Why should companies look beyond their operations when measuring the environmental impact of their products? Why are middle managers so vital in carrying out green initiatives? Why do green initatives fail?

Andrew Winston and Daniel Esty explore these concepts in their book, "Green to Gold, How Companies Use Environmental Strategy to Innovate, Create Value and Build Competitive Advantage." The book, the authors say, is written for businesses of all shapes and executives from every rung of the corporate ladder.

Correspondent Elizabeth Striano recently interviewed Mr. Winston to discuss lessons from the book and how incorporating environmental thinking into corporate strategy can build value on several levels.

Elizabeth Striano: In your book you recommend that businesses that want to go green first need to understand exactly where they are with regards to the environment. You recommend that they begin with the AUDIO tool. Can you talk a little bit more about that tool?

Andrew Winston: Sure. It's just sort of like you said. The knowing where you are. The general understanding of where you stand on environmental issues. And part of that is knowing your footprints or the hard data on how much energy do we use? How much water? All those kind of good things and knowing what your stakeholders think of you.

That's sort of part of your standing in the world but the tool that we recommend for I think getting a strategic sense of how you interact with the environment is the AUDIO and that's an acronym that stands for A is aspect and we'll come back to that and U is upstream. Downstream is D. Issues and Opportunities.

And so it's sort of a elaborate version of a SWAT analysis and looking at weaknesses and opportunities and threats and then really the only main addition is that it looks up and down the value chain. Upstream is your suppliers and downstream is your customers and aspect is sort of a term from ISO 14000 stuff for environmental factories, environmental operations.

But just be how does environment touch your business. So when you go through the exercise you just take sort of the ten environmental issues we suggested. The big ones that companies and society are dealing with and just ask how did these issues affect our business and how do we affect them? And then upstream how do we affect our suppliers. Downstream how do they affect our customers.

And then look for the issues and challenges and the opportunities within those issues.

ES: Mm-hm. Does it actually include measuring your environmental footprint as well?

AW: Yeah. But the audio's more of a qualitative exercise. It takes companies through that as part of the consulting idea. It's really just to dredge up all the possible issues that can come up and define if there's a -- you might think our company doesn't depend on water. But if you depend on a supplier that does then water is a critical issue for you whether you think it is or not.

And it's not just sort of highlighting those issues and bringing them to the floor but you need to connect the audio with some real hard analysis and then okay. So we think this has an impact but then what's the scale of that impact? What are the real numbers behind it so there's one that's qualitative and then you've got to get to sort of hard-core metric things like lifecycle analysis and ways to measure how big your impact is.

ES: And then you're talking about upstream and downstream. When I think of those terms I think more of a producer of products, consumer products. So you're talking about your consumers and your suppliers. What application does that analysis have for a service based industry?

AW: Well, services, you know, it's interesting. They've gone through such a transition on the environment over the last five years I think where -- and it's still pretty typical. I talk to companies that, you know, banks, insurance companies, or even ones that make software. Certain tech companies.

And they feel like we don't have smokestacks so we don't have a big environmental impact. And they're realizing now that they do but it's not directly in their -- the box of their operations. Yes, they have buildings and they know that and they use paper and they think of that as their big impact.

But banks have been under tremendous pressure about where does your money go and that's sort of downstream. What are your customers doing with that? If you're financing a coal plant then you have an impact.

Upstream for them could be the paper impact of the paper that they use so service businesses are finding that tech company that relies on technology uses a lot of toxic elements. They rely on technology that uses a lot of energy downstream with their customers so they're connected in the value chain to big impacts.

ES: Okay. So even those businesses can use an analysis.

AW: Sure. And I think actually that upstream and downstream perspective is more critical really for a service business because a manufacturing company is sort of used to asking what's our impact. But a service business will just say, you know, we just use paper in our offices and that's it. And then thinking upstream and downstream I think they'll find both the challenges for them but also opportunities. That they can help their customers green their lives or their operations of their company. There's benefit for them.

ES: Right. Right. You talk a lot in your book about the importance of developing an eco-advantage mindset. What is that and why is it so important?

AW: Well, there's a few things we lay out in the book but the critical one is sort of the opening part of the mindset is broad thinking about both the boundaries that you operate in and that's again the sort of upstream and downstream, your full value chain. We're all thinking about the payoffs to doing something and including intangible value. Brand value or customer loyalty, employee loyalty. These kinds of things.

And the decisions you make because of the traditional cost benefits of analysis in a company doesn't work perfectly in this realm. It's very hard to measure things in some aspects but they create real value.

And then thinking broadly about the time. So it's boundaries, payoffs and time. And time is what's the long-term payoff to what we're doing and maybe the short run doesn't work perfectly but let's think about the long-term value of a company and to our brand.

