Sustainability: The “Invisible Hand” Shapes Next-Generation Location Selection

Companies that view their location strategies through a “sustainability filter” are more likely to achieve competitive advantage and long-term stakeholder value.


Article originally published by Area Development Magazine 

“An invisible hand,” Adam Smith’s 18th century locution on the self-regulating behavior of the marketplace, still rings true. Smith could never have imagined the intricate formulations today’s markets have created, with one of these being sustainability as an underpinning of business location selection. Sustainability’s triple-bottom-line business operating philosophy, driven to the modern stage by the challenges of globalization, is a logical and evolutionary extension of the invisible hand. 

Origins of Sustainability

Sustainability as a business term has come into common use only within the last decade or so. Before that, sustainability was rooted in the environmental movement of the 1960s and later the United Nations Brundtland Commission, which in 1987 defined sustainable development as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs.” Sustainability’s mandate is to balance a three-legged stool of society, the environment, and the economy, translated for business as the triple-bottom-line. 
Sustainability as a business practice is driven by the interdependence of national economies through a rapid increase in cross-border movement of goods, services, technology, and capital — in a word, globalization. Globalization brings opportunity to virtually every doorstep, but also brings risk from a myriad of origins including resource scarcity, rapid market shift, political instability, disruptive technology, and environmental challenges (e.g., climate change). These, in turn, shape ever-changing societal expectations, public policies, regulatory frameworks, and competitor actions — the very things that challenge business decisions. Companies that anticipate and manage current and future economic, environmental, and social opportunities and risks, dealt rapid fire by globalization, will emerge more likely to achieve competitive advantage and long-term stakeholder value. In part, competitive advantage comes from getting more use from investments in real property and machinery and equipment.
Figure 1: B Corps are a legal form adopted by for-profit companies that want to consider society and the environment in addition to profit in their decision-making process. B Corps have legal status and are administered in 19 states and the District of Columbia

Corporate Sustainability Metrics

Companies that successfully translate social, environmental, and economic challenges to their advantage should expect to outperform their peers. Measuring corporate adaptation of sustainability has been elusive, however. As a business practice sustainability lacks uniform definition, though this is starting to change. 
Confusion over the term is not surprising given the numerous ways in which the sustainability tag is hooked to business organizations. One definition accompanies Benefit Corporation designation, also called a B Corp. B Corps are a legal form adopted by for-profit companies that want to consider society and the environment in addition to profit in their decision-making process. B Corps have legal status and are administered in 19 states and the District of Columbia (Figure 1). 

B Corp designation expands the fiduciary duty of company directors to require them to consider non-financial as well as financial interests of shareholders. This gives company directors and officers legal protection to pursue a broader corporate mission. 


Communities positioned to support LEED Certification are by default more closely aligned with sustainable corporate organizations. LEED (Leadership in Energy and Environmental Design) is a program of the U.S. Green Building Council (USGBC) started in 1998. LEED provides metrics that advance convergence of business and community sustainability.
LEED NC (new construction) and LEED CS (core and shell, i.e., existing building) have scoring criteria that encapsulate aspects of community organization and physical assets that feed the needs of sustainable business organizations. In LEED (NC) v3 2009, the latest version of the program, there are six scoring categories encompassing 65 variables, 110 possible points, and four certification levels. Approximately 30 of the 65 variables are connected to owner design decisions that are largely unlinked to community. The remaining 35 variables are either directly or indirectly supported by organizational and physical assets of the community.
A similar designation is the Certified B Corporation. A Certified B Corp is a for-profit company that has met standards set by B Lab, a third party 501(c)3 nonprofit with headquarters in Wayne, Pa. B Lab’s mission is to “…serve a global movement of entrepreneurs using the power of business to solve social and environmental problems.” 
Certified B Corps are found in all 50 states and around the world. (Benefit Corps are not required to be certified.) At the start of 2014, more than 900 companies in 60 different industries had achieved certification, including companies like California outdoor apparel leader Patagonia, Vermont’s Ben & Jerry’s, as well as Colorado-based craft brewing giant New Belgium Brewing. 
Rob Michalak, Director of Social Mission for Ben & Jerry’s says, “Certified B Corporations codify what being a progressive, socially conscious business is all about. By becoming a Certified B Corp we are supporting the movement for business to play a leading role in providing social as well as economic benefits to society, and of course great products and services.”

Sustainability and the Invisible Hand

Adam Smith knew well that individuals act in their own self-interest. At the same time Smith acknowledged that the actions of individuals to maximize their own gain in a free market ultimately benefit society, even if the individuals have no benevolent intentions.
It stands to reason, therefore, that in a complex world, companies managed according to robust and well-rounded sustainability principles should realize higher shareholder value versus companies that manage solely on traditional practices that rely heavily on conventional financial analysis. And while recognition of sustainable business organizations by legal means or through certification is significant, it’s easy to view these as “sustainability lite.” Real proof of sustainability’s efficacy lies elsewhere.
Figure 2: Analysis clearly shows that companies that follow business practices recognized as triple-bottom-line-focused cast a different profile when compared to traditional companies
In capitalist society the marketplace is fertile proving ground for testing ideas. Over the last decade a number of investment services have done just that by focusing on the premise that a sustainable corporate model will produce successful businesses over the long term. 
Perhaps the best known of these services is the Dow Jones Sustainability Diversified Indices (DJSI Diversified), which measures company performance relative to traditional benchmarks. DJSI Diversified, which represents a collaboration between S&P Dow Jones and Switzerland-based RobecoSAM AG, analyzes corporate sustainability profiles using a trademarked Corporate Sustainability Assessment (CSA) methodology. The methodology includes industry-specific questionnaires with as many as 120 questions focused on economic, environmental, and social factors. According to DJSI Diversified, “The questionnaires include factors that are relevant to a companies’ success but that are under-researched in conventional financial analysis.” 
The DJSI Diversified family covers 26 developed market and 20 emerging market countries for 24 separate industries. Several thousand companies are regularly assessed with a special focus on the latest industry-specific risks and opportunities. Among the recognizable names on the 2013 DJSI Index are Volkswagen, Siemens, Panasonic, Citigroup, Nestle, Abbott Laboratories, AkzoNobel, Alcatel-Lucent, and Air France-KLM. The analysis clearly shows that companies that follow business practices recognized as triple-bottom-line-focused cast a different profile when compared to traditional companies (Figure 2).

