Sustainable Tea at Unilever

To survive and prosper over the long term, learn how to adapt your business model by making it servant to society and the environment. Not the other way around.

Sustainable Tea at Unilever

In 2010, Unilever announced its commitment to a new "Sustainable Living Plan," a document that set wide-ranging, companywide goals for improving the health and well-being of consumers, reducing environmental impact, and, perhaps most ambitiously, sourcing 100% of agricultural raw materials sustainably by 2020. Such a goal implied a massive transformation of a supply chain that sourced close to 8 million tons of commodities across 50 different crops. Unilever CEO Paul Polman believed that the company's ambitious goals could drive savings, product innovation, and differentiation across the company's portfolio of products. But more importantly, it would create a company better suited to survive in the future that Polman envisaged:

This is a world that is challenged. When you look at the interdependent challenges that we face on food security, poverty reduction, sustainability of resources, climate change, and social, economic, environmental development, these challenges have never been greater. And I believe that these pressures will only increase as 2 billion more people enter this world and many aspire to increase their living standards.¹

The changes happening at Lipton, Unilever's €3.5 billion tea brand, were an important cornerstone of Unilever's plan. For more than five years, Michiel Leijnse, the global brand director for Lipton Tea, and the Unilever procurement team had led the transformation of the Lipton brand and its supply chain toward a goal of 100% sustainable sourcing. Approximately 25% of all Unilever tea now came from Rainforest Alliance-certified farms, and real gains had been made in the social, environmental, and economic sustainability of tea production. The scale of Unilever's mainstream partnership approach was unprecedented in the beverages industry, where "ethical" brands had failed to grow beyond niche market positions. Unilever's goal was to have all of the tea in Lipton tea bags sourced from Rainforest Alliance-certified farms by 2015, and to have every kilogram of Unilever tea sustainably sourced by 2020. Leijnse was confident that the company could achieve these goals, but it faced two critical issues as it worked to make them a reality.

The first issue was how Unilever could transform a supply chain that was not only geographically very diverse hut also highly fragmented. Unilever bought tea from all producing regions, and in many markets, the majority of production was controlled by smallholders who sold their tea at open auctions. Unilever and the Rainforest Alliance had successfully certified Unilever's own tea estates and those of many large plantations, hut the firm now faced the increasingly difficult task of convincing smallholders in worldwide markets of the benefits of changing agricultural practices and pursuing Rainforest Alliance certification. India, for example, was a major tea producer and consumer, hut the small scale of many of the farms and the nature of local farming practices made certification a significant challenge. What should Unilever do in such markets? Should Unilever insist on Rainforest Alliance certification or instead work to implement, incremental change through standards better suited for Indian practices? How could it persuade hundreds of thousands of smallholders to adopt new farming methods in markets where most tea production and consumption was local and Unilever was not the dominant buyer?

The second issue was whether and how Unilever could gain market advantage from its move to sustainable tea. While the adoption of Rainforest Alliance certification appeared to have led to market share growth in some Western markets, it was not clear either that this would continue or that the concept of a sustainability message would resonate with consumers in developing markets like Turkey, India, or Russia. How should Unilever market its sustainability efforts in emerging markets?

Beyond these two key issues, several other smaller hut also potentially important, questions consumed Unilever's attention. The Unilever Sustainable Living Plan committed the company to sourcing 100% of all agricultural raw materials sustainably by 2020. Did this mean moving to sustainable paper in tea bags and packaging or to sustainable ingredients sourced in very small amounts—such as chamomile—where there was currently no sustainable supply? If so, what was the best way to approach such moves? And more broadly, were there lessons in Lipton's experience for the rest of Unilever's agricultural supply chain and for the power of sustainability as a source of consumer differentiation?

Unilever and Lipton Tea

Unilever

In 2011, Unilever was one of the world's leading consumer goods companies, selling everything from food products to personal-care and home-care goods. It was a company with a global reach, with sales coming from more than 180 countries, over half of which were in the developing world. Worldwide, over 2 billion consumers used Unilever products each day, and 2010 revenue was over €44 billion ($59 billion¹¹).² (See Exhibit 1 for income statements from 2006 to 2010.) Just over half of these sales came from foods and beverages, with 31% of sales in personal care and 17% in home care. (See Exhibit 2 for a breakdown by segment.) The company employed 167,000 people globally. Much of the company's success was due to its portfolio of strong brands. The company had 12 brands with individual sales over €1 billion per annum, including such widely recognized products as Lipton, Dove, and Axe.

The company faced competition from a number of other large consumer goods companies, including Procter & Gamble, Nestle, and Colgate-Palmolive. (See Exhibits 3 through 5 for further comparative financial figures.)

Unilever Ten

Lipton Tea was the largest tea brand in the world, with annual sales of approximately €3.5 billion.^b Unilever's tea portfolio contained a number of other strong regional brands, such as PG tips in the United Kingdom (U.K.), Lyons in Ireland, and various other brands in countries worldwide, including India, Pakistan, Russia, and Poland. Lipton's global market share was nearly three Limes that of its nearest rival, Tata Beverages, the owners of Tetley Tea.

Lipton teas were sold in over 130 countries and were particularly popular in Europe, North America, the Middle East, and parts of Asia. Growth in the developed world was around 1% to 2% a year, hut the markets of the developing world—specifically, India and China—were seen as particularly promising, with anticipated annual growth rates of close to 10%.

In 2010, Unilever sold nearly 350,000 tons of tea. Approximately 90% came from external suppliers, with the remainder coming from Unilever's own estates in East Africa, including its flagship estate in Kericho, Kenya. Every market had a distinct taste in tea, making it to some extent reliant on supply from particular countries. For example, the North American market sourced much of its tea from Argentina, since its tea was particularly well suited for iced tea, which was popular in the U.S.

The Global Tea Market

Tea was the world's most popular beverage after water. In 2009, approximately 4 million tons of tea was produced in 46 countries, with China, India, Kenya, and Sri Lanka accounting for 70% of global production.³ Kenya, where much of Lipton's tea was produced, accounted for approximately 8% of global production,⁴ hut was the world's largest exporter of tea (see Exhibit 14 for a breakdown of global tea production).⁵

Tea was consumed for a variety of reasons and in a wide variety of blends. Russia, the U.S., and the U.K. were the biggest net importers of tea, accounting for nearly 30% of global imports.¹¹ Japan, with its strong preference for green tea, consumed approximately a fifth of all the global green tea supply. In many countries, tea was an ingrained part of daily life for cultural and historical reasons. In other parts of the world, tea was becoming increasingly popular due to its perceived health benefits.⁷

Historically, global tea markets had suffered from oversupply. The resulting price pressure was exacerbated by tea's high degree of commoditization, low switching costs for consumers, and tea's perishability, which meant prices were often cut drastically to clear stocks.⁸ Despite moderate gains in the price of tea since 2000, the price of tea in real terms in 2010 was still 35% lower than its peak in the mid-1980s.⁹ (See Exhibit 6 for global average tea prices, 1960-2010.)

Ten Production and Its Consequences

Tea production was a very labor-intensive activity. With a few regional exceptions, tea production occurred year-round, as farmers carefully hand-picked the top two to three leaves of the plants every 7 to 21 days, depending on the altitude and climate.¹⁰ Tea plants^c could grow to a height of 30 feet or more, but were usually cropped at about 2 to 3 feet and then pruned regularly in order to make them easier to pick.¹¹

The leaves were plucked by hand and then processed immediately, either on-site at the plantation or at a bought-leaf factory.¹² During processing, tea leaves were withered, macerated, oxidized, dried, and sorted on-site. The processed tea was then transported to a broker or auction, after which it was blended, sometimes flavored, and packaged. Finally, it entered the relevant retail sales channel before ending up with the consumer.

