"Sustainability Dialogue with Leaders and Pioneers"
Aula of the University of Zurich
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It is an honour and a pleasure for me to be here with you tonight in the Aula of the University, and to be able to speak to you from this historic rostrum. You have invited me here to present some ideas on a subject that is certainly a major current issue, namely companies’ responsibility with regard to sustainability. I would like to thank the Sustainability Forum in Zurich and in particular its CEO, Dr. Ernst Brugger, for their kind invitation.

I will be taking a brief look back at the original concept of the term ‘sustainability’, and will also be describing how this is put into practice in an environment I know very well, namely at Nestlé.

My following statements are based on intensive consideration given to this issue at our company over many years: what does sustainability mean for us, and what responsibility does it entail? These are considerations that must be continually reviewed and openly discussed, both within the company and externally.  This is also the main reason why I accepted this invitation, because it once again gives me the opportunity to address a completely different audience and talk about this issue. I look forward to a lively discussion and to learn something new this evening. 

It is not possible to cover all the aspects of our efforts to ensure more sustainability in one presentation.  I will be referring to brochures for those who wish to find out more, all of which are freely available on the Internet at www.nestle.com.

Let us now turn to the matter in hand with an overview of the points I will be discussing this evening, some of which I would like to focus on in more detail.

These are the points:

1. Some facts on Nestlé
2. Brief history of sustainability – in three stages
3. Sustainable use, not exploitation!
4. The Brundtland definition and day-to-day work in the company
    • shareholder value
    • wages and jobs
    • disproportionately strong growth in indirect employment    • farmers and consumers
5. Responsibility for the environment
6. Dialogue and acceptance

So, first of all Nestlé, who or what are we? Below you find a few figures.

Ø Leading company in the food & beverages industry: sales of CHF 87 billion, net profit of CHF 6.7 billion (2004).500 factories in 83 countries on five continents; production facilities in developing countries for more than 80 years.42% of sales in Europe, 30% in the USA and Canada, 28% in Asia, Latin America and Africa.

Our company began to develop a global presence back in the late 19th century, and our first factories in developing countries were set up in the early 1920s (Africa, Latin America).  My own personal experience has been shaped to a large extent by the almost 20 years I spent working in South America – much longer than here in Switzerland.

Our success is based on the hard work of our employees and managers across the globe for many years. And to achieve our sales figures, we at Nestlé depend on hundreds of millions of consumers every day choosing to buy our products.

We offer simple, everyday goods at prices that are affordable in poorer countries as well. Our cheapest product costs around 6 centimes; if a product costs more than two francs that is considered a high price.

The size of the Nestlé Group has to be taken in context.  As the largest food and beverages firm in the world, our market share is relatively small.  The fact that we have a global market share of less than 2% underscores how fragmented the supplier market is.  Compare this figure with the significantly higher market shares of the leading companies in the automotive and oil industries. There are very few industries where the market leader has so small a share of the market.

There is a first specific conclusion we can draw from this with regard to sustainability: we have to take on responsibility, but we should not expect to make changes significantly affecting the whole world on our own.

My second point this evening is to look back over the history of sustainability, looking at three different stages in a sort of time-lapse photography.

1. There are several origins of the concept of sustainability. One is here in Switzerland; initial discussions date back to about the same time as when Nestlé was formed (1867) – at least that’s what Swiss forestry experts tell us.  Following a heated debate over almost a decade, the basic premise was enshrined in law in 1876.  (Swiss federal law placing the forest police under overall supervision of the Confederation).  The idea was as follows: “The forest area in Switzerland should not be reduced”. In other words, we should not cut down more wood in Switzerland than will grow back naturally.

2. One hundred years later, in 1987, the idea was taken to a global level by a pioneering report by Gro Harlem Brundtland, and this in two respects:
- the focus was no longer on a single country, but instead worldwide,
- and sustainable management should become the norm in all aspects of life, not just in forestry.