Sustainable Location Selection

As a business practice, sustainability is still seeking definition; this is no more evident than in the rules for selecting sustainable locations. Best practices for selecting sustainable locations are just now emerging. Under sustainability’s triple-bottom-line, rules for location selection arise from the palette of policies, procedures, and resources that constitute a business organization — broader than the palette from which conventional location criteria are derived. 
Many palette elements have location correlates. For example, the unencumbered operation of corporate facilities demands a reliable and predictable operating environment. For a corporation to manage against a risky and constantly morphing business landscape, corporate facilities, and the communities in which they operate, must work harmoniously. 
Corporate managers require a sustainability-filter through which location strategy and community/property alternatives pass prior to a final decision. Figure 3 presents filter elements that are part of a broad sustainability assessment of location. 

Sustainable Communities Breed Success

Globalization offers new opportunities for corporate growth and stability, but also brings increased risk for failure. Companies that successfully translate these challenges to their advantage can expect to outperform their peers in the future. Companies that measure performance along the triple bottom line — society, environment, economy — are destined to be better equipped for the journey.
Companies following a sustainable business management strategy can expect their facilities to run more efficiently with less disruption over a longer period of time. Success, of course, requires that the locations selected for these facilities are chosen for their ability to meet sustainability’s more demanding requirements.
Target Industry Strategy: The era of communities being all things to all companies is well in the past. The first filter element in a sustainable location search is to verify the community has an investment attraction strategy based on an honest appraisal of regional assets. If they have done this correctly and are targeting your industry, they will understand your requirements and be working to align local resources with your current and future needs. Everything on this list should tie back to the community attraction strategy.
Police and Fire Emergency Services: Appropriate staffing, equipment, facilities, training
Emergency Planning: Recognition of and planning for natural and manmade disasters
Utility Services: Reliable, abundant, and redundant utility services built on modern well-maintained infrastructure
Transportation: Reliable and redundant transportation access for employees, service providers, and supply chain
Regulation: Predictable and workable regulatory structure
Schedule: Globalization mandates speed. Corporations cannot afford to be slowed down by actions that can be anticipated. Community attributes must include:
Real estate — Certified ready-to-go sites and available buildings in areas of the community that are aligned with environmental and operational considerations
Permitting — Streamlined and responsive permitting process
Community — Consensus among community leaders on attraction targets and a commitment to expedite the development process
Communities that support investment in the supply chain of targeted industries are more likely to be a good location for regionally sourced materials. This reduces the company’s operating costs and lowers greenhouse gas emissions, and supports local economic stability.
Every corporate facility has a unique environmental footprint shaped by facility technology, age, and condition, and by community attributes. Sustainable companies prioritize environmental issues in order to better manage the impact of these issues on company performance. A properly vetted community will support a broad array of corporate environmental policies and management initiatives. Communities are more attractive to sustainable companies if they:
Support waste stream management through a comprehensive plan for recycling industrial waste with special attention to the waste streams of target industries
Support water resource management through codes and local practices that limit the use of potable water, natural surface, and subsurface water for irrigation through best practices for landscape design and maintenance, including plant species, irrigation efficiency, use of captured rainwater, and recycled wastewater
Support water use reduction by encouraging best practices including water efficiency within buildings to reduce the burden on municipal systems, use of recycled gray water, and water-efficient appliances
Support on-site renewable energy through building codes that allow installation of photovoltaic, wind, solar thermal, bio-fuel, and geothermal systems
Invest in a modern power grid that supports the latest technologies in energy management and on-site cogeneration

Sustainable organizations place high importance on nurturing human resources, often through a sophisticated process of skill mapping and work force development. Communities are more attractive if they are aligned with company human capital needs including:

Local resources supporting personal and organizational learning, including modern and well-funded work force training geared to targeted industries
Local work force characterized as being loyal to employers, with a strong work ethic measured both anecdotally and by metrics like voluntary and involuntary employee turnover
Community reputation for a diversified and harmonious work force at all skill levels
Professional and well-funded jobs-retention program actively engaged with local employers

Attraction and retention of talented people are now the most cited factors in corporate location decisions. Of course, a company’s ability to retain and attract talent depends, in part, on the attractiveness of the job and company. But community plays a role. Sustainable companies are best-served by communities that are attractive places to live and work. Sustainable communities should exhibit:
Healthy downtown business districts
Land use planning that encourages wise use of resources and supports overall community health and attractiveness
Reuse of brownfield properties, sites, and buildings
Clean and well-maintained public spaces, community-wide programs for landscaping
Resources devoted to promoting healthy lifestyles including ample investment in park and recreation facilities, biking and walking trails, and sports facilities
Public transportation
Arts and entertainment community including festivals, artist groups, public art, and performing arts programs
Community Culture: Select communities that align with corporate giving policy. The right mix of nonprofits, foundations, and other local cultural assets will make local giving easier and reinforce the bonds that make for sustainable company/community relationship


and Organizations:
  The Site Selectors Guild   Competitive Ready