Issue 1: September 2008

Top mind

of

Issues facing technology companies

Situation

Ready or not, here comes sustainability

Environmental issues have been discussed for decades without much impact on global economy. In the last few years, however, sustainability has risen as the a business issue with breathtaking speed. The simple difference: customer demand. Social, environmental, renewable energy and political forces have converged to create a powerful, fast-emerging demand for sustainability in economic production meaning that an economic activity should use minimal energy and not damage the environment so that it does not jeopardize the ability of future generations to meet their own needs.

Summary
1 Consumers are demanding eco-friendly products. 2 Businesses will be held accountable for sustainability. 3 Eco-efficient initiatives canresult in cost savings. 4 New, sustainability businesses are emerging. 5 But, it will be a while before supply chains are fully sustainable. 6 Technology will be part of the solution. 7 What is voluntary today may be mandatory tomorrow. 8 Check sustainability preparedness! your

Customer demand is driving sustainability Demand is coming from consumers as well as from businesses, as their customers hold accountable for the sustainability of their own products and that of their entire them supply Although technology products have improved significantly in terms of going chains. cleanlast decade, their power requirements, toxic metal content, production and in the business mean they still have far to go before becoming fully processes sustainable. Companies are listening Recent responses of government regulators, corporations, entrepreneurs and venture demonstrate that the demand for sustainability is being heard loudly and investors clearly. In the Information Technology (IT) industry, the major multinational companies have sustainability on their corporate agendas. Some emphasize recycling (and sometimes refurbishing) of their equipment to eliminate hazardous waste issues; others emphasizeof the carbon footprint resulting from their business activities; others reduction the focus on their products power consumption. One communications equipment reducing vendor its eco-efficiency by offering customers price discounts equal to the cost of advertises the energy savings they would achieve in using its equipment instead of its chief rivals. industrys major systems integrators have launched practices to help customers build more efficient data centers that require less cooling, thus mitigating power consumption growth increasing number of data centers in the from the world.
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Th e

Sustainability can make good business sense Ironically, companies with leading sustainability programs are discovering that such efforts than merely burnish their brands. It turns out that sustainable business do more processes more efficient, and the greater efficiency can make companies more are often competitive, not less. Sustainability becomes a cost factor only if it is treated as an add-on. If it is into a technology product or process from the beginning, it can result designed in a 3 Technology companies are beginning to recognize that there significant cost savings. economic incentives to pursue eco-efficient initiatives. Positive are powerful environmental a superb attributes are bonus.

Social, environmental, renewable energy and political forces have converged to create a powerful, fast-emerging demand for sustainability in economic production.

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Current issues
Corporations face a daunting challenge: can they evolve their business processes rapidly enough to keep pace with changing customer attitudes about the sustainability of the products and services they purchase, and the partners with they choose to work? Companies appear to be working hard to keep up: which a recent report showed that 25% of Fortune 500 companies now have a board committee overseeing environmental issues, up from 10% five years ago. a clear reflection of changing customer attitudes. Customers are demanding that suppliers have coherent sustainability strategies and can provide their metrics measure that their progress.
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Thats

What technology companies are saying That customer demand for their suppliers to have coherent and measurable sustainability reflected in Ernst & Youngs recent review of 18 large technology strategies is companies activities. We found sustainability that: Most have: A sustainability statement More than half are: Incorporating green features into their products Reporting on their energy use Integrating cleantech features into internal systems or supply chains Asking suppliers to comply with environmental goals mission But fewer than half are: Making larger investments in R&D develop innovative products to with features green Investing in renewable sources of energy to bring down greenhouse (GHG) gas emissions Developing sustainable packaging options Exploring buildings Operating a recovery (recycling) program sustainable formal asset

Given increasing customer advocacy on sustainability issues, it wont be long before all these activities will be required for leading technology companies.

