing her 25 years of experience working on local, national, and international environmental and sustainable issues to engage businesses in proactive and innovative mainstreaming of sustainability. As president of the Rainforest Alliance, she built the organization from a$4.5 million to a$50 million budget, transforming the engagement of business with sustainability. Her previous work included serving as executive director of the New York League of Conservation Voters, vice president of the National Audubon Society, managing editor of Ambio, a journal of the Swedish Academy of Sciences, and a journalist in Latin America.

2:15Tulsi has been recognized by Ethisphere as one of the 100 most influential people in business ethics and was a city fellow in leadership and ethics at NYU Stern. She's served on numerous nonprofit boards and currently serves on the advisory boards of ALO Advisors, Edelman, Giant Ventures, Nespresso, and Workiva, and is an advisor to the Future Economy Project for the Harvard Business Review. Tansy, it is such a pleasure to have you here on the Future in Sound podcast. Welcome. Thank you so much. I'm delighted to be here.

2:50Now, Tansy, I am so curious to hear. So often we have conversations on this podcast where we're talking to folks who've just been in academia or they've just been authors. And I'm saying just as though it's more than enough, but just staying in one lane and they stay in that lane. But it's actually very rare to see someone come from the nonprofit sector and then come into, you know, creating a center for sustainable business at a university, but then also working with private sector. I just love to hear. I mean, how have you managed that? It's actually been wonderful. I've really feel lucky in my career.

3:31I've had the opportunity to live and work in other countries and learn about other cultures and learn about sustainable development up front and personal in places like Latin America. And I think my path has always been, you know, how do we move forward? How do we find action? How do we change things? And from my perspective, one of the ways that you change things and really one of the most effective ways, if you get it right, is to work with business, to partner with business, to change how they do business. Government obviously isn't very important in terms of the policies that they promulgate, but they move at a slow pace.

4:14As we've seen recently, there's ups and downs in what they focus on. Whereas if you can get corporates to understand the benefit of doing things in a positive way for themselves and for society, you know, they can move forward and take things to scale. And so my work at Rainforest Alliance, for example, was using markets to drive sustainability uptake amongst everybody in the value chain from farmers and foresters to retailers. and we were able to get to scale because we use market-based mechanisms versus most NGOs. When they do that, they have to get money to fund a project. And if that project goes well, they get money to fund another project.

4:54And by that time, the founder's tired of these projects and they can't grow them, right? So that's always been my interest to sort of where's the power dynamic? How do we actually change things? And I find that business is a good way to do so. I'm really interested. You make this transition into NYU Stern from the Rainforest Alliance. And what was it, you know, the Center for Sustainable Business, you spent, we're going to get into, you know, value and sustainability here in a moment. But what was it when the center was founded? What was the purpose? And how does this connect to this idea that, okay, in order to have transformative impact, we need to involve business?

5:38Well, so after 15 years of running Rainforest Alliance, I was looking around for what I wanted to do next. And I had guest lectured at Stern. And the head of the department at the time asked me if I'd like to come teach. And I thought about it because in a way, you know, when you run an NGO, in fact, you're teaching. And I came back to him and said, you know, actually, that'd be really intriguing, but I'm also an entrepreneur and I don't think I can only teach. And so I looked at Stern and at that time, they had nothing to do with sustainability, No sustainability offerings for students, no sustainability research.

6:10So I came back to the chair and to the dean and I said, look, I'd like to set up a center for sustainable business for you. I'll raise the funds for it. And I got an initial grant for a million dollars from the Citi Foundation. And they said, OK. So what was intriguing to me about coming to a business school and what I wanted to do was in fact to start to articulate and define the value associated with investing in sustainability. Because when I was running Rainforest Alliance, I saw significant financial benefit for everybody in the supply chain, but nobody recognizing it or tracking it. In fact, I did a little work with the UN Global Compact when George Kel was there to explore that when I was running Rainforest Alliance and just got very intrigued.

6:59And so coming to Stern, we set up the center, I set up the center to really focus on helping current and future business leaders embed sustainability core to business strategy to drive better financial performance as well as better societal performance. Because in my view, you don't get the speed and scale you need until business understands that it drives financial opportunity as well as societal opportunity. Unfortunately, but that's just the way it is, right? But in fact, it does. And so that is sort of the unlock that I saw in my own work in the field at Rainforest Alliance and wanted to bring to one of the premier business schools in the country.