3. In the 1990s, the idea was also adopted by private fund managers.  This resulted in new, and not always coherent definitions and criteria.  Let us take as an example the ‘sustainable’ equity fund of a medium-sized Swiss bank (not based here in Zurich): “The fund shall refrain à priori from investing in companies in the following sectors: tobacco, arms, nuclear energy, automobile and aircraft construction, chlorine and agro chemicals.”

What is the definition behind this rather sweeping negative selection? Sustainable management is – and I quote – “the production of goods and services that are broadly accepted in society, and which use methods of production that entail as little conflict as possible.”

I’m not entirely comfortable with this definition. It gives the impression that the focus is on what is currently popular or perhaps "politically correct". And although we should certainly not provoke conflict, sometimes it is necessary to engage in a conflict in the long-term interests of an issue or an institution, the Swiss forestry law of 1876 being an example.

What I do agree with is the need for acceptance. In the consumer goods industry, it is impossible to work without broad social acceptance. As I mentioned earlier, we make our living from hundreds of millions of purchase decisions every day. The consumer has the option of buying elsewhere. It is in this perspective that I once said : “Nestlé will have acted in a sustainable manner if our products are still being bought by our grandchildren and yours.”

I now come my third point – sustainable use, not exploitation – and would like to illustrate it by taking a specific example, namely water sources.

My comments earlier about forests also apply to the springs of our bottled water. We can and we want to only use as much as the natural water circulation will replenish.  There are basic economic reasons for this: for a brand such as San Pellegrino to remain a long-term business, we must ensure that the spring flows continuously over the long term.  Furthermore, if the water table in a spring declines, the quality of the mineral water changes and this would immediately entail a reaction from consumers.

And so we have learned how to adopt a sustainable approach in dealing with water. We have developed methods to allow us to constantly monitor the water table when using underground and spring water.  We do not just keep this experience to ourselves, however, but also pass it on, for example to the team of the UN High Commissioner for Refugees, among others in a project supplying water for refugees in Ethiopia. 

One of the problems with refugee camps is that you suddenly have an enormous number of people all packed closely together in a small area with no water supply. The water that is essential for their survival must be pumped into the camps in large quantities. This gives rise to the risk of uncontrolled excessive use of the water sources, with the threat that the water table will fall so low that the camp risks to be left behind as a desert. 

We would be more than happy to pass on our expertise in the controlled, sustainable use of water – knowledge we gained internally – to other organisations as well. And we participate in the discussions about water, because it is a matter of greatest importance for us, for the farmers that supply us and for preparing many of our products.
(See: http://www.the-world-around-water.net/)

And so to my fourth point: the Brundtland definition and day-to-day work in our company.

The Brundtland report of 1987 defines sustainable development as follows: “Meeting the needs of the present without compromising the ability of future generations to meet their own needs and their ability to choose their lifestyle.”

To whom – to which ‘stakeholders’ as they are now called – do we in a company such as Nestlé owe responsibility with regard to the sustainability of our work?
- firstly, to the company itself as a value-generating institution,
- then to our shareholders,
- we have a massive responsibility to the consumers, without whom we would not exist,
- to our employees all over the world,
- to our network of local partners, the suppliers – and Nestlé’s most important suppliers worldwide are still the farmers whose produce we buy and process,
- and ultimately to the communities in the countries in which we invest and work.

As you can see and as you will further discover below, this is very much of a business perspective on sustainability. You may dispute some of the points I make here, but that is the purpose of this event, at least so Dr. Brugger tells me.

I expect some people to dispute my first point above all, where I present shareholder value as a major contribution to sustainable development.

The Brundtland definition calls for future generations to also have the ability “to meet their own needs and choose their lifestyle”.  This is a very specific demand.  For a company manager, the primary goal is to ensure that the company remains for future generations.  If you take a look at how many major companies with longstanding traditions have disappeared in recent years, you can see that this is one of the most important tasks of a company’s managers.  At the level of society, Gro Brundtland’s definition is no longer dealing with nature alone, but includes also real people, men and women of today and the future.  And in this context we of course think of our social institutions, in particular pension funds.
 
