Does sustainability clear the fiscal hurdle? Yale Insights talked with Kurt Kuehn, chief financial officer for UPS, about how he evaluates sustainability initiatives in the face of a fast-changing and complex global market.
Q: Sustainability is often thought of as being synonymous with environmental sustainability. Is there a broader definition that should be used?
Depending on the business you're in, the environmental impact can be substantial, but clearly, we see it as a broader concept. To us, sustainability is a part of corporate citizenship—making sure that the business you operate has a beneficial impact on society. It’s an issue of operating in a way that generates a positive outcome for share-owners, is great for the earth, and increases quality of life for people.
The edges between environmental sustainability, social sustainability, economic sustainability, and even into philanthropy are soft and permeable. It is a broad umbrella but all of these factors need to be considered as you examine your business practices and impacts.
Q: Does your role as CFO shape how you view sustainability?
The sustainability efforts at UPS don't roll up directly to me. But I’ve been an executive sponsor from the inception of our first report. I was in an investor relations role as UPS was going public; we met with a few investment firms that had an increased focus on sustainability, especially in Europe. After that, I migrated into sales and marketing where I dealt directly with corporations and businesses that had a deeper engagement in sustainability. Coming into the CFO role, those experiences gave me a broader perspective.
The gist of my philosophy on sustainability is that the way to make sustainability effective is to make sure it harnesses the existing momentum and energy of the corporation. It's great to have a senior executive that has a passion about cause A, B, or C, but if it's not aligned with the core mission and output of the corporation then ultimately it lives or dies based on that champion.
When we can leverage normal business activities to create positive outcomes, then you get 10 times the results for a fraction of the cost. Sustainability isn't sustainable if a dollar output only creates a dollar worth of good. But if you can find ways to harness existing capabilities to create social good then the economic cost can be minimized dramatically.
Q: You mentioned harnessing the company’s existing momentum. Can you give an example of where engaging with sustainability might instead require a change of course?
Sustainability activities are a form of risk management. If there is an increase in risk, whether it's supply, regulatory issues, or environmental impacts, being out there increases your awareness, so that you can make decisions as to whether you need to change course. If the momentum of the business community is heading in a direction you're not in sync with, you need to decide, is this just not an area we should play in or is this an early warning sign that the company could be at risk for sourcing or for demand?
Q: Could you expand on how you approach cost versus return with respect to sustainability?
Part of our broader sustainability activities are a form of research and development. We see the vast majority of our alternative fuel applications and trials as rolling laboratories. Most of them haven’t generated returns to capital anywhere near what our normal hurdles would be, but they increase our knowledge and make us better able to understand the choices. With R&D you don’t expect to bat one thousand.
Having said that, we’ve invested in research for decades. Our first electric vehicle was tested in the 1930s, believe it or not. Staying at the leading edge is a form of constant innovation. In the last couple of years, we've seen a confluence of both increases of supplies and new technologies in the natural gas environment to where the economic results get very close to our traditional hurdle rates. After hard scrutiny and finding the right locations, we made a decision that the good outcome outweighed any minor gap against the economics.
Embracing natural gas, especially for over-the-road tractors—there's never really been any alternative fuels for those and they're a quarter of our emissions—could be a catalyst. UPS ordering over 1,000 vehicles at one time really begins to get the ball rolling, across industry, in a broader sense. It’s something that could create momentum that ultimately will drive costs down, making the solution even more viable, and encouraging broad investments in fueling infrastructure.
Q: You talked about moving to natural gas. Are you looking further down the road—for example considering the possibility of sudden price changes in fossil fuels or of carbon taxes being implemented?
We are. In our scenario planning, one possibility we consider is what we call Oil 200 which is, how does the world change if crude goes to $200 a barrel? We look at the implications not just for our own specific business but the impact on trade flows. In that scenario, the calculus changes on far-shoring versus near-shoring—the benefit of labor savings gets offset by the tremendous increase in transportation costs.
When you understand the ramifications of these scenarios, it may be a catalyst to leap a little earlier into areas that give you protection. It means looking at all modes of transportation and helping customers take advantage of those that are lowest carbon. We do a lot of work helping large companies measure the carbon footprint of their supply chain and figuring out what happens when they use rail rather than truck or ocean rather than air. Some of that may mean we may make less revenue, but if it's part of a healthy, growing relationship with the customer, then that's a great move to make.
Q: How is the behavior of the market, in general, different today than it was five or ten years ago?
It's a fascinating and tumultuous time. On a global basis, we see shifting trade patterns as manufacturing moves around the world. One of the things we're seeing right now is the beginnings of an industrial renaissance in North America. Low-cost energy and relatively stable labor rates are beginning to compare favorably to the benefits of far-shoring.
Consumer behavior, with continually compounding double-digit growth of internet commerce, is having a radical impact on business. Every brick and mortar retailer that I know is undergoing an identity crisis. They're trying to realign their supply chains. Inventory is moving all around; we're seeing some brick and mortar stores use their individual retail outlets as inventory rather than solely relying on big warehouses. It's an exciting time to be involved, with great retailers figuring out how to create omni-channel capability, so customers can experience their brand on the internet, by virtually walking down the aisles, or maybe on an iPad with a salesperson facilitating the sale.
One of the great things about being right in the middle of supply chains is when business changes occur, we see it on all sides. That makes working for a business that is trying to help companies optimize their supply chains exciting.
Q: As CFO, what are your priorities as you look at the company’s capital?
UPS has been a very fortunate company. We have a very strong balance sheet, our cash flow is very consistent, and we distribute a significant amount of that cash back to investors. We do wrestle a little bit with cash deployed around the world and the broad differentiations and tax rates. As a U.S.-based company, we are worried that the U.S. is getting to be a pretty lonely place when it comes to tax rates, which does, in some cases, distort economic decisions. So, on the political side, that's one of the things that we're working on.
My charter as the CFO is to make sure the company is prioritizing investments. Ultimately, growth is my job as much as it is the head of sales and marketing; I just look at it through a little bit different lens. When you're working for a great company, with a long history, where the mandate is continue to reinvent yourself, we look to expand beyond our current boundaries to grow the business going forward.
Interview conducted by Ben Mattison and edited by Ted O'Callahan.