7:37So you go to Stern, you're an entrepreneur as well as a professor, and I'm really interested in the story of Rosie. And this is something that has really come to the fore in some conversations in private markets. We have now industry associations like the ESG Data Convergence Initiative that are inspired by the work that you've done, Tansi, yourself and your team. And I'm really interested, like, what's the story of ROSI? How did it come about? Where are we coming from? And where are we now? Yeah, so ROSI stands for Return on sustainability investment, though we like to think of it as Rosie the Riveter, you know, could get anything done.

8:23So as I said, as I was working, you know, I worked with hundreds of companies all throughout the supply chain. I worked with producers. I worked in, you know, I personally didn't work in 60 countries, but my organization did. And so I started to see pretty consistently similar types of financial benefits, tangible and intangible, that were coming about as a result of sustainability investments. So, for example, looking at small cocoa farmers and seeing that when you put sustainability practices in place, their productivity increases, their net costs decrease, their access to market increases, and a number of environmental and social impacts occur.

9:06And then I saw, I was sitting next to an insurance broker at a dinner. And he started telling me about how because the cocoa and coffee were certified by Rainforest Alliance, this coffee and cocoa was no longer, quote unquote, falling off the back of the trucks as its transport, in other words, being stolen because there was traceability required. And because of that, he was giving lower premiums to the trader who was purchasing the insurance. And that trader was now giving those premiums or the difference back to the farmers since they were ones making the investments in sustainability. And then further up the chain, I started to see, for example, as we started to work with Lipton and PG Tips in Sustainable Tea in the UK, how they started to take market share away from other companies.

9:53And in fact, then those other companies then got on the bandwagon, all right, to become certified and sustainable. So, you know, throughout the chain, I just saw all these operational efficiencies, innovation and growth opportunities, sales and marketing benefits, employee retention and productivity benefits, risk mitigation benefits. If you understand and track the sort of sustainability in your supply chain, economic and social, one you have, and environmental, you have more stable suppliers, but you also have less of a potential reputational or market risk, right? So a whole series of benefits that, again, no one was tracking.

10:30And so that insight led me to begin to sort of figure out a framework when I got to Stern for how we actually track that. Published an article in Harvard Business Review called The Comprehensive Business Case for Sustainability. It was sort of the first out there on this topic. And, you know, since then I've published a lot of different aspects of this in HBR, M &T, Sloan, and others, but found that we could identify nine drivers of better financial performance that would drive a variety of different types of financial benefits that in fact, any kind of good management can drive. Like any kind of good management can drive innovation or operational efficiency or sales and marketing benefits or employee retention.

11:10But the fact of the matter is, and this is what we started to map, for every industry, sustainability strategies that are tied to the material, environmental and social issues for that industry can drive three or four of these different rosy benefits at any point in time. So just to give you one example, circularity, right? Circularity can drive operational efficiencies in that you're buying less virgin input because you're reusing product and you're paying less for your waste disposal costs. It can also drive supply chain resiliency. When I was on the board of Aston Martin, if we didn't get one car component, we couldn't build the car.

11:53So if you're putting some used car car components stack into your car, you're less dependent on sort of challenging geopolitical risk in your supply chain. Right now in the United States, circularity is driving less exposure to tariffs, okay? If you're putting used component back into your product, like we did a study with a medical device company, a lot of medical device components come from outside the U.S. where there's 10 % plus tariffs, right? You will reduce your costs significantly. We also see from circularly, if you look at the pre-loved apparel space, the brands are now able to get a second bite at the apple.

12:29They can resell a product and get money from it twice. So there's a series of financial benefits. And those are just a few of that one sustainability strategy that nobody tracks currently, right? And I can go on. But that's sort of the unlock. That's how Rosie works. One other point I would make about Rosie is that it's not at the strategy level that you monetize. So in other words, I have a strategy as to improve waste management. It's the practices that I'm putting in place to execute on my waste management strategy that I can monetize, right? Because those practices may be effective or ineffective.

13:07I mean, this is another thing, you know, you get a lot of noise because people say, oh, well, I have a policy on waste management. Okay, well, so what? What does that actually result in, you know? So understanding what specifically you're doing to reduce waste to landfill right, then helps you understand how you're driving financial value from it. So I guess just because you have a dashboard does not necessarily mean that we are getting into the activities or creating leads, helping those leads turn into qualified leads into ultimately sales. And so I guess what you're saying is that we need to look one level below at the actual activities to determine, for example, the value of improved waste management.

13:49Is that right? Exactly. I mean, another example is you put LED lighting in your factories. All right. So in theory, and actually some companies don't do this, but in theory, you're at least tracking your energy cost savings. But you also have significant maintenance savings. We find 50 % at least because, you know, you don't have to change the bulbs on those high ceilings as often, right? We also see significant productivity increases because the lighting's better and sometimes less accidents, right? So you could start to look into some of those intangibles and understand the full benefit of that investment in ways that you do currently.