It is essential that pension funds are able to perform over the long term as this is the only way to preserve the lifestyle choices for future generations as called for by Mrs Brundtland.  For this to happen, good returns must be earned on the contributions paid into the fund during the person’s working life.

We have used a small model to calculate the impact of the return on capital on pension funds’ performance.  Although simplified, this nonetheless offers us useful indications; it is based on the actual contributions to be paid into an existing Swiss pension fund over an assumed working life of 40 years.

A couple of points in the chart show the ratios.  The first, at the bottom left, shows the current yield on Swiss Confederation bonds. With these returns, at the end of 40 years paying into the pension fund there would be much less than five years’ salary available.

The next point, in orange, shows the current compulsory interest rate.  This has had to be lowered several times in recent years because – to the surprise of some – the returns on pension fund investments cannot be decreed by the authorities on a theoretical basis and must instead be generated in the economy.

The next point – 7.2% per annum – shows the long-term average performance of a pension fund for civil servants in the Zurich region (the period covered being 1993 to 2004; for the period since 1997 the annual average has been less than 4.5%). 

The final point – at 12% – shows the annual average performance of Nestlé shares since 1997. 

A large portion of pension funds’ investments should be made in bonds – this is also set down in the pertinent regulations.  It is therefore necessary to generate very good returns on the equity component, and a significant increase in shareholder value is called for to ensure that the combination of bonds and stocks can produce the average returns required to secure the provision of pensions of those who paid during their long working life into the fund.
 
But we shouldn’t be satisfied with this alone.  Higher returns could perhaps also open up the possibility of reducing pension fund contributions.  These are currently well over 20% of employees’ salaries in some cases. 20% non-wage labour costs for pension funds alone of course mean that Switzerland is far from being as competitive as it would be if we could bring the costs down somewhat.  Lower non-wage labour costs resulting from higher returns in pension funds would contribute to creating more jobs.

So what have we achieved for our shareholders since 1997? I showed the percentages of returns, but what are the amounts? Well, the appreciation and dividend payments since 1997 give a total of over 83 billion francs.

Three quarters of this, the proportion relevant for pensions, corresponds to four and a half times the assets of one of the largest Swiss pension funds – a fund with 77,000 members.
Why three quarters? Around 65% of Nestlé shares are now held in the portfolios of institutional investors, pension funds and other retirement savings vehicles.  According to our estimates, a further 10% are held as savings put aside by small shareholders for their old days. 

As part of the returns generated for shareholders since 1997, slightly more than 18 billion francs have been paid out as dividends.

This amount is almost as high as the total of all taxes paid, spread over all the countries where we operate and not just Switzerland. However, given that the Swiss tax authorities retain a third of the dividends via the reclaimable withholding tax, the tax returns increase to almost double the amount actually paid to the shareholders.

I am not complaining about the taxes we pay, instead I see them much more as a further contribution to sustainable development in that the governments can use our money to finance social and environmental tasks.

But what about the direct obligations and contributions made by Nestlé with regard to the needs of the present generations? Let us first look at our employees and their income.

On the right you see the total wages since 1997, compared with the returns received by shareholders. By the way, the scale as shown on the left is different from the slide shown before, as the amounts will get higher.

This comparison is purely aimed at providing an illustration.  There is no zero-sum game – as it is so often assumed – between total wages and the return on capital for shareholders.  80% of the shareholder gains since 1997 were attributable to share price appreciation, i.e. they are the result of our strategy, which combines the improvement of profit margins and sales growth, the latter leading to more employment and higher wages.

In other words: at Nestlé, we haven’t taken the approach fashionable in other firms, i.e., focussing on those sales with the highest margins only, thereby reducing sales and related direct and indirect jobs.

In the next slide, the cumulated expenditure on raw materials, mostly paid to farmers, has been added, as has the amount spent on goods and services purchased as inputs.

 

Total purchase of inputs of semi-finished goods and of services has risen sharply in recent years.  This has also led to a rise in the number of people at suppliers working for us compared with those employed directly at Nestlé.  I will be covering that subject in more detail later.