Inappropriately managed, tea production could raise a number of social and environmental concerns. The industry contained a mix of large-scale estates and smallholders, each with their own challenges. Over the years, there had been reports of bad working conditions on poorly managed plantations that damaged worker health through exposure to harmful pesticides and agrochemicals. In certain cases, the workforce included migrant laborers with no protection in case of illness, pregnancy, or other factors.¹³ Workers generally received low wages and were not always given medical care, housing, education, or pensions. Further, in some cases, independent trade unions, when they existed, had been accused of corruption or ineffectiveness.¹⁴

For some smallholders who grew tea as a cash crop, tea production implied the conversion of tropical forests into agricultural land, which could lead to reductions in the diversity of local species and to soil degradation.¹⁵ However, for most farmers, unsustainable practices were a result of focus on increasing yields and not acreage. Logging for the firewood needed to dry tea could lead to local deforestation, which could in turn lead to problems in water retention. Some farms used excessive amounts of fertilizers and pesticides, which could negatively affect soil quality and pollute local soils and waterways. Years of commoditization had contributed to a downward price spiral that put pressure on workers and the environment as farmers tried to safeguard their income.

Unilever's Commitment to Sustainable Tea

Unilever first established a set of good agriculture practice guidelines in 1998. The guidelines outlined sustainable farming practices for the suppliers of its major crops, including tea, palm oil, and tomatoes, and included 10 key indicators of environmental, social, and economic performance, each with its own sub-parameters (see Exhibit 7b for more details). Unilever did not impose the guide on external suppliers, but shared it with them and with the broader public. This was the first move of this kind in the industry.

In 2006, Leijnse began the process of transforming this internal commitment into a major consumer-facing initiative. He believed that many Western consumers had become sufficiently concerned about sustainability that it might help drive product differentiation. More importantly, he saw this as an opportunity to transform the entire tea industry, benefiting not only tea workers and

^c There are two main varieties of the tea plant: China and Assam. The Assam variety, which is used in India and Kenya, is the most common. All varieties can be and are used to produce green and black tea. There are many kinds of hybrids between the varieties, and other factors like soil, climate, altitude, picking time, and processing all affect the flavor.

the environment, but also purchasers of tea who were reliant on a healthy supply chain. Aware that such a transformation was not costless, Leijnse explained the initiative's rationale:

If we didn't do something to transform the industry, at some point we just wouldn't be able to get the quality and quantity of tea we need. While we might see market share gains in some markets, it won't always be the case. It is a challenge to properly align the short-term and long-term interests of the brand.

Tea Certification and the Rainforest Alliance

Leijnse and his team decided to pursue certification for the brand and chose the Rainforest Alliance, a founding member and secretariat of the Sustainable Agriculture Network (SAN), as its certification partner. There was significant overlap in Unilever's and the Rainforest Alliance's approaches to sustainable agriculture practices; both focused on environmental, economic, and social factors. Further, the Rainforest Alliance focused on market-based premiums rather than fixed price supports (characteristic, for example, of FairTrade products) as the best way to create change. The Rainforest Alliance had some consumer recognition from previously successful campaigns certifying a range of other commodities, including bananas, coffee, and cocoa, hut had no prior experience with tea certification or on the African continent, where Unilever had decades of experience in its tea estates.

Unilever set ambitious targets for the implementation of Rainforest Alliance certification. By 2011, it had successfully achieved its initial target of having all Lipton Yellow Label and PG tips tea bags in Western Europe certified by 2010. Lipton had committed to sourcing all the tea in Lipton tea bags from Rainforest Alliance-certified estates by 2015, approximately a third of all Unilever tea volume. And if Lipton were to meet the commitments of the Sustainable Living Plan by 2020, 100% of Unilever's tea would need to be sustainably sourced, although the plan did not commit Unilever to using tea from Rainforest Alhance-certified farms.

The certification process The Rainforest Alhance evaluated farms based on 10 principles covering issues such as worker welfare, farm management, and environmental protection, each with its own criteria.¹⁶ The Rainforest Alhance certified entire farms, so that in order for any of a farm's crops to he certified, the entire production area for ah crops had to meet the standards. In order to obtain and maintain certification, a farm had to he in compliance with at least 50% of the applicable criteria associated with each principle and with at least 80% of the total set of applicable criteria. Further, there were 15 critical criteria that were mandatory for certification, regardless of overah comphance (see Exhibit 7a for information on certification standards).¹⁷

While independent farmers bore the costs of complying with the Rainforest Alhance standards (for each estate or group being certified, there was a certification cost of approximately €3,000 to €4,500, or $4,000 to $10,000, depending on farm size¹⁸), Unilever also incurred costs in choosing to buy certified tea. First, Unilever paid a premium for the tea. In 2011, this was approximately €0.08 per kilogram of tea. In 2010, the average market price per kilogram of tea was €1.69 ($2.28).¹⁹ In the market for certified coffee, there had been price premiums of 15%. From 2011, Unilever had to pay the Rainforest Alliance a participation fee of €0.0089 ($0.0125) per kilogram of tea in order to carry the organization's frog logo on its packaging. Unilever's procurement organization devoted six full-time employees to work on the rohout of global certification education and spent approximately €200,000 per year on the development and deployment of farmer training, in conjunction with the Rainforest Alhance.

Scaling Certification in the Supply Chain

Unilever had to certify almost a quarter of its tea volumes to meet its 2010 goals. Given the lack of any preexisting certified sources, Unilever and the Rainforest Alliance faced a significant challenge in developing large volumes of certified tea in a relatively short lime. To address this, Unilever initially focused on certifying its own production in Kenya and Tanzania, as well as some of its larger and better-managed tea suppliers.

Achieving the firm's 2015 and 2020 goals would require working further down the supply chain with smaller, less organized suppliers operating in widely varying countries, each of which had different agricultural practices, government support, and institutional capacity. Unilever had been successful in building a certified supply chain in East Africa. Could it replicate this across the entire supply chain?

The Certification of Unilever's Estates in East Africa

The Unilever estates in Kenya and Tanzania were the first sites to he certified. Unilever had actively worked to maximize¹ long-term yields and to control costs ever since planting commenced on the 13,000-hectare estate²⁰ in Kericho, Kenya, in 1928. For example, the estate left tea hush prunings on the field to rot, rather than removing them as waste or for use as firewood or cattle food; this practice maximized soil fertility and water retention. The estate also carefully managed its fertilizer use. Fertilizer was not only expensive hut also a potential threat to soil quality if mismanaged. On­site hydropower provided reliable electricity at one-third the cost of power bought from the Kenyan grid, and the tea was dried using wood sourced from fast-growing eucalyptus forests planted on the edge of the estate. In contrast to estates in Asia, Kericho was able to minimize¹ use of agrochemicals and other pesticides because of the favorable climate and appropriate management of the surrounding land, which was home to natural predators of many pests.

The Kericho estate also invested in the health and well-being of its 16,000 employees and their dependents. The employees, who were paid a fixed sum per kilo of tea plucked, typically earned two- and-a-half limes more than the local agricultural minimum wage. In addition, Unilever provided them free access to company housing and health care, including the company's hospital and pharmacies, and the employees' children were educated in company-owned schools.²¹ The company had recently invested €1.2 million to update many of these facilities.

The Kericho estate achieved some of the highest yields in the world, with annual yields of 3.5 to 4 tons per hectare, compared to an average of 2 to 3 tons per hectare in India. At the Unilever estate in Tanzania, which followed similar practices, the yields were 3 tons per hectare compared to less than 2 tons per hectare in the rest of the country. "The sustainability work we did at Kericho made good agricultural sense, and in the long run it also made good financial sense," explained Richard Fairburn, former managing director of Unilever Tea East Africa. "We understand that this is simply the way the industry needs to operate in order to survive and thrive."