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Searching for answers If technology is part of the problem, it is also likely to be a very however, largeof the solution. Entrepreneurs part and venture capitalists (VCs) are filling in the in R&D and it has been widely gap noted they are that entrepreneurswho and VCs often the same helped shape the technology previous decades. In the industry in US, venture investments in cleantech companies a record US$961.7 million in climbed to the 6 second quarter of 2008 onthewayto quadrupling over the US$917 million in all of 7 Strategic invested 2005. investors are also participating, as many large companies pursue a diverse set of sustainability initiatives, including with start8 partnering ups. For example, when three semiconductor giants separately became involved in solar products earlier this year, it power was thought that their manufacturing and specialized industry knowledge would help accelerate that efficiency improvements industrys
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Underscoring the complexity Sustainability is not simple. It often requires innovative technology and innovative thinking. Current IT practices offer an illustrative example. To ensure reliability, corporations often build up unnecessary redundancies, rarely retire aging applications and over-build relative to their actual requirements for instance, specifying 24/7 operation and 99.9% uptime for applications that dont really demand it. a result of these and other As approaches, corporate computer server the average is 6% utilized and the average data just facility just 56% utilized, according to a recent 1 0 Technology companies see report . an opportunity: at least one large multinational IT manufacturer and services firm formally a green IT practice this year launched to advise on data center efficiency and the overall environmental impact of a 11 companys IT function.

cost-

However, it will be a . before the results while of those companies recent into the solar market are entry known.

If technology is part of the problem, however, it is also likely to be a very large part of the solution.

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Regulating sustainabilityof Regulation

product disposal and recycling has a complexity all its own. The European (EUs) Restrictions on Unions Hazardous (RoHS) decree took effect Substances in 2006, banning the use of lead and other material. The ban aims, in part, toxic to make recycling of electronic waste safer. Some observers fear technology companies an unnavigable array of may face RoHS regulation around the world because other countries and individual US states have begun laws modeled after the EUs enacting but slight differences. And it could with happena pending EU directive known again: as Energy-using Products (EuP) goes into environmental issues. further EuP specifies eco-design principles and requirements for minimal energy consumption, not only by the product in use but throughout when developmentmanufacturing and process. Global interdependence Adding to the

Financing sustainability Finally, financing sustainability can be complex, as exchange markets emerge for cleantech investment tax credits and carbon emissions allowances. The market for trading cleantech investment tax credits is estimated at US$3 billion and growing Carbon emissions cap-andrapidly. trade systems create incentives for the companies that can significantly lower emissions to do so,inordertoselltheirexcessemissio ns allowances others. to
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Future implications
Sustainability will continue to grow very because customers, governments fast and business leaders have recognized

its

that modern society really does face sustainability issues and those issues can have solutions profitable businesses. that are Already these realizations have caused the world to enter an intense period of innovation sustainable around technologies, practices and business processes. Forrester Researchthat the market for green predicts IT services will reach US$4.8 billion by 2013. Companies that are too slow to respond may find themselves unable to compete. Recruitin g instance, recruiting top talent For may become difficult for companies that do have a serious sustainability not agenda younger generations appear because far sensitive to sustainability issues more than generations. Recruiting top older talent is a key issue for technology companies, for whom never-ending cycles of innovation of competitive business are a fact life.

complexity of achieving sustainability are interdependence issues: among nations, throughout a globally global industry and across a companys enterprisewide supply chain. Some technology product recyclers have been accused of polluting in emerging nations because they recycled gear to plants there, ship where the products are broken down and valuable materials are reclaimed. Environmentalists have measured higher levels of the toxic chemicals banned in the EUs RoHS in the surrounding such plants. On the areas other of this issue are two major USside based multinational technology companies who have earned praise from environmentalists of their re-use of on the strength recycled materials 12 .

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Sustainability will continue to grow very fast because customers, governments and business leaders have recognized that modern society really does face sustainability issues.

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Corporations and governments alike will be forging new business territory as sustainability issues are explored more deeply.

Innovation goes greendisruptive innovation that has The always part of doing business in been technology is increasingly green. Among product innovations already announced this year ismicroprocessor technology that new allows computers to come on instantly from sleep which the manufacturer reports mode will energy consumption up to 71%. reduce A copier company has introduced a rewritable printer, which will reportedly erase and rewrite on the same paper up to 200 times. 15 Another company is developing a new battery that contains a nanoscale internal combustion engine to generate electricity 16 . Efficient data center design data center, new technologies In the suchvirtualization and software-as-aas service can drive up utilization rates. Likewise, corporations are discovering that big energy savings can also be had through more efficient data center design. The mission of the Green Grid Association, a vendor consortium launched in 2006, is help companies develop more to energy- data centers. It currently efficient has member companies. 17 But 201 given the direction of existing and pending legislation, be a stretch to imagine it would not the emergence of government regulations for data center design. Government regulationgovernment regulation is sure Increased to follow the growing activism on sustainability issues. Technology companies and their customers already face many international, and state and local US federal environmentalAnd because of the regulations. nascent sustainability as a regulatory stage of issue, nongovernmental organizations many are proposing their own guidelines, including technology standards groups, vendor consortiums (like Green Grid) and electricgroups. In the near future, utility this growing body of rules is likely to increase the complexity of the challenge faced by the most well-meaning companies. of technology