Let us first look at the employment situation in Switzerland.  Since 1999, we have created 800 net new jobs.  Net means after the deduction of jobs that were no longer necessary as a result of measures improving our efficiency.  

In the picture you see the opening of the new Nescafé factory in Orbe.  We have also built a new factory for Nespresso at the same location – the latter subsidiary having created a total of more than 300 of the 800 new jobs in Switzerland. We have invested 1.2 billion francs in Switzerland in recent years, a sign of the confidence we have in this country as a place to invest.

Worldwide, the Nestlé Group directly employs 247,000 men and women. 
Employment and training at companies makes a significant contribution to ensuring people’s long-term wellbeing.  Our comprehensive programme for training and further education including the transfer of knowledge to our suppliers and clients was outlined in a special report in 2003; you can find it on our Internet site.

As part of our local activities and roots, we are increasingly working together with local and international companies as suppliers of goods and services. I mentioned the huge amounts spent by the Nestlé Group on these inputs a moment ago. These amounts have their equivalent in an increasing indirect employment.
 
The number of people employed indirectly by Nestlé – i.e., mainly the job multiplier effect of our purchases of goods and services – has been increasing rapidly for years.  A very cautious estimate now puts the figure at over 1 million indirect jobs with our partners – translated here into full-time equivalent positions – giving a total of 1.3 million direct and indirect jobs.

Most of these employees support a family.  As you can see, the resultant figures are huge.  This increases our responsibility; if we do something wrong, this could have far-reaching consequences for more than 4 million people whose living depends directly and indirectly from Nestlé’s activities.

What strikes me as being important from a global perspective is that only by giving people work we can make a lasting contribution to reducing poverty. 

Now, if we look at the developments with regard to the worldwide creation of jobs in industry and services overall, we see that trends in direct and indirect employment by Nestlé are not a solitary case.  And globalisation has strengthened the positive impact. Since the early 1980s, the annual addition of new jobs has almost doubled to 34 million new jobs (net) per year.  I know that this acceleration did not happen to the same extent everywhere, as is illustrated when we take for instance a look at some of our neighbouring countries.  However, in these cases we should ask whether this does not stem from home-grown problems.

I would now like to say a few words about our most important and most numerous suppliers – the farmers across the world, and in particular dairy farmers.  My example – Nestlé in Pakistan.

We collect the milk in more than 3000 villages far off in the country, without competing with the small milk dealers near to the towns and cities.  Our collection units in Pakistan are spread over an area almost twice the size of Switzerland.

Thanks to high-performance logistics, we can ultimately bring cost-effective milk products to the consumers in the towns and cities despite the great distances involved in procuring the raw milk for processing.

The dairy farmers are not merely suppliers – over the years they have instead become our partners. We work together with them and help them improving their farming. Our well developed advisory service covers the entire milk district, providing advice on issues such as better conditions for the animals, productivity and quality.

But advice does not stop in the stable. In Pakistan, it is mostly the women that tend to and milk the cows and buffalos; many of our advisors are therefore women.  Over the years, they have built up a relationship of trust with the women on small farms in these far-flung villages; and the discussion today increasingly also includes advice on everyday hygiene and healthy eating.

As the result of our work, 100 million rupees are paid to the 130,000 farmers in our milk district in Pakistan every week.  That is more than 9 million Swiss francs (on a purchasing power parity basis).

Nestlé has comparable operations in many other countries across the world, and in a similar form with other raw materials such as coffee and cocoa.

In all products, advice and performance incentives for the farmers are also aimed at promoting better quality, for example less bacteria in the case of milk. This is also particularly in the interests of our local consumers and their health. 

In preparing my speech I was struck by how seldom consumer interests are mentioned in the debate on sustainability.  Here once again the Brundtland definition:  “Meeting the needs of the present without compromising the ability of future generations to meet their own needs and their ability to choose their lifestyle.”

If we again think here of existing, real-life men, women and children, “meeting the needs” should very much also seen as a case for providing goods and services for people everywhere, for providing value for money, and also to ensure that the inhabitants of poorer countries have some choice. 

I realise that in my own speech here I am not giving consumers the appropriate amount of attention either