To further increase the supply of certified tea, Unilever identified a priority list of its larger supphers in Africa, Argentina, and Indonesia. Many of these estates were already professionally managed and were certified following adjustments to existing practices using available tools.²²

Working Down the Supply Chain

Initial success with smallholder farmers in East Africa Certifying the 500,000 Kenyan smallholders from which Unilever purchased tea was a critical component of the Rainforest Alliance rollout because East Africa alone accounted for nearly one-third of Unilever's total tea requirement. Fortunately, Unilever was able to work with the Kenyan Tea Development Agency (KTDA) and with the IDH, the Dutch Sustainable Trade Initiative, to design a program that "trained the trainers" and led to the rapid diffusion of sustainable farming practices across the country.

The KTDA was a highly respected farmer's cooperative covering 62% of all Kenyan production through 59 factories. Its goal was to help local farmers receive better prices as well as to provide training and other extension services. In 2011, Unilever bought approximately 40% of KTDA's production.²³ Unilever worked with the KTDA and the Rainforest Alliance to educate the locally elected lead farmers who did the bulk of the smallholder training. Each factory elected 30 to 40 lead farmers, each of whom received approximately three days of training. International donors like IDH covered most of the training costs, hut the KTDA was ultimately expected to take over this responsibihty, estimated to be about €1 to €2 ($1 to $3) per tea farmer.²⁴

Each lead farmer was to train approximately 300 other farmers through group and individual training, focusing on hands-on demonstration of sustainable agricultural practices. The meetings could also be a way to increase awareness of the potential price premiums paid for Rainforest Alliance-certified tea. The certification criteria were broken down into easy-to-communicate, actionable activities, and the Rainforest Alliance helped develop simple posters and checklists that the lead farmers could distribute (see Exhibit 9 for an example). The process was designed to be very participatory. The KTDA's extension officers, who also received training, provided further technical support.²⁵

The certification process was organized at the factory level. For the external audit, the Rainforest Alliance or an authorized third party checked compliance with a sample of farmers at random. Before this, each farmer was also internally audited by a lead farmer, hut never the same lead farmer who had trained him. Lead farmers received modest financial support in the first year to cover the costs associated with their efforts.

Most of the changes expected of farmers did not require huge changes in practice or much investment. For example, getting farmers to leave their prunings in the field (to improve¹ soil quality), rather than removing it for use as firewood, required persuading them to plant trees for fuel. Tree seeds were very cheap, and Unilever subsidized the cost. It also encouraged farmers to make compost from organic waste, rather than burning it, and make better use of waste and washing water.

Some changes were expensive. For example, the Rainforest Alliance standards required the use of personal protective equipment for the spraying of (approved) pesticides. This could cost up to $30, half a month's salary for a smallholder.²⁶ However, the KTDA set up its own micro-credit scheme to assist farmers with these kinds of purchases, and in some places, the local smallholders had pooled money to buy a single set of equipment that they shared.²⁷ A Unilever pilot study in 2004 showed that total net investments were less than 1 % of total cash farm income for the first year.

Many of the farms saw yield gains of 5% to 15% from the implementation of more sustainable practices, improvements in the quality of the tea, and reductions in operating costs, as well as higher prices for their tea. Average income increased by an estimated 10% to 15%. Unilever also felt that sustainable practices would help farmers better adapt to the climatic changes, like abnormal rainfall

patterns, that many locals were already experiencing.²⁸ But, according to Fairbum, the most salient benefit to farmers was their personal empowerment: "The Kenyan smallholders are ultimately interested in creating a farm in good health that can be passed on to future generations. That was the 'sustainability' that resonated with them."

By 2011, the Rainforest Alliance had successfully certified over one-third of the smallholder farmers in Kenya, and Unilever was confident that eventually all Kenyan smallholders would gain certification. One encouraging sign was that some of the first groups to become certified had since independently renewed their certification.²⁹ Whether this model could be rolled out to other tea­growing regions like Turkey and India was, of course, still in question.

Marketing the Sustainable Message to Consumers

While Unilever's procurement organization took the lead on sustainable sourcing, Leijnse's major task was to explore whether and how the company's commitment could be translated into increased sales or market share. This effort was complicated by the fact that Unilever had a portfolio of tea brands, each with its own distinct brand proposition. Leijnse had responsibility for Lipton, the largest of the brands, hut he needed to work closely with his fellow brand managers across the category to frame appropriate messages and to communicate them well. His research suggested that an increasing number of consumers were interested in a brand's ethical position and that credible action could change consumer preferences, hut no one believed that any of Unilever's tea brands should become "green" brands. "Certification was never approached as green marketing, hut rather as a new marketing message for consumers," explained one manager involved with the U.K. campaign. "Consumers aren't choosing our product because it's green, hut because this new message was aligned with their expectations for our brand."

Retailers were very supportive of the certified tea—some even demanded it—since the product was well ahgned with the retailers' own sustainability initiatives for their businesses and supply chains. Despite this, none of the brand managers wanted to charge a premium for sustainable tea. Instead they hoped to use certification to boost brand equity and, possibly, market share.

The Early Successes of the Rainforest Alliance Initiative

Unilever launched the Rainforest Alliance certification with full-scale marketing campaigns for all of its biggest Western European and Australian tea brands, including Lipton Yellow Label, PG tips, and Lyons. In some markets, the campaigns had significant success. In others, however, the impact was much more limited.

The PG tips success The U.K. market was a large and important one for Unilever, representing just under 10% of the firm's tea production. The almost €990 million^d (£850 million) market was dominated by two major brands, PG tips and its rival, Tetley Tea, each of which had roughly a quarter of the market.³⁰ PG tips was a classic, black tea blend, with few line extensions.

Unilever saw the U.K. as a progressive country in terms of environmental policies. However, while Unilever's research suggested that the mass-market consumers were aware and concerned about "sustainability issues," broadly defined, they were not interested in paying more for green products. The PG tips brand was a mass-market, working-class brand that held a place in the everyday lives of its consumers, who were, in general, middle aged and middle income. The brand

^d Using exchange rate of €1 = £0.86 as of December 2, 2011.

proposition was one of sociability, family, and lightheartedness. This was captured in its ad campaigns, which were infused with offbeat British humor.

In 2008, PG tips was the only brand on the market proposing any sustainability differentiation. The marketing team treated the initiative as a major brand innovation and devoted its entire €12 million (£10 million) marketing spend in the launch year 2008 to promoting the efforts. Previous U.K. experience indicated that it took 12 to 18 months to address mental barriers and get the full message to consumers. The challenge for the PG tips team was to find a message that would resonate with its core consumers while maintaining consistency with the brand's core proposition. "It was a huge challenge," explained Neil Gledhih of the PG tips campaign. "We had to talk to mainstream consumers in a way that explained a complex topic without preaching, ah in a language aligned with the brand."

The chosen message, "do your bit: put the kettle on," emphasized the positive action that consumers could take by drinking PG tips. The campaign tried to keep the lighthearted spirit of the brand's previous campaigns and used its well-established characters: a talking monkey called Monkey and a working class man named Al. In one of the ads, for example, Monkey, presenting a shde show in the kitchen, explained to Al what certification meant, and how easy it was for him to do the right thing (see Exhibit 11 for sample ads). The campaign used TV and print, as weh as a short movie that was shown as a preview in cinemas and was ultimately included as a DVD in special promotion packages along with a tea towel. Packaging was also changed to include the certification seal and a description of the alliance.