14:26That's really clear. And it's interesting, the past 10 years have been fascinating from a sustainability and business standpoint. So when you started NYU Stern and, you know, Rosie came to sort of born, you know, we definitely saw a lot of changes. So 2019, 2020, there was sort of this momentum around sustainability and investment. We've recently had some headwinds when it comes to sustainability. I'm just interested, as Rosie has been developing, how has the backdrop shaped or not shaped Rosie? Well, first of all, what's interesting to me is that Rosie is becoming even more in demand now because in order to fight back against criticisms, whether it's a company or an investor, they need to demonstrate the financial returns.

15:17And what has been, as I alluded to when I first started on this journey, but had continued, even during, come back to this for a minute, the sort of whole focus on ESG investing in 2020-21, what has continued has been a lack of tracking of financial returns. And there's a number of challenges that I think we have the broader political environment, which is very certain, you know, absolutely to very bears a lot of responsibility for this. But there is some responsibility in the fact that ESG reporting standards are process and output based. They're not performance and outcome based. In other words, they track things like whether you have a policy, whether you've trained X number of people, whether you've looked at your chemicals, whether you've, you know, activities and outputs.

16:06So if you try to manage ESG reporting metrics, which honestly a number of private equity firms have done, you're not going to drive either societal impact or financial value because it would be just like you would drive your strategy to some financial metrics as opposed to the things that will lead you to those financial metrics, right? And so you need key performance indicators around sustainability that then you can map to ESG reporting metrics. The other thing that I want to point out around ESG and how people focused on ESG strategy and investing is unlike sustainability, profitability is not included in there.

16:46Right? So ESG was always meant to be, when the UN first came up with that term, a system of measurement. Like, so, okay, you have sustainability commitments. How are you delivering against your environmental, social, and governance commitments? It was never meant to be a standalone strategy because it isn't the same thing as sustainability, which incorporates profitability and sort of harmonization of these topics. So I think there's a variety of legitimate reasons why there's some backlash as well as some very illegitimate ones. And so from my perspective, the return on sustainability investment work actually gets to the heart of that problem and helps leadership, investors, sustainability leads, finance folks really understand those connections between sustainability and better financial performance.

17:37Hey, it's Jen. I just wanted to take a quick moment to let you know a bit about RICO and what we do. We're a tech-enabled advisory firm that helps private market investors and companies measure sustainability metrics using our software platform. We also help you to set targets and focus your efforts on sustainability areas that really matter for your business. And finally, we help clients to translate all of this work into your core value creation strategy or your business model. Check us out at re.co.com to get in touch. All right, now back to our conversation. If I'm a private market investor listening to this and thinking, okay, I'm in the operations team or in the value creation team, at a very high level, very simple level?

18:27How does this ROSI thing work? Like, what do I need to incorporate into how I manage portfolio companies going forward to think through the return on sustainability investment? Well, so first of all, we've developed a GP sustainability value driver tool that has two stages to it that will help you get to the first sort of strategic prioritization you need. And then we have the ROSI tools that help you get to the quantification. And all this is open source on our website with cases with different companies, PE firms, as well as corporates. So at the due diligence phase, this value driver tool has you enter in your particular target company industry and auto-populates with the SASB plus a few industry-specific material topics.

19:14But we do not use their metrics because, again, they're 90 % sort of output and activity-oriented. So it auto-populates with the material issues, but then with the most common sustainability strategies, practices, and then value drivers. Then you enter in a bit of information about how the target company is currently performing. We give you some guidance on how to do that. And it generates a heat map. But again, not based on ESG reporting metrics, but based on value drivers. So if you can see associated with the material issues. So you might see, for example, that this company has a lot of red around chemical management.

19:54But you can also see on the value driver side that there might be actually some significant benefit if you invest in that company to actually shift that. Or you might see on the green side that it's got, you know, really high scores in sustainable packaging. It's been an innovative there. It's sort of undervalued for that. So that's a place where you could buy them and really invest. OK, so that's at the due diligence stage. Then when you get into your 100-day holding period, this looks more future forward. So it gives you an ability to analyze against the material topics, and you can narrow them down, right?

20:24Future facing risk and future facing upside. Because again, another big problem is a lot of this stuff is just risk oriented. And a lot of people don't, you know, P doesn't really, they invest a little bit against risk, but not much. And it's much more on upside. So there it identifies that. And then again, it'll give you a, you'll enter in a few things, but then it'll give you a scatterplot where you can find kind of what's the highest risk downside and upside to manage as well as level of effort. Then it leads you, you pick a few, it leads you to some sustainability KPIs and some rosy KPIs that you can use with your portfolio company to manage how they perform.