Green opportunities change may also create Yet regulatory big market opportunities. For example, new investment tax credits or subsidies could new businesses. The power lead to of regulation can be seen in the solar energy in the US, where sector government subsidies drove purchases up until the subsidies expired in the early 1980s; after US shipments of solar that collectorsby more than half, and as of dropped 2005 had not yet returned to prethey 1986 1 8 New subsidies or investment levels . tax credits could lead to explosive growth where are they companies may need opportunities. Implications for accounting? is another area where Accounting new regulation could have a significant effect. Corporations and governments alike will be forging new business territory as sustainability issues are explored more New business territory can deeply. often new accounting rules or mean practices. Cross-industry transaction s There will undoubtedly be influence felt in mergers and acquisitions as companies look to expand their green assets. Already this for instance, German auto year, parts manufacturer Robert Bosch purchased solar technology company ersol Solar Energy AG. green tax incentives are As enacted, such cross-industry transactions are likely to accelerate. Voluntary to mandatory Much of what will soon be required relative to sustainability remains unclear. What is clear is that companies voluntary compliance with sustainability practices will today undoubtedly become mandatory whether by government fiat tomorrow, or customer demand. And that customermeans that you will need demand to communicate transparently with customers marketplace throughout the and the process of converting to sustainable practices, not merely when complete. the transition is offered; to technology for such prepare

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Ernst & Youngs observations

The future will be here before we know it. How does your company measure up in terms of sustainability? Following are a few questions to ask yourself.

Things to consider company established 1 Has your a baseline sustainability quotient? 2 What are the risks in developing a long-term sustainability program?established a business 3 Have you case for how sustainable processes will affect business model? Will your your business have model to change? 4 What are the success factors for your sustainability program? How will you measure them? 5 How will your sustainability program impact your supply chain? 6 Communication is critical throughout the process of greening, not just it is in place. What is after your communications plan? 7 How can governments help sharesustainability risks with corporations? credits Are tax enough? 8 Have you Sustainability Officer created a Chief

11 What potential regulatory mandates have the biggest impact on may your business? What can you begin doing nowtomitigatesuchimpact ? 12 What are you doing to reclaim valuable resources from products that have their useful life? Is it a good ended idea your company to partner for with others who successful programs? already have

13 What new types of partnerships or structures are required for success in sustainability? 14 Can collaboration at distance technologies reduce a your companys footprint carbon without decreasing your ability to innovate in new

products and services? 15 What are the promising new technologies on the horizon? are 16 What the unintended consequences of sustainability for your company, real perceived or (e.g., ethanol production blamed for rising food prices; recyclers for blamed nations)? polluting emerging

position? 9 How can sustainability facilitate process improvement 10 Is? your company aware of new and pending sustainability regulations in all areas where you do the business?

19 The business of green initiatives are starting to benefit the bottom line, in addition to 1 Green benefiting the

environment. 2 Consumers are demanding green products but expect the same functionality as conventional products and will not necessarily pay more. 3 Companies must practice green strategies in-house in order to sell them. 4 Thereisanewfocusonproductsandservices,ratherthanmeasuringth carbon e footprint. 5 The location of green managers and strategy within a company indicates their importance to the company. One option is a Chief Green Officer. 6 Communicate during the process of greening, not just after it is in place. 7 Voluntary compliance on sustainability practices today may be mandated tomorrow.

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Source notes
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Cl ea n te ch M at ter s: Fi n an ci n g, Po l icy, Pa rt ne r shi p a n d G ro w th : In si gh t s f ro m t h e Cl ea n tec h S y mp o siu m W in t er 2008, E r nst & You n g G re en co m pu t in g ga th e rs p ac e, Th e Au str al ia n , 29 Ap r il 2008, v ia Do w J o n es Fa ct iva

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F in a n ci ng , p ar tn e rsh i p, p o li cy a n d g r ow t h: i n sig h ts fr o m t he Cl ea n tec h S y mp o si um , W in t er 2008, 2008 E r nst & You n g L L P

Cle an te ch Ma tte rs

Rick Fezell Global

Technology Leader United States rick.fezell@ey.co m 408 947 6568 +1

Industry

2008 EYGM Limited. All Rights Reserved.

EYG No. DC0038

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