Prior to the campaign, PG tips and Tetley Tea were bathing hard for the top spot in the British market. However, following the campaign, PG bps developed a significant lead in market share, which increased by 1.8 points, while Tetley remained relatively hat; the purchase repeat rate increased from 44% to 49%. Sales of PG tips increased by 6%. Surveys suggested that following the launch of the campaign, there had been a steady increase in the perception of PG tips as an ethical brand.

"Project Sunshine": the Australian success Like the U.K.'s tea market, Australia's market was relatively straightforward, with only a handful of available products and most of its sales in black tea. Before the launch of the campaign in 2009, the Lipton brand held nearly a quarter of the €260 milhon^e (345 million Australian dohars [A$]) market. Unilever's other brand, Busheh's, had an approximately 13% share of the market. The local team chose the phrase "Make a Better Choice with Lipton, the world's first Rainforest Alliance Certified tea," and because of the relatively small portfolio, implemented it across the majority of the products. The team felt that the phrase was aligned with the existing brand vision, which had been "Drink Better, Live Better," an attempt to increase the perceptions of quality and the health benefits of the Lipton brand. The €1.1 million (A$1.4 million) campaign covered television, print, and public relations. Unilever also supported the initiative with in-store promotions. It changed packaging to include the Rainforest Alliance seal on the front of the package, with further explanation of the initiative and its benefits on the back and sides. Customers were not charged a premium for certified tea, since surveys had found that higher prices were a perceived barrier to sustainable consumption. Relahve to the same test period the year before the campaign, sales were up 11%, and Lipton's market share rose by 158 basis points from 24.2% to 25.8%. Average purchase value per occasion rose from €3.11 to €3.23 (A$4.10 to A$4.25). The only area where the Lipton brand did not improve¹ was in perceptions of quality, which decreased shghtly during the campaign.

Full activation in Italy: The Italian tea market was estimated to be approximately €285 million in 2010. Unilever's share was approximately 12%.³¹ The Italian marketing team supported the certification with a €3 million mixed campaign of television, press, online, public relations, in-store promotions, and packaging updates. The team chose the message, "your small cup can make a big difference." Following the first year of the campaign in 2008, Lipton saw sales of its Yellow Label brand increase by 10.5% and market share increase by over two full percentage points. It also witnessed an increase in its buyer base, which came mostly from younger and more upmarket consumers. The team continued to support the campaign with in-store promotion in 2009 and a web and editorial partnership with Italy's National Geographic magazine in 2010, all of which cost €250,000.

The French market disappointment In 2010, Lipton had a 37% market share in the €430 million French tea market.³² Lipton's main competition came from retailers' private-label brands, which accounted for 30% to 40% of sales. In France, Unilever's portfolio was more diversified than in other countries: Lipton sold over 40 different tea products. Whereas in the U.K. and Australia, Unilever had been able to carry the certification message on the majority of its products, in France, it was initially only linked to the Lipton Yellow Label black tea product, representing only about a fifth of sales.

The first wave of the campaign in France retied heavily on a significant public relations effort to educate consumers and customers (i.e., the retailers) and inform them of Lipton's certification efforts. The team focused on engaging key opinion leaders and journalists with press releases, media and press conferences, and trips to the Kericho estate in Kenya. The press widely covered the brand's efforts, and the team members felt that they had made significant inroads in attracting attention. Print ads with the message "your tea can make a difference" were placed in travel and cooking magazines and were primarily focused toward current consumers, who tended to be female and over the age of 50.

The loam's research had suggested that French consumers were less likely to buy box of tea with a Rainforest Alliance seal on it. This reluctance appeared to reflect a dislike of changes in packaging rather than any lack of concern for environmental issues, hut as a result, the team chose a staggered approach to package change, whereby certification was initially announced only on the inside of packages before being added to the back. Only in 2010 did the seal start to appear on the front of the packages. This made it harder for consumers to link advertising support to the product they were seeing on shelves.

The campaign received TV support in 2009 and 2010, and held an online competition, in which the winners won a trip to Kenya, which was intended to engage consumers and bloggers. The limited television advertisements that ran in the fourth quarter of 2009 and the first quarter of 2010 contained scenes of sustainable farms in Africa, as well as information about the Rainforest Alliance (see Exhibit 11). In total, only 10% of the team's marketing spend went toward supporting the Rainforest Alliance message, with the remainder going toward more conventional promotion and support of other innovations. Lipton market share remained flat, and awareness of the brand did not increase. Further, the campaign was not successful in linking Lipton to the Rainforest Alliance, and Lipton was not seen as more ethical than other tea brands.

The U.S. experience The U.S. tea market was an almost €1.5 billion ($2 billion) market in 2010.³³ Unilever launched its U.S. campaign in the summer of 2009 with a particular focus on the brand's green tea line, where Lipton was second in the market. The mainstream black tea range was not linked to the Rainforest Alliance initiative. Company research had shown that 80% of U.S. consumers wanted to buy eco-ethical brands, although without sacrificing cost or quality. Only 5%

were willing to pay a premium. The message used was "Your Small Cup Can Make a Big Difference," although Unilever also had other messaging for its ready-to-drink beverage line running concurrently. To generate credibility, Unilever allowed National Geographic to create independent TV, print, and online content about the certification, which was published between June and September 2009. The campaign was also supported by a sponsored trip to the Kericho estate for three online bloggers and journalists, as well as advertising in online and social media. It changed the packaging to include the Rainforest Alliance seal on the front and information about certification on the side and flap of the package. A retail partnership with Walmart and Sam's Club provided information and positive images at the point of purchase, which helped reinforce perceptions of health and quality benefits (see Exhibit 13 for examples of in-store promotions). The marketing team's analysis indicated a strong ROI for the €740,000 ($1 million) campaign; however, given the size of the business, the investment was relatively small. Unilever did not see any significant effect on overall market share for Lipton or the Rainforest Alhance-certified green tea.

Challenges Going Forward

A few years after the launch of the certification scheme, many of Unilever's major competitors responded with their own certification programs. Tetley, Twinings, and Yorkshire Tea all made arrangements for some or all of their tea suppliers to obtain Rainforest Alliance certification, while Pickwick and Carmien Tea opted to use UTZ, a certification scheme originating in The Netherlands. Yorkshire Tea announced a goal of selling 100% Rainforest Alliance-certified tea by 2015.³⁴ Twinings had goals of 100% certification by 2015 for its Everyday brand tea.³⁵ Tata's Tetley Tea vowed to have 100% of its branded tea certified by 2016, a year after Lipton.³⁶ The surge in demand placed pressure on the Rainforest Alliance, which expected to be certifying close to 20% to 25% of the world's tea supply by 2015.³⁷

The Emerging Market Challenge

With competitors committing to third-party certification, sustainable tea at Unilever faced a number of challenges going forward. On the supply side, the company had to improve farming practices in some very difficult markets in order to meet the company's targets. On the marketing side, Leijnse and his colleagues had to decide how to proceed in emerging markets. Could consumers in countries like Turkey, Russia, or India be persuaded to value certified tea? If so, how? And how could Lipton maintain a point of difference in countries where competitor brands had followed suit?

Reaching 100% Sustainable Sourcing

In 2011, Unilever sourced approximately 25% of its global tea requirement from India; most of India's tea was consumed domestically. Some Indian tea growers had already achieved Rainforest Alhance certification, hut they were generahy exporters and Unilever purchased a significant share of their production. Converting smaller domestic producers to sustainable practices presented (at least) two tricky challenges. First, developing an organizational model that could handle training and rohout was likely to be difficult. A large proportion of India's tea was grown by smallholders who sold to local tea factories. However, in contrast to the situation in Kenya, there were no government- sponsored tea cooperatives, and farmers were free to seh to any factory. Some factories did provide extension services and training for their farms, hut the quality of these services varied dramatically.