That's sort of the breadth of thinking is the critical thing. Other key elements are having CEO support and CEO guidance or the top level. And sort of understanding that your stakeholders, their feelings about things are sort of facts for you to deal with and it's very hard for companies to get their head around that if the perception is that your company uses a lot of water in a region that you think we don't use as much as the golf course down the road. That doesn't matter if your stakeholders, your community, your own employees think you use a lot of water. You have to still address it.

And that's part of the mindset too is accepting that sometimes just throwing science and what you consider facts at people doesn't always work.

ES: Mm-hm. You just mentioned and you mention it frequently in your book about the important buy-in from the very top to really getting the initiative underway.

AW: Right.

ES: What if that doesn't happen? Can a business overcome that? Can this be led by middle managers from the bottom up?

AW: Well, it's gonna be a lot more challenging. I mean it's sort of a no-brainer to say the CEO has got to be involved but it is really critical because again the sort of typical cost benefit and the kind of decisions you make you need to stretch your thinking. And without the CEO support to say hey, this is our goal. We want to be greener in this way. You make it happen.

Without that kind of leeway to think broadly you're still gonna have to hit your normal targets and your normal _____ rate and you may not make some of the decisions for the long run that make the most sense. So it is really challenging without CEO support.

I certainly see companies doing it and in different divisions or particular product lines will do something and then pitch it as green or they'll do really well and that usually -- once they show the green in green they often can convince their manager and pretty quickly.

But I don't see many CEOs in Fortune 500 companies who aren't at least aware right now that they need to at least say something about this. How many are thinking deeper than that than just hey we ought to say something and sort of package the things we're already doing. We planted some trees on earth day. Let's go talk about that.

How many are further than that? It's still not that many I think but it's growing fast.

ES: And what about the employees themselves? You worked with a lot of businesses over the years. Do you ever see a situation in which the employees are the ones who are holding it up or is there a way for a business to ensure that they're on board?

AW: Well, I think, I guess I wouldn't say I see often the broad base of employees. Employees are generally pretty happy to see their company is gonna live up to some amount of -- some set of values and they're gonna do the right thing.

I think the middle management, expecting the middle management to do it alone that's where it gets really tough and one of the hurdles we talked about in the book is the middle management squeeze where the CEO is on board and the employees are on board and the people running the plant or factory, whatever, have to hit these new targets and they don't mesh perfectly with their other goals and if there isn't some bend in how they're measured or their incentive and some change it's gonna be very tough for them to hit all their goals at once and that's gonna -

ES: Right.

AW: That's a big challenge at that level so I don't see it in sort of the everyday walk in the door employee but I think that middle level can be pretty resistant to _______. If they're thinking, 'My bonus is based on my throughput in my organization,' or how many deals I sign in the service business or whatever, it's very challenging to move them to environmental goals. Even if they agree with them. If you don't actually change the culture and the incentives.

ES: Right. Right. Well, that's the issue. A lot of the -- that's what you read about frequently is the resistance to change and even if it is for the better and for the good that there might be that culture there that's gonna be slow in developing.

AW: Well, that's true from just a consumer level in this country when you're talking about environmental issues. There's been earth days for 37 years and we've been waiting for this value shift in consumers and it hasn't -- it still hasn't really happened. There's a small percentage of people that will buy green, solely green or they'll pay more for it. I don't think that number is growing very fast.

I think the percentage of people who will choose green all else being equal, same price, same quality, will choose green over something that's not is growing very fast and that's the group that companies have to really, really worry about.

ES: Right. Let's get to the pairing of environmental initiatives. You talk about the importance of being able to look at two different initiatives kind of as a package so that way one is not doing as well or perhaps costing the company money and another is doing very well and saving the company money.

If you look at them together it paints a different picture. A maybe more optimistic picture.

AW: Right. Well, it's interesting. It comes back to that idea of how do leaders in a company allow the environmental decisions to be made. When sometimes they're looking at very specific financial metrics it can be tougher.

One of the examples that I love from my interviews with some, you know, the Timberland, the apparel company in the book. They had two distribution centers that they wanted to retrofit with new, lower energy lighting. This is a few years back now. Before it became really fun for everybody to do this.

And one was in California and because of State incentives it was only gonna be like a two-year payback because there was some extra money there from the State. And in Kentucky they had another one that it was gonna take six years to pay back. But the six-year one didn't meet their hurdle rate and so in theory in that company they would only decide to do the California one but they combined the two projects and said we'll buy new lighting for both of them. We'll do it once and it will be a three-year payback. And that meets our hurdle rate.

