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WAL-MART STORES HAS BEEN TRUMPETING ITS SUSTAINABLE business practices since June 2004, when Rob Walton, an avid scuba diver and chairman of the company his father founded, organized a meeting between then-CEO H. Lee Scott and two environmentalists. Wal-Mart was facing a deluge of negative press and litigation over everything from alleged violations of the Clean Water Act and immigration law to sex discrimination, with the latter having produced the largest class-action suit in U.S. history.

Scott came to the meeting simply wanting to get the critics off his back, as author Edward Humes recounted in his 2011 book, Force of Nature. But the meeting with Jib Ellison, a white-water river expert and founder of San Francisco–based consulting firm Blu Skye, and Peter Seligmann, founder, chairman and CEO of Arlington, Virginia–based nonprofit organization Conservation International, changed Scott’s thinking about the future course of one of the biggest companies in the world in terms of revenue.

Wal-Mart 

Within the walls of Wal-Mart’s one-story, starkly furnished headquarters in Bentonville, Arkansas, Ellison convinced the Joplin, Missouri–born chief executive that going green would buttress his company’s profits — and image. “Lee, the thing you have to remember is that all this stuff that people don’t want you to put into the environment is waste. And you’re paying for it,” said Ellison, as recounted in Humes’s book. “If you really want to know something cool about this whole environmental and social side of the equation, here it is: It’s a massive business opportunity.”

Ellison used laundry detergent to illustrate how waste hurts the bottom line. Back then, laundry detergent was often sold in 120-ounce containers that were about the size of a gallon of milk. But there was a concentrated form sold in a container about the size of a ketchup bottle. At the time, consumers bought a total of 1 billion bottles of detergent in the U.S. each year. If they were all ketchup-size bottles, transportation costs as well as waste would be reduced.

Scott hired Ellison soon after and pushed through those changes. To this day, Wal-Mart executives, store managers and sustainability experts are quick to cite this anecdote to describe a turning point in the company’s history.

Wal-Mart CFO Charles Holley neatly sums up how sustainability fits into the discount retailer’s financial operations. “Everyday low price starts with being everyday low cost,” he tells Institutional Investor . “Sustainability is a great way to save costs.” The most important priority for the company now, he explains, is to maintain its “productivity loop,” in which Wal-Mart leverages its scale to reduce operating costs, leading to lower prices for its customers, which in turn feed growth, starting the virtuous cycle anew. The company earned $16 billion on $447 billion in revenue in 2011, compared with $9 billion in profits on $256 billion in revenue in 2004, the year of Scott’s change of heart.

Andrea Thomas, senior vice president of sustainability at Wal-Mart, concurs: “The productivity loop is about getting the absolute best cost for our customers, and sustainability supports that.”

Maybe so. But Wal-Mart’s business model faces challenges in addition to rising energy costs. Like any company’s, Wal-Mart’s continued growth hinges on its ability to tap new opportunities, but more so than perhaps any other company’s, its prospects depend increasingly on social issues as well as environmental ones. For socially responsible investors, who now represent almost one eighth of U.S. assets, the giant, everyday-low-price retailer is one of the largest targets now that tobacco companies have gotten their comeuppance and the Gulf of Mexico oil spill and the petroleum industry’s role in it have faded from memory. And the recent stories of long-running bribery of local official in Mexico have not helped the retail giant. Moreover, the issues that concern so-called environmental, social responsibility and corporate governance (ESG) investors serve to block the company’s much-needed access to urban and foreign markets, many of whose political leaders and citizens are also troubled by the company’s practices.

Simply put, Wal-Mart is a leading flak catcher from stakeholders who question, among other things, its treatment of its employees, both in the U.S. and abroad, even as a weak global economy threatens top-line growth for years to come. From that perspective, Scott’s sudden embrace eight years ago of a more sustainable business model was far from complete.

More broadly, Wal-Mart is a leading indicator of what it will take for companies and investors to come to terms with the growing perception, and perhaps the reality, that the world’s resources are dwindling. As goes Wal-Mart, so goes capitalism, because if a company as focused as Wal-Mart is on minimizing cost can truly go green, so can anyone. But that’s a big “if.”

