Certification Schemes & Markets
Friday, December 2, 2005
A couple of weeks ago, I received a copy of about time edited by Tim Aldrich and Forum for the Future, and published by GreenLeaf. I’d read about this book on WorldChanging.com and after reading the introduction (PDF) and an excerpt from the book, I decided to order myself a copy. I recently finished reading it, and it didn’t disappoint.
I found plenty of interesting points and insights, such as the idea of cyclical time versus linear time (the predominant sense in Western civilization) and the inseparable relationship between distance and time in some cultures, but the most intriguing part was a reference to the World Business Council on Sustainable Development and the document Exploring Sustainable Development: WBCSD Global Scenarios 2000-2050. (PDF)
This document, a product of the WBCSD Global Scenarios Project, lays out three scenarios for future development:
- FROG! (First Raise Our Growth!)
- GEOpolity (Global Ecosystem Organization)
- Jazz
Of these three scenarios, the last one, Jazz, was striking because of its similarity to the structure I’ve been developing for my thesis. Namely, multiple stakeholders cooperating towards a shared goal of sustainability.
In the world of Jazz, diverse players join in ad hoc alliances to solve social and environmental problems in the most pragmatic possible way. The key note of this scenario is dynamic reciprocity. This is a world of social and technological innovations, experimentation, rapid adaptation, much voluntary interconnectedness, and a powerful and ever-changing global market.
What enables the quick learning and subsequent innovation in Jazz is high transparency—the widespread availability of information about ingredients of products, sources of inputs, company financial, environmental, and social data, government decision-making processes, and almost anything else concerned consumers want to know. Many players are involved, in part because the way information technology lowers barriers to entry allows new actors to step onto the economic stage. And that stage itself is characterised by a global free market, sound legal systems, and a respect for property rights.
What I’ve been working on this summer has been a way of reconciling the traditionally adversarial positions of consumer and corporation: demand and supply. And it just occurred to me the other night, in a conversation with Victor Szilagyi, that what I have been developing is in fact a scenario—Victor used the word futurecasting.
My scenario uses the following train of thought:
Businesses and their stakeholders have an increasing number of incentives to pursue sustainable development. Some considerations include:
- high-risk exposure to volatile price fluctuations in key resources, such as oil, and corresponding decreases in risk as they switch to renewable resources.
- the potential for environmental lawsuits, similar to how McDonald’s is threatened by lawsuits related to health and obesity1.
- pure profit motives, as sustainable development, energy and material efficiency measures, and steps to eliminate waste have been shown to lower costs and directly increase profits.
- the potential for shareholder lawsuits, as companies which forego the aforementioned sustainability measures could be shown to be negligent if said measures are proven to increase shareholder value for the company.
- pre-emption of laws and regulations which government could eventually place upon industry, such as green fees or legislation to regulate waste.
- increased insurance costs related to environmental considerations levied by insurance companies, as insurance companies begin to realize risk in events such as the recent Hurricane Katrina in New Orleans.
- increased difficulties securing loans from banks and financial institutions as they raise their standards for investment.
1 And it’s not just lawsuits, as “a significant proportion of people agree that ‘food companies should be made to pay a levy to the NHS for the cost of treating obesity’.” (Observer – Just Say ‘No’)
So on the one hand, companies currently have or potentially will have quite a push to adopt sustainable measures. However, these same forces can also be seen in a positive light: volatility of oil is a negative factor, but energy autonomy is a positive factor. A company can be pushed into energy autonomy because of legislation, or it can adopt energy autonomy because of the economic and competitive benefits it provides. How can companies achieve these goals? The Natural Step is one blueprint for achieving sustainability goals, and various rating systems (e.g.: LEED and ISO 140001) have evolved to document and recognize various aspects of sustainable development.
I need to comment here that although I was originally pursuing the following as my thesis topic, this is no longer the case because it bends more towards business. Were I working on a sustainable MBA, perhaps this would be an appropriate area to pursue, but my focus is on interaction design because I am in a school for interaction design. So, consider the following an interesting idea which I think is worth exploring.
My position with these rating and certification systems is that I do not believe they are fully valued by the market. That is to say, although some companies pursue these ratings and certifications, the market does not have a way to integrate this information into its decisions. The general public is not yet aware of the nuances of LEED, for example, and this tool remains a tool of the industry and not one of general conversation or everyday transactions. However, if these ratings and certifications could be valued by the market, then this brings some interesting forces to bear on the issue.
First, these ratings and certifications need to be authenticated or endorsed by a third party. Companies may in fact be trustworthy, but a third party certifier adds an element of trust to the scheme which the company by itself is unlikely to achieve. More importantly, certification needs to occur on a broad scale. Within an industry, companies which do not subscribe to sustainable measures can combat certification schemes by starting competing certification schemes, with the goal not of providing real competition but of confusing and devaluing the real certification scheme. A supra-industrial rating system, such as ISO, which is recognized across industries, is much harder to devalue through competing standards because it is more difficult to organize many companies across industries than it is to organize them within a particular industry. So while a certification scheme for wood put forth by lumber companies is susceptible to competing certification schemes created by other lumber companies, a certification scheme that happens to certify wood in addition to certifying automobiles and carpet manufacturers is much more robust because coordination between those industries is difficult and very unlikely.