It was sort of like a ta-da! We're just gonna wave our hands and put them together and they went to their management, the CEO and said this is how we're gonna do it. And the CEO could have easily said just do the California one because they're separate places. They're across the country. But they wanted to do it. They just needed to find a way to make it palatable within their structure.

And I heard that from a lot of different companies that would find a way -- if they could do something that at least broke even, they could do it if it had an environmental benefit with their management. But again that comes back to your management has to be on board for that kind of thing.

ES: Right. I mean you could even look at that for anything from energy, purchasing renewable energy which might cost more but you do enact some energy savings.

AW: Exactly. That's usually the best example. People say, 'We want to do more renewable but it costs 10 percent more,' and I just say, "Find 10 percent savings somewhere. Maybe you were going to anyways but package it. That's how you make it work in your culture." Or find 20 percent savings. Make it actually be a reduction in energy use or in cost.

ES: Right. For small businesses I would imagine that a bit of this might be somewhat overwhelming for them and they do make up a large proportion of the businesses in the United States right now. What advice would you give to them?

AW: I do get that question a lot and I think for the most part since Green to Gold tries to lay out frameworks and sort of general principles for how companies go green, for the most part small, medium enterprises can work in the same framework. We lay out four buckets of value creation.

And this is not rocket science. I mean it's sort of business school kind of stuff but we said you can lower cost and you can lower risk. Those are reducing the downsides. And you can increase revenue and increase brand value.

Now I think small businesses can do all those things. Some are a little bit harder for them. Things like pushing up the supply chain and trying to reduce risk in how things are made. Yeah. You don't have the clout. You're not a billion dollar company who can tell your suppliers how to make something.

So there's some things that are harder but a restaurant can -- a small business, local business can pitch itself on green and serve organic food. Build revenues and drive brand value and they can think of it the same way. It's not gonna be like they're doing a multi-million dollar ad campaign and want to build a brand that way. But they want to build a brand in their local community. And attract the best people to work for them and to come to their store or to whatever the business is.

So I think besides that kind of leverage and power of being big around your supply chain and a little bit over your customers, I think small medium companies can do a great deal of what's in Green to Gold and find it useful and I know there's some organizations out there using the book to help them talk to small and medium enterprises and work with them in the community and they're finding it still pretty helpful.

ES: You talk about toward the end of the book where environmental initiatives fail. And there are some commonalities. Can you talk about some of those reasons why these initiatives might fail?

AW: It's funny. We did a chapter called “Why Eco Initiatives Fail,” and I think for me it was almost the most fun one but it's the one I think people have found the most useful in a lot of ways because the conversation about green business for many years was win/win focused. For good reason. You needed to sort of convince business that environment wasn't alien.

And we're still doing that but we felt the need to reach past that kind of sort of easy answer that if you think about the environment you profit. And so it doesn't, things fail in business.

So we laid out a few things. A couple that I think are sort of important. I mentioned the middle management squeeze and sort of this pressure organizational. And that's I think one of the biggest challenges that there isn't an easy answer around. It depends on the culture of the company.

But one of the other things is just sort of potentially investing a little bit in the wrong direction. Doing something green but maybe you didn't again sit down and do the AUDIO analysis or something like that that says where is our impact or a lifecycle assessment or something that asks where are the big issues so that you're addressing the right thing.

And the example we use in the book is Ford. And they built a very green factory and that's a great example of green manufacturing but 85 percent of the emissions from a car are when it's used. Not when it's made. So their biggest issue really should have been making cars that were greener. And their competitors in Japan did that and won in a big way.

And I think that's one of the main reasons and actually they didn't get that much credit from the environmental community for building this great $2 billion plant because the environmental community sort of knew that value chain thing. They knew the lifecycle and said you gotta make your cars burn less.

So I think the investment was good from a green perspective but it probably wasn't that strategic. It was probably $2 billion maybe they could have spent on looking into car train technology or motor train technology and hybrids.

ES: Now would this also be a good example of where the value bring in stakeholders? Where that comes in?

AW: Yeah. I think that's right.

ES: If you listen -

AW: If you're doing a lot of listening to a broad spectrum I think they would have heard that probably. I mean I assume they did and they thought about it but -- and there's a lot -- it's certainly complicated as to why Toyota and Honda have risen so fast but this isn't the only reason but it's a big one. And I think listening and understanding where your stakeholders stand as just another part of that first couple steps you'd highlight some of these issues and you'd find out. Then you'd make the choice about where you want to put your money.

ES: The stakeholder issue is emphasized regularly throughout the book. It seems to be -- it's definitely a theme in virtually every tactic that's mentioned. Doesn't that complicate things? What is the real benefit other than targeting your efforts in the right place? There must be an overriding reason to do that.