Second, farming practices in India were in conflict with the Rainforest Alliance over two main issues, child labor and pesticide use. The standards did not permit certified farms to employ anyone under the age of 15, hut Indian law and the United Nation's International Labor Organization permitted the employment of 14-year-olds in developing countries. Moreover, in India, the pesticide Paraquat was widely used in tea production. It was quick and effective, hut it was also highly toxic when ingested or if absorbed by a person without protective equipment.³⁸ It was implicated in many suicides in the developing world due to its low cost, potency, and widespread availability. The European Union banned the use of Paraquat, hut the U.S. allowed its use, with restrictions.³⁹ Rainforest Alliance standards did not permit its use, and since the ban on Paraquat was one of its critical criteria, it could not make exceptions by country.⁴⁰

Unilever could potentially address these issues by introducing an alternative standard tailored to India's local practices. This standard could act as a stepping stone toward future certification. Unilever would almost certainly need partners to transform Indian tea growing. One option was to work with local NGOs, as it had in Kenya; another was to implement industrywide initiatives.

Marketing in India and Other Emerging Markets

Getting the messaging right in India would he another important challenge. Tea was the traditional hot beverage of India, and the market was estimated to be €1 billion^f (RS 64.6 billion), with Unilever the market leader with a share of around 30%. Demand for tea was robust, with the market growing an estimated 12% per annum by value and 3% per annum by volume from 2005 to 2010. The demand for tea had actually outstripped the growth in national tea production, resulting in tea price increases in 2010.⁴¹

Approximately two-thirds of the market, by volume, was sold as unbranded loose black tea (in bulk). Only one-third of the market was branded tea, which was almost exclusively loose black tea in packets. Tea bags represented less than 2% of the market, but were a growing segment. Green tea was another high-growth category, particularly in urban areas, because of its perceived health benefits.⁴² Almost three-quarters of all tea was still sold through independent small grocers, but supermarkets and hypermarkets had begun to slowly increase their share as rising incomes began to shift consumers' buying behavior. Branded coffee shop chains had also become popular, particularly with young Indian consumers, who increasingly viewed tea as an old-fashioned beverage.⁴³

Unilever's Indian subsidiary, Hindustan Unilever, sold mostly through two major brands, Brooke Bond and Lipton, which had market shares of 19% and 6%, respectively, in the branded tea market. Its main competitor was Tata Global Beverages, which had a market share of 26%, mostly under its Tata Tea brand, which had almost 20% of the market by retail value.⁴⁴ But Unilever also faced competition from regional tea companies, which took pride in tailoring their blends and preparation methods according to local preferences and which often competed aggressively on price.

Under the Sustainable Living Plan umbrella, Hindustan Unilever had begun to introduce products designed to improve¹ the quality of life of India's poorest consumers, including new, highly effective hand soaps and a range of water purifiers. (See Exhibit 12 for an illustration of the plan.) The company had also been marketing Surf Excel, a concentrated laundry detergent, which required two fewer buckets of water for washing than competing products.⁴⁵ The company believed that if the environmental issue was tangible and had an immediate local impact, people's awareness and

f Using exchange rate of €1 = RS 69.6 as of December 2, 2011.

appreciation of the issue was generally high. But it was less clear if Unilever could communicate the comparatively distant benefits of sustainable tea farming.

Leijnse wondered whether the company's recent experience in Turkey could provide any lessons. In Turkey, the tea-growing industry played a prominent role in national cultural identity, and the Turkish loam had chosen a message that suggested that certified tea offered national benefits, highlighting gains to domestic producers, as well as to the country's tea crops (see Exhibit 8 for sample packaging in Turkey). Should Leijnse attempt something similar in India?

He also had to consider how tea could be marketed in emerging markets where there was no tea­growing base. One such example was Russia, where Unilever had a 16% share of the almost €3 billion!’, (115 billion rubles [RUB]) market in 2010. Tea was a traditional Russian drink consumed by almost everyone.⁴⁶ A domestic tea manufacturer led the market, and while volume growth had been limited, sales in the market had been growing at close to 15% since 2005, as consumers switched to more expensive varieties of tea and as the major Russian brands continued to expand the range of their offerings.⁴⁷ Could Unilever's sustainable tea platform serve as the basis for product differentiation that would drive growth and market share in Russia? Or should Unilever forgo any promotion of sustainability and instead focus on other ways of competing in the Russian market?

Concluding Thoughts

With the launch of Rainforest Alliance certification in 2007, Unilever had started the transformation of the tea industry and improved the lives of hundreds of thousands of farmers. It had also demonstrated that in certain markets, certification could increase market share. However, with most major tea manufacturers implementing aggressive certification targets of their own, it appeared that sustainability might, at least in Western markets, become increasingly more a cost of doing business and less a source of competitive advantage. Unilever needed to decide not only how to ensure that 100% of its supply chain could he sustainably sourced, hut also how that message could be communicated in a diverse group of emerging markets.

Leijnse also needed to decide how far he could push sustainability in the brand. If Unilever were to reach its targets under the Sustainable Living Plan, it would eventually need to sustainably source all agricultural raw materials, including the paper and board used for the tea packaging and tea bags (see Exhibit 10 for its agricultural raw materials by volume). Could it communicate this to consumers in a useful way?

Looking across Unilever, Leijnse wondered if his experiences in tea had anything to contribute to marketing managers grappling with the potential benefits of 100% sustainable sourcing. From a marketing perspective, tea and the Lipton brand had been an obvious place to start addressing sustainability, given the tight link between the raw material and the end product. The same could not be said for many of the other raw materials that Unilever purchased. For example, Unilever was the world's largest buyer of sustainable palm oil, and it had committed to ensuring that all its purchases came from sustainable sources by 2015. Consumers did not ultimately buy sustainable palm oil, hut rather, products that contained it, such as soap and edible fats. Unilever was uncertain whether to make consumers aware of its efforts. Moreover, Leijnse had experienced increased attention and criticism from activists since launching the Rainforest Alliance partnership; would the Sustainable Living Plan potentially make Unilever a bigger target for scrutiny? Were there any lessons that could be learned from Lipton?

“Sustainable Tea at Unilever” 

1) Why did Unilever commit to sustainably source 100% of its tea? 

3) What should Unilever do with its tea business in India? Should it pursue Rainforest Alliance certification? Should it market sustainable tea to consumers?

UBS and Climate Change—Warming Up to Global Action?

UBS and Climate Change—Warming Up to Global Action?

Marco Suter, executive vice chairman, UBS Board of Directors, carefully studied the chart on his desk. It showed the public commitment of major financial institutions to help mitigate global warming (see Exhibit 1). Evidently, UBS lagged behind its competitors. The graph was part of a report that environmental specialists and senior executives at UBS had compiled. It suggested the company adopt a more progressive policy on climate change. Suter thought about the options that the working group had generated. These ranged from stabilizing the company's current carbon emissions to complete carbon neutrality (see Exhibit 2). He felt it was possible that climate change would become an important issue for financial services companies in the future:

Think of a superstar soccer player. What distinguishes the superstar from the average player? The superstar is not running after the ball, he is anticipating where the ball will be. This is the role of corporate responsibility at UBS. We are not focused on our current legal and ethical obligations. These we meet as a matter of course. As chairman of the UBS Corporate Responsibility Committee it is my job to anticipate what stakeholders will expect from us in the future. Which of these expectations will pose risks? Which ones will open up new business opportunities?