20:59So that both during the life of the holding and at exit, you have the narrative to explain the financial returns. The ROSE work will go into more detail around what are those specific monetization methods you can use? What are the specific drivers of better financial performance by industry? So we've done automotive, agriculture, real estate, health care, energy, et cetera, right? There's a number of things that work across all sectors, but there's also quite a lot of differences. I mean, what drives value in an IT firm is going to be different than a heavy manufacturing company, right? So you need to understand those delivered ag firm, right?

21:38So you need to sort of get a little bit deeper, as you would in that initial process to understand what's material, and then go in and sort of make sure you put in place a way for your portfolio companies to track these financial returns. And I'm happy to go into some examples, but just that's the kind of overview. I would love to get some examples. So what I'm hearing is that this is not unlike if a deal team is looking at a new opportunity. They're thinking about what's material to that company. They're thinking about how can they transform this company to grow it. And so it's clear that this is in line with that, thinking about what's going to not just create risk, but also opportunity and then managing around that.

22:23How do we measure that? How do we make sure that we're on track or flag if we're not on track? So that's really clear in theory and would love to hear some examples, Tossie. Absolutely. So I'll give you some corporate examples. So we looked at one automotive company who had significant waste management strategies, a strategy in a number of practices, including things like recycling paint and solvent. When you recycle paint and solvent, you no longer buy the virgin product. You no longer pay for waste disposal costs. And actually, they had some leftover that they're selling, right? That's just one of the practices they put in place.

23:03They were netting from their waste management strategies$235 million annually, which they did not know because they were not tracking it. They were looking at it as a cost of compliance, which is a problem we see with companies all the time. And this is also a big issue that corporates and GPs need to look at. Corporate finance does not track avoided cost. Avoided cost, and that's nothing to do with sustainability, it's just generally, right? Avoided cost is a huge element of benefits associated with sustainability. Avoided energy costs, avoided water costs, avoided fees, you know, regulatory fees, avoided loss of employees in terms of turnover, right?

23:46All of those costs are really, really significant in today's world and yet are not really brought into the equation. So that's one learning from looking at that type of process. I mentioned medical devices before in circularity. So to give you sort of the financials on that is fascinating. For this medical device company, we looked at if they refurbished the medical devices as well, instead of throwing them away and buying new ones, for the cost of about$500 ,000 one-time cost, they would be netting$3.5 million annually in both reduced cost and upside. Again, if they hadn't been tracking the reduced cost, they would never have gotten that number.

24:37If we look at more of an intangible, sort of on a social side, we worked with REI, purpose-driven, sustainability-oriented activewear company, to look at how much did that focus on mission and purpose drive better retention and productivity? And what did that mean for the bottom line? And so they had very robust annual survey instruments, exit interviews, et cetera. So we were able to make a very strong correlation. And then we looked at what their cost of turnover was, what high productivity individuals generated, and were able to, with their CFO's office, define about$34 million annually in net benefit of their purpose and sustainability program, which was about 5 % of paywall.

25:30Again, which nobody really tracks. We're in the process of working on a health and safety example, which will be unveiling at our annual private equity practicum in December. So I'm excited about that because I'm finding there is a lot of value in health and safety that companies are currently not recognizing. They're doing the minimum required from a compliance perspective, of course, but they're not seeing that if they make some investments, the impact on retention, insurance costs, productivity is really significant. So those are a few examples. And as we look to the future, so these are obviously, you know, you're getting great traction.

26:13You're adding topics. You're going deeper into topics on a regular basis. And I'm interested, as we look to the future, the next five years, how do you think that value and sustainability is going to evolve as a topic area when, say, it comes to private markets? Well, one thing I didn't mention in those examples is where the market demand is, right? So I think two things are going to happen. One is that we are increasingly experiencing a high-risk, volatile world in terms of many things. But one thing is sourcing our commodities that we need. And whether that's energy or food or metal, right, it's becoming extremely volatile and more and more challenging.

27:00The impacts of climate change, water scarcity, energy use, et cetera, also increased cost for businesses. So those things are all reality. They're going to continue to grow. So those internal operational changes to be more resilient, to drive efficiency, to reduce dependency on natural commodities as well as on globalized supply chains, all really critical. On the upside, on the market side, the innovation side. So one of the things that I say to folks is don't talk about decarbonization as greenhouse gas emissions. Talk about it as innovation. You're innovating new processes, new products, new services, right?