AW: Well, there's both defensive and there's both reactive and proactive reasons to talk to stakeholders. And they're all good. I mean I think the original reason some companies give is just get them off our back. Let's go talk to them.

And then there's concern sometimes in the NGO community about whether NGO was co-opted by a company because they start doing work with them. I think most NGOs have gotten over that and are feeling pretty comfortable working with companies now and my attitude is the company co-ops an agenda but they take it in. But who cares? Meaning they took it in. They listened.

So I think there's a lot of reasons. There's the defensive one which is okay, let's at least identify what we're gonna get yelled at about before it happens and then we can avoid it. But there's the proactive one which is sometimes these are really educated people on environmental issues that you might not have that expertise in your company and they may know a lot of things that you don't about impacts, about emissions, water, toxics, what have you. And it's just a form of listening. And hearing what the best practices are.

And some of these organizations, you know, Environmental Defense has the corporate partners program. It used to be called the Alliance for Environmental Innovation I think. And they basically work for free for companies and they don't charge them as consultants because they want to maintain a role as an advocate and so that means they can sort of just bring best practice to the table and they have expertise like how fleets should run to reduce energy use. They can bring that to company after company.

ES: They can add value.

AW: Right. It's like it's real and measurable value.

ES: What do you think is the biggest blind spot companies have going into this?

AW: That's a really interesting question. I haven't been asked that in that way. What is the biggest blind spot? I mean well I can just trot out the same thing about looking at your full value chain and maybe not thinking -- I think I don't know that there's that many blind spots any more. I think that companies are realizing that the supply chain can hurt them but Mattel didn't certainly seem to be totally aware this year of what can happen if there was like lead in the paint so there's still things happening all the time or it looks like where they need to really think about where things are coming from.

I guess the biggest blind spot, I think there's still a sense that the environment is a nice to do, the right thing to do. All of that's important and I certainly don't begrudge any company saying this is a moral responsibility. I don't think they're gonna really motivate all of their employees just on that. It certainly will keep people around and they'll be attracted to working at that company but you need to see the business case.

And I think there's still a blind spot that environment can add tremendous value. That the environmental lens can be a way to save billions in some companies or create new products. I think even with the success of things like the Prius, whatever, but there's still a sense of well, that's a one-off story. That's not my company. That's not my industry.

And I do a lot of speaking around this and I still have a lot of audiences who are like I have no idea there was this much going on. I didn't know Wal-Mart was talking about this. For those of us in the green business field these stories seem trite and everywhere -

ES: Yeah.

AW: But a lot of people aren't seeing them as much as you'd think and there's still a sense that -- and there's a little bit of a blind spot that the environment is some democratic liberal plot to undermine business. There is still a strong strain in that in the American business community and I think we have to get out of any political perspective on where it's coming from. That's it's not a blue state/red state, Democrat/Republican thing. It's just good business. A better way of doing business.

So the sort of small downside to Gore that being the visual and the voice of the climate change discussion is that people sometimes will just write him off if they don't agree with his politics and I think that's too bad because it doesn't matter who's delivering that message. It's still fundamentally fact based and it's science and so there's still a politicalization of the topic and that's too bad I think. And that leads to a blind spot.

If you don't really like liberals or Democrats you might just say oh, it's a crazy plot. And not find the value that you can.

ES: Mm-hm. Well, what do you think is the single most important thing a business could do right now to start on the path to sustainability?

AW: Well, I mean I always say this. Again it's understanding what your footprint is. And then just starting to measure it. And it sounds like oh, that's easy. It's really hard and most companies -- I have some clients or I know companies that financial data is cutting edge. They can tell you -- they can close their books in a day. Last month we made this much revenue. In the billions. Whatever it is. And this was our free cash flow. Whatever they're using as their metric.

If you say how much energy did all your facilities use, they have no idea. And so they're scrambling and so I think the first thing is to start to collect data and figure out what you don't know. And then start to build the tools and get them in place to build that knowledge so that's an ongoing -- so it can become an ongoing metric, an ongoing set of things.

Sort of back to the blind spot point is I think CEOs -- everyone has their favorite phrase for what they use for metrics. Their corporate balance scorecard or their dashboard. The metrics that get up to the CEO or the top management.

And what I tell companies is you've got all your financial ones but in reality half of your dashboard is blank because you don't have environmental and social metrics. So that is actually the biggest blind spot really. You don't even know where your hurdles are or how big your footprint is or where you might get slammed.

And so I think starting to measure that is the critical first thing to do. You gotta get some hard data.

ES: Mm-hm. Okay. Great. Well, thank you very much. We've been talking with Andrew Winston, author of Green to Gold and thank you very much.

AW: Thanks for having me.