The report also included figures on the cost of reducing carbon emissions, but Suter did not view these as central:

It is difficult to measure the benefit of corporate responsibility, and we currently do not do it. This is a question of leadership. Corporate responsibility is a part of our strategy; it is a part of what we believe in.

The UBS Corporate Responsibility Committee would meet early next week. Suter wondered which option he should support.

UBS

UBS AG, headquartered in Zurich and Basel, Switzerland, was one of the world's leading financial services companies, offering wealth and asset management as well as investment banking services internationally, and retail and corporate banking in Switzerland.¹ UBS managed 2.65 trillion^[3] Swiss francs (CHF) in invested assets, had offices in more than 50 countries, and employed 70,000 people worldwide. The company established a strong presence in the U.S. after purchasing the brokerage PaineWebber in 2000. UBS was listed on the New York, Swiss, and Tokyo stock exchanges and had a market capitalization of CHF 131.9 billion on December 31, 2005. Since 2000, the firm had significantly outperformed other global financial services companies such as Citibank, HSBC, and its hometown rival Credit Suisse (see Exhibits 3 and 4). UBS served high-net-worth individuals, corporations, and institutional clients via three business units: Global Wealth Management & Business Banking, Global Asset Management, and Investment Bank.

Global Wealth Management & Business Banking

Global Wealth Management & Business Banking (GWMBB) served private investors and corporations. The unit earned CHF 6.7 billion in income (before taxes) in 2005. It accounted for 38% of UBS's total operating income and 51% of the firm's operating profit.² Since 2000, the unit had grown organically and through a series of acquisitions. Higher fee income came from an increased number of sophisticated investment vehicles such as real estate and hedge fund products. The firm had also purchased nine deluxe money-management firms that catered to ultra-high-net-worth customers.³ By 2006, UBS was the largest wealth manager in the world, with a 3.5% share of the CHF 50 trillion GWMBB market.⁴

GWMBB was divided into three units. Advisors in the Wealth Management International & Switzerland division served wealthy Swiss and international clients excluding those from the United States. Nearly half of the division's clients invested at least CHF 10 million with UBS.⁵ While a majority were European (26% hailed from Switzerland and 41% were from the rest of Europe), the division was also the leading wealth manager in the Asia Pacific region (excluding Japan), and it held a strong position, after Goldman Sachs, in the emerging markets of Brazil, Russia, India, and China.⁶

Wealth Management US competed with Citigroup Smith Barney, Morgan Stanley, and Merrill Lynch to advise high-net-worth individuals in the U.S. From 2000 to 2005, the company's share of the U.S. private wealth management market had increased from 13.2% to 15.8%.

The Business Banking Switzerland division provided traditional banking services in Switzerland. It managed CHF 153 billion in invested assets and CHF 141 billion in loans, 83% of which were mortgages. UBS was the top bank in Switzerland, serving 2.6 million individuals and approximately 137,000 corporations. It had about a 25% share of both the individual savings and mortgage markets.⁷

Investment Bank

Headquartered in London and New York and employing over 18,000 people in 34 countries, the UBS Investment Bank earned a profit of CHF 5.2 billion (before taxes) on an operating income of CHF 17.5 billion in 2005. The investment bank's mergers-and-acquisitions (M&A) business grew particularly quickly, doubling its worldwide share between 2002 and 2005. UBS participated in 295 deals worth $314.8 billion for a market share of 13.9% in 2005.⁸ These deals included some of the largest in the industry. For example, UBS was the financial advisor to Gillette when Proctor & Gamble purchased the company for $57 billion in 2005.

Global Asset Management⁹

In 2005, the Global Asset Management business earned a profit of CHF 1.06 billion (before taxes), managing CHF 765 billion of invested assets. The largest manager of mutual funds in Switzerland and the second largest in Europe, the unit offered clients traditional investment vehicles (e.g., equities and fixed income), alternative and quantitative investments (e.g., hedge funds), and real estate investment options. Its institutional clients included public pension plans, municipalities, and central banks. Global Asset Management competed with businesses such as Fidelity Investments and Merrill Lynch Investment Managers as well as local and regional companies.

Corporate Responsibility at UBS

UBS had taken corporate responsibility (CR) seriously for some time.¹⁰ For example, the company was among the first to sign the Bank Declaration of the United Nations' Environment Program, committing to conduct its business in an environmentally responsible manner. CR efforts had further gained in prominence in recent years, Chairman Marcel Ospel explained:

The numerous recent corporate scandals have sent shock waves through the global economy and pushed "responsibility" up the agenda. As tends to happen in these situations, a large number of organizations have taken the issue on board, and it is clear that clients, the media, and financial analysts in particular are now paying greater attention to this aspect of corporate management.

For the UBS leadership, "responsible behavior" was an important part of the company's culture, identity, and business practice. Defying Milton Friedman's notion that there was one and only one social responsibility of business—"to use its resources and engage in activities designed to increase its profits"¹¹—UBS pursued a broader mission. Ospel explained: "For us, behaving responsibly sometimes means moving beyond solely profit-oriented considerations and legal requirements." UBS management was in good company. A 2005 McKinsey study of more than 4,000 executives in over 100 countries had found that more than 80% of respondents believed that corporations should balance their obligation to shareholders with explicit contributions to "the broader public good."¹²

Principal Activities

UBS's CR activities focused on four areas: the internal work environment, client relationships, the communities in which UBS conducted its business, and the natural environment.

Client relationships UBS strove to develop expertise in incorporating environmental and social aspects into its research and advisory activities. In 2004, it established an equity research desk to monitor the rankings of socially responsible investments (SRIs) and produce original research. By 2005, UBS managed SRIs valued at CHF 46.89 billion, about 2% of all invested assets. In its approach to SRIs, the company distinguished among three classes of products. Funds using positive criteria selected companies with a superior social track record (1.7% of SRIs). A second type of fund excluded problematic industries such as weapons or tobacco (15.7%). This approach was particularly popular in the U.S. In its most significant class of SRIs (82.1%), UBS actively engaged management, trying to influence the corporate behavior of the companies in which it invested. The Global Asset Management unit in the U.K. was particularly active in this regard. On average, the UBS SRIs tended to slightly outperform broad market indices. In 2004, for example, the performance of these investments exceeded the MSCI World Index by 1.3%.^[4]

Communities UBS management believed that the company's success depended not only on the skills and resources of its employees and the relationships with its clients but also on the health and prosperity of the communities in which the bank operated. To support these communities, UBS made annual cash donations on the order of CHF 50 million, mostly for educational and environmental projects.

Environment UBS carefully tracked the impact of its business operations on the natural environment. Under its global environmental management system, which was certified by an independent auditor using the ISO 14001 standard, the company sought to manage the impact of its business operations on the natural environment. UBS produced an annual environmental report that documented these impacts (see Exhibit 5). Environmental reviews were also a standard part of the bank's risk management systems.

In recognition of the company's efforts, UBS was included in the Dow Jones Sustainability Group Index (DJSGI) and the FTSE4Good Index. Both indices attempted to identify companies that met globally recognized corporate responsibility standards. Whether the indices succeeded was a matter of dispute.¹³ Flarvard University Professor Michael Porter and Mark Kramer, managing director of FSG Social Impact Advisors, for example, argued that the groups that created these indices lacked the resources to audit companies and that they relied on easy-to-observe but questionable indicators to measure social performance.¹⁴ While UBS management understood these issues, competition among firms for inclusion in the indices was nevertheless seen as positive. Markus Jaggi of UBS Communications explained:

DJSGI and FTSE4Good provide good examples of how companies can track their performance against peers in the area of corporate responsibility. The indices also act as a discipline and an incentive for companies, since those that fail to meet the criteria of the indices lose their place, and other companies can always strive to enter the indices by improving their performance in the areas under assessment.