Secondly, the ratings and certifications are based at worst on objective observation and at best on hard, quantifiable data. This means that they reflect the infrastructure and capital resources and processes of a company. For other companies to compete on this basis, therefore, means they have to compete on substantive data. For one company to get a better rating than another company means that it has to substantively change the way it functions. This is in contrast to subjective changes, such as changing the color of products, or launching PR campaigns (also known as greenwashing).
What this effectively means is that when companies can differentiate themselves in the marketplace along these substantive lines, that differentiation has significant value. To compete in this arena, another company may have to potentially change its whole business model and will at least have to spend time and money on capital and process changes. In this scenario, companies which begin this transition earlier stand to gain hugely on their competition because of the time involved with making these changes. Time becomes, in effect, a barrier against competition and re-imbues “first-mover advantage” with substantive meaning.
The effectiveness of this differentiation relies on two critical points: transparency and communication, the latter in the form of both corporate communication and feedback to the company. Transparency is important because the goal is trust and rapport between customer and business, and it is to the benefit of the company to show how much better they are compared to the competition. Once a company embraces transparency, its competition will be judged based on whether they are transparent as well. If they’re not, then the question could very well become “What do they have to hide?”
Communication is the other important focus because it is the means by which companies can gain maximum value out of their sustainability initiatives, and it enables them to respond to customer needs. Corporate communication will begin to focus on extolling the benefits and virtues of the company’s initiatives and progress—both to help with consumer awareness and to differentiate themselves from the competition. Feedback mechanisms will become important tools for enabling companies to respond to customer needs and desires.
This point of communication and feedback is of particular interest to me, but first, two points.
The first point is that companies are not their products. Companies are something else. To quote “Built to Last”, by Jim Collins and Jerry I. Porras:
We had to shift from seeing the company as a vehicle for the products to seeing the products as a vehicle for the company. (pp 28)
or, as they in turn quote Thomas J. Watson, Jr., former CEO of IBM:
If an organization is to meet the challenges of a changing world, it must be prepared to change everything about itself except [its basic] beliefs as it moves through corporate life. ... The only sacred cow in an organization should be its basic philosophy of doing business. [emphasis ours] (pp 81)
A basic tenet of service design is that the company’s relationship with people is the core value of the company. A company’s success lies, therefore, on the ability of that company to effectively address the needs and desires of the customer. We see this in the hotel industry, among other service-based fields, where a good hotel is one with good service. This is one kind of service, and we know what good service is on a basic, fundamental level. The catch is that businesses which aren’t traditionally service-based will need to become service-based, which leads to different kinds of services. Car-sharing services, for example, instead of car-rental agencies, for example. But this shift also entails maintaining relationships. So selling a car isn’t about selling that particular car, it’s about forming and maintaining a relationship with the customer. And, in fact, it’s not even about selling cars. It’s about providing customers with transportation solutions which fulfill their needs. We see this with the music industry: music companies are just beginning to understand that they’re in the music business, not the record business.
This overall scenario is therefore predicated on the understanding that successful companies will change their offerings in response to market forces, because those offerings aren’t the company. The company’s success lies in its ability to innovate solutions which address the needs of its customers and in its ability to create discerning customers. As Paul Hawken mentions in The Ecology of Commerce, Japanese car dealerships spoil their customers with such things as door to door service and the amount of detailing they perform. This in turn creates a hurdle for competing companies, because customers now expect at least the level of service provided by the first company.
Therefore, the important point to note is that the rating system rates the company, not the products it offers. The rationale is that, fundamentally, the products aren’t the company, and that rating the company has broader effects than can be achieved simply rating a product. A company can create a single product that’s “good” or “green” but it is not a significant or meaningful change if everything else the company produces is not “green”. However, if a company changes the way it produces and conceives of products, then more than one product line will be affected—perhaps every product it produces is affected.
The second point is that people value this information and will act on it. Currently, the market provides only one piece of supposedly objective information at the point of sale: price. Yet price generally neither encapsulates nor reflects the true cost of things. An example is broccoli in a supermarket. Organic broccoli tends to cost more than conventional broccoli, but that’s because the price of the organic food more accurately reflects the real cost of the food. That is to say, the price of conventional broccoli is artificially low, and does not take into account such costs as runoff from chemical fertilizers and pollution from transportation.
Given more information about a product, specifically the sustainability rating or certification of the company behind the product, people can use this information to make a purchasing decision. The catch is that this information needs to be presented to them in a personally meaningful way. Abstract values such as the amount of carbon NOT released into the atmosphere are interesting, but are not very resonant because they are fundamentally abstract concepts—I am aware of something called CO2, but it’s not something I can see piling up in my backyard. In contrast, appeals to a person’s frugality or status or health (among other motivations), are potentially more resonant. Choosing to purchase one company’s product over another company’s product is a kind of voting, a way of rewarding companies in the marketplace who are proponents of sustainable development practices.
So, this is where my thesis was heading, more or less, until I tweaked it. I still think the above framework is worth exploring in further detail, but doing so is not in the purview of my interaction design coursework. This post was a long time in writing, in part affected by the recently-completed Applied Dreams, and I obviously need to catch things up to my current thesis status. Any comments on the above?