Don’t tell this to Wal-Mart. The company says it takes “a 360-degree view” of sustainability that includes suppliers, the environment and communities. Its greatest achievement to date, by most accounts, is its supplier sustainability assessment. Introduced in 2008, this innovation has been a green game changer, to hear the company and suppliers tell it. The 33-page form covers energy and climate efficiency, material efficiency, natural-resource usage and people and communities. All of Wal-Mart’s 100,000 suppliers in 60 countries are required to fill it out and take it to heart. On the back of that, in 2009 Wal-Mart announced plans to create a global sustainability index that will provide a consistent measure of every one of its products’ sustainability. Once formalized, the index also is supposed to alter industry and consumer behavior.

Furthermore, the company has improved the efficiency of its U.S. truck fleet by 65 percent from 2005 rates. In its stores it has replaced ceramic metal halide spotlights with LED lighting, saving about 50 percent in energy costs per bulb installed. In addition, Wal-Mart was able to redirect more than 80 percent of its waste from landfills in California, and it is using the same system across the country. The retailer also has an array of innovative pilot programs, like its beef traceability systems and antideforestation efforts in Brazil, and solar panel projects in places like California and Puerto Rico.

Scott wrote in the company’s 2007–’08 global responsibility report: “We have found that there is no conflict between our business model of everyday low costs and everyday low prices and being a more sustainable business. To make sustainability sustainable at Wal-Mart, we’ve made it live inside our business. Many of our environmental sustainability efforts, for example, mean cost savings for us, our suppliers and our customers, so that in both good times and bad times, they will remain part of who we are.”

Yet the company’s conversion to sustainability for the most part begins and ends with energy savings. According to Toronto-based Corporate Knights’ latest sustainability ranking of Standard & Poor’s 500 companies, released on March 8, Wal-Mart scores only a five out of ten in the ranking’s productivity measures on energy, carbon, water and waste; taxes paid; CEO-to-average-worker pay; pension fund status; employee turnover; leadership diversity; pay linked to environmental achievements; and safety. The company did not make Corporate Knights’ list of the world’s most sustainable companies.

If Wal-Mart were to be truly sustainable, it might have to upend its business model, notwithstanding Scott’s assertions. True sustainability requires Wal-Mart to make significant investments to reach 100 percent renewable-energy dependency. It also demands similar expenditures on behalf of associates (what it calls store workers), suppliers and customers so that they live subsidy-free lives — not for their sakes but for the company’s own. All of this means higher costs, at least at the outset.

Meanwhile, Wal-Mart’s revenue growth is showing signs of slowing. Until the quarter that ended on October 31, foot traffic and same-store sales had been declining for two years. The percentage of net new-store openings to total stores was 1.5 percent in 2011, compared with 15 percent in 2004. Groceries now account for more than 50 percent of overall sales, while apparel has dropped from 10 percent in 2007 to 7 percent at present. Because the cost of food is more difficult to control than that of clothing, the trend in Wal-Mart’s sales mix could make it harder for the company to maintain its everyday-low-price model without seeing margins shrink.

It doesn’t help that the company is up against two long-term structural shifts in the retail industry. The first is technology’s ability to provide price transparency via mobile phones. “Considering half of America is going to a Wal-Mart store, technology is going to play a role in pricing going forward,” says Credit Suisse retail analyst Michael Exstein in New York. Wal-Mart’s “customer may be a lower-end customer, but they have the same access to the price look-up technology as anyone else does, and they are using it.” He adds that it is an open question whether Wal-Mart can grow without hurting its margins. E-commerce as a percentage of total sales in the U.S. jumped from 3.5 percent in fourth-quarter 2007 to 4.8 percent in the last quarter of 2011, according to the U.S. Census Bureau. The trend will only continue upward as technology’s ability to provide price transparency improves. The company is trying to counter the threat that e-commerce poses by exploiting it for its own purposes, but the success of this effort remains uncertain.

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