CR Effects

UBS, a sophisticated marketer that received a prestigious Ogilvy Award for the research underlying its 2005 "You and Us" campaign, carefully measured the economic effects of its brand. In surveys, the company tracked the relation between the popularity of its brand and consumers' knowledge of UBS sponsoring activities. UBS marketers also studied the likelihood that respondents would become UBS customers after learning of the bank's sponsorships. In contrast, as of 2005, the company did not measure the economic effects of CR. "We don't know to what extent CR activities influence the value of our brand," said Oliver Loch, UBS global head of brand research. Fie added, "We also don't know how our customers feel about CR. Do they really want us to support the communities in which we operate?"

Organization

Unlike many other companies, which assigned CR activities to the general counsel's office or communications, UBS had created a special Corporate Responsibility Committee. In its activities, the committee relied on the input of business groups and corporate functions (risk, communications, ¹³

legal, HR) (see Exhibit 6). The committee's task was to judge how UBS could best meet the ever- evolving expectations of its stakeholders. Suter outlined the task:

If the CR Committee comes to the conclusion that there is a gap between what our stakeholders expect and what we practice—and that this gap represents either a risk or an opportunity to the firm—the committee suggests appropriate measures to management, which is then responsible for implementing solutions.

The CR Committee comprised many of the company's most senior managers. In addition to Suter, there were two other members of the board of directors, and four members of the group executive board, including Peter Wuffli, the group CEO. The involvement of top managers reflected a deeply held belief. "Corporate responsibility is a function of management at all levels. One cannot simply delegate one's responsibilities to an expert body," explained Mark Branson, chief communication officer. Suter agreed:

Our commitment to corporate responsibility must be a matter of conviction, not something that is driven primarily by reputation-related considerations. We must do what we believe to be right, what ties in with our corporate culture and, ultimately, what is right for the UBS name.

Climate Change^[5]

While the earth's climate had not changed much since the Industrial Revolution—the average surface temperature rose by only 1.1 °F during this period—industrial activity had substantially increased levels of carbon dioxide in the atmosphere, from 280 parts per million (ppm) before the Industrial Revolution to 380 ppm in 2005 (see Exhibit 7).^c The most important sources of CO, and other greenhouse gases were electricity generation (24.5%), deforestation (18.2%), agriculture (13.5%), and transport (13.5%). These gases had formed a layer that trapped a part of the sun's heat, hence warming the planet. Svante Arrhenius, a nineteenth-century scientist and winner of the Nobel Prize, was first to speculate about the link between CO, concentrations and increases in temperature.^[6] Because he was from Sweden, a warmer climate seemed just fine to him. But by 2005, many scientists were deeply concerned about the prospect of global warming. At current trends, CO, concentrations would reach 800 ppm by the end of the twenty-first century, and the Intergovernmental Panel on Climate Change (IPCC) expected the average global temperature to increase by 2.5°F to 10°F during this period.^[7]

Predicting long-run changes in climate, however, was exceedingly difficult. The earth's climate system was complex, with many poorly understood feedback loops. For example, melting ice decreased the planet's albedo, leading to quicker warming.^d In a similar vicious cycle, warmer oceans absorbed less CO,. In 2005, scientists agreed that global warming had the potential to seriously affect the earth's ecosystem. Some of the direst consequences included a shutdown of the Gulf Stream and a rise in sea levels. The Gulf Stream carried warm, salty water from the tropics to the north Atlantic, leading to a milder climate in northern Europe.^e As the stream approached the Arctic, it cooled down and began to sink because its salty water was heavier than the surrounding waters, thus keeping up the stream's circulation. Melting Arctic ice, scientists feared, could dilute the

Gulf Stream, reduce its salt content, and lead to its slowing or perhaps even a shutdown. This was more than a theoretical possibility. The Gulf Stream had come to a standstill about 8,000 years ago when a sudden flood of fresh water from a North American lake poured into the north Atlantic. If the Gulf Stream shut down, the consequences could be grave. "You could have icebergs around Britain," said David Griggs, director of climate research at Britain's Met Office.¹⁸ Other scientists, however, predicted far less frosty consequences.

Rising sea levels were a second major concern. Melting Arctic ice would not have a big impact on sea levels because it was already swimming at sea. In contrast, ice in Greenland and Antarctica was sitting on land. If all of Greenland's ice melted, sea levels would rise by 23 feet. Recent data presented a complex picture. Sea levels were falling in the northern Pacific, the northwest Indian Ocean, and Antarctica. They were rising in the tropics and subtropics. Changes in water temperature as well as wind and land movements—the Northern Hemisphere was still bouncing back from the weight of long-melted glaciers—all contributed to fluctuating sea levels. Whether melting glaciers also played a role was an open question. Emma Duncan of The Economist explained:

Nobody knows what is happening to the mass balance of Antarctica. Greenland's does seem to be shrinking very slightly—by around 0.4 mm a year, in sea-level equivalent. That would be only 4 cm a century, if the rate stayed constant. But there is no reason to think that the rate will stay constant—nor, if it did accelerate, that anything could be done to stop it.¹⁹

Some scientists also maintained that warmer ocean temperatures contributed to the increase in the number of hurricanes. The Pew Center on Global Climate Change, for example, linked Katrina's development from a tropical storm to a Category 5 hurricane to the abnormally warm surface temperature of the Gulf of Mexico in the summer of 2005.²⁰

Given the complexity of predicting climate change, it was no surprise that scientists, policy­makers, and the general public varied in their opinions about the degree of warming, the intensity of its effects, and consequently the efforts that should be undertaken to mitigate them (see Exhibit 8). Economists struggled to predict the economic impact of climate change. One study, by Professor William Nordhaus, the father of climate-change economics, predicted that a 4.5°F increase in temperature would reduce global output by 3%.

Carbon Markets

Until the late 1990s, most companies and consumers were shielded from the cost of global warming. While taxes on energy consumption and transport were common, these charges did not reflect concerns about greenhouse gases. Even the increased risk of major storms, which could be expected to result in increased insurance rates, were hardly felt because governments kept prices artificially low. Commenting on insurance rates in Florida, Robert Muir-Wood of Risk Management Solutions quipped: "Communism survives in three parts of the world ... North Korea, Cuba and the American insurance market."²¹

Efforts to slow climate change gained momentum in the late 1990s when developed-country governments established the Kyoto Protocol, committing to decrease their greenhouse-gas emissions on average by 5% below 1990 levels before 2012. To achieve these goals in an efficient manner, governments set up a number of trading mechanisms, including the Kyoto-wide Clean Development Mechanism (CDM) and the European Emissions-Trading Scheme (ETS). As a result, UBS had various options to lessen its impact on climate change: reducing its own emissions and purchasing offsets in carbon markets.

Internal Reductions

A first possibility was to adjust activities in the company. UBS's carbon footprint showed that energy consumption (31% of the bank's electricity was produced from fossil resources) and business travel (UBS personnel took more than 300,000 flights annually) were by far the most important sources of emissions. Replacing flights with videoconferencing was one way to reduce the company's carbon footprint. In 2005, UBS held over 20,000 videoconferences, a 47% increase over the prior year. The company also strove to effectively manage its energy use. For example, when UBS renovated one of its buildings in Zurich, improved cooling, heating, and lighting systems resulted in 41% energy consumption savings. In London, UBS purchased climate change levy-free electricity, guaranteed to be generated from an energy source with lower emissions than fossil fuels.

Offsets

UBS could also purchase offsets to neutralize its own emissions. These offsets represented investments in third-party projects that reduced greenhouse-gas emissions. Several markets existed.

Certified emissions reduction units (CERs) These certificates came from carbon-reducing projects in developing countries. Often project-management companies such as Cameo and AgCert identified polluters and studied ways to cut emissions. Niche investment banks such as Climate Change Capital and Natsource acted as brokers and sold these projects to companies seeking to offset their carbon emissions. To facilitate trades, exchange markets were set up (European Climate Exchange, Nord Fool), and the World Bank organized a carbon fair in Cologne for bilateral exchanges. Carbon-reducing projects in poor countries were particularly attractive because the marginal cost of abating a ton of CO, was only $5 to $10. In 2005, the market price for CERs hovered around $20 (see Exhibit 9). The markup represented the substantial demand for CERs. Frices also reflected the decision of the Chinese government to levy a 65% tax on carbon-reducing projects in the country. In 2005, roughly two-thirds of carbon deals involved projects in China. While the country had been skeptical of carbon markets early on, arguing trading allowed richer nations to pay their way out of obligations to reduce emissions, China eventually warmed up to the idea of carbon trading. Jiang Weixin, a senior official of the National Development and Reform Commission, welcomed the opportunity to attract foreign investment:

Developed countries get opportunities to emit greenhouses gases at a relatively low

economic cost and achieve their emission reduction targets, while developing countries obtain

benefits such as funding and technology transfer.²²

Emission reduction units (ERUs) The company could also offset its emissions by purchasing ERUs. These certificates represented carbon-reduction projects in industrialized countries that had signed the Kyoto Frotocol.

Verified emission reductions (VERs) These voluntary certificates represented carbon- reduction projects that were traded in over-the-counter markets. The projects were verified by independent consultants, but they had not yet undergone the procedures for verification, certification, and issuance of CERs or ERUs. Because it was uncertain whether VERs would eventually qualify as CERs or ERUs, buyers tended to pay a discounted price for these certificates.²³

Froponents of market-based approaches argued that they allowed countries to cut emissions at reduced cost. The EU Commission estimated that ETS saved European companies €3 billion, one- third of the cost of Kyoto compliance.²⁴ On the other hand, critics of carbon markets saw these

institutions as an easy way out for polluters. Larry Lohmann of the U.K.-based nongovernmental organization (NGO) The Corner House explained:

[Offset] projects are merely supplementing fossil fuel use; they are not replacing it. The institutions most eager to set up offset projects—from the World Bank to Tokyo Power—are precisely those most committed to burning up more and more fossil fuel. Covering the land with windmills and biofuel plantations will be of little use unless fossil fuel extraction is stopped.²⁵

While they did not share these views, some UBS managers thought the bank should take them into account when deciding how to reduce its carbon emissions. Liselotte Arni, head of Group Environmental Policy, argued for this approach:

It is important that internal and external audiences understand the value of the program. While we obviously focus on cost-effectiveness, for example by buying offsets when break­even or in-house investments cannot be reached in a reasonable time frame, we also have to accommodate critical voices. People argue, "Banks are rich; they can afford to buy their way out of reducing emissions." So we need to optimize across climate change and the UBS reputation.

Competitors' Actions

In reviewing the UBS climate-change proposal, Suter thought about the policies that other banks had adopted (see Exhibit 10 for summary information).

Citigroup Citigroup served clients in more than 100 countries and managed over $1 trillion in assets.²⁶ The company's measures to protect the environment were part of its corporate citizenship agenda. Starting in 2002, Citigroup compiled data on energy use in its 13,000 buildings. Based on these analyses, the firm was refurbishing some of its U.S. facilities. Citigroup planned to purchase 10% of its electric power in the U.S. as green power through 2007. In 2004, Citigroup began disclosing the carbon emissions from power plants that it financed. Two years later, the company announced it would lower its greenhouse-gas emissions to 10% below their 2005 level by 2011.

Credit Suisse Credit Suisse Group (CSG), UBS's main competitor in Switzerland, emitted 450,000 tons of greenhouse gases in 2005. Most of these stemmed from its business travel and the use of electricity. In an initial step towards reducing its impact on climate change, in April 2005, CSG's Sustainability Committee approved a plan that called for all of the company's buildings in Switzerland to be greenhouse-gas neutral by 2006. CSG also ordered 243,000 tons of carbon credits for 2006-2008 so that its operations in Switzerland and its business flights out of Switzerland would be carbon neutral. The firm expected to spend CHF 2.2 million on certificates.²⁷

HSBC HSBC Holdings, the world's largest bank by assets, led the banking industry in its commitment to mitigate climate change. In December 2004, HSBC committed to neutralize 100% of its carbon emissions by purchasing green electricity and offset certificates. It accomplished this goal ahead of schedule in September 2005. HSBC's offset credits came from a wind farm in New Zealand, an organic waste composter in Australia, an agriculture methane reducer in Germany, and a biomass co-generator in India. The average price of each metric ton of offset was $4.43. In mid-2005, HSBC pledged to reduce its carbon emissions by another 5% by 2007, and it set up a Carbon Management Task Force to oversee the project.²⁸ HSBC's efforts were widely recognized. The Financial Times

named HSBC as the top bank in its first Sustainable Banking Awards for "its leadership in merging social, environmental and business objectives."²⁹

Morgan Stanley Investment bank Morgan Stanley began trading carbon credits in 2004. It hoped to acquire deals valued at over $3 billion in the next five years. "We strongly support the use of market-based solutions to meet environmental policies and objectives," said Simon Greenshields, managing director and global head of power at the company.³⁰

Competing Issues

Climate change was not the only issue on Suter's desk. All types of environmental impacts as well as the alleged tax evasion among the wealthy and human rights were other concerns. Suter explained:

NGOs use the globalization process to export rich-country standards to the rest of the world. There is a trend to make financial institutions responsible for their "sphere of influence." Some groups think we are accountable for all the activities that we support financially. Take the Global Compact, a United Nations initiative, as an example. The compact asks companies to make sure they are not "complicit in human rights abuses." What does complicity mean? And where does our responsibility end?

Which issues and groups UBS should address was a complicated question. Christian Leitz, NGO facilitator at UBS, explained: "The issues that NGOs bring up can certainly not be ignored. These groups are increasingly concerned about the activities of financial services providers; their expertise in financial-industry issues has grown markedly in recent years. It is therefore important both to monitor NGO activities and to engage in constructive dialogue."

Many analysts pointed to the important role of the media in bringing particular problems to the attention of the public. But this simply begged the question why the media reported on some issues and not on others. Professor David Baron of Stanford University argued that the media's stance depended on the societal significance of a topic and on intrinsic audience interest in the matter.³¹ Rating an issue on these two dimensions, Baron believed, could help predict the response of the media (see Exhibit 11). Determining societal significance, however, was no easy matter. For example, experts often disagreed with the risk perceptions of the general public (see Exhibit 12). Suter wondered whether UBS should follow common perceptions or expert judgments in these instances.

Taking Action?

In the upcoming meeting of the Corporate Responsibility Committee, Suter wanted to reach three decisions. Which of the four options, if any, should UBS adopt? For any given option, what was the right mix of mitigating measures? And finally, how should the new policy be communicated? Suter was well aware that views sharply differed among UBS managers. Some business units feared that even stabilizing carbon emissions might be too ambitious in view of the bank's growth prospects. There were also important geographical differences. U.S.-based businesses had shown decidedly less enthusiasm than other units. Finally, some managers had expressed concerns about the cost of the proposed programs. Was it realistic to assume that carbon certificates would only double in price in the next seven years, as the working group had assumed?

Suter glanced at the chart on his desk one more time. Was it time to take action?

---

“UBS and Climate Change: Warming Up to Global Action?” 

1) What are the benefits for UBS of reducing its carbon emissions? What are the risks? 

2) Which option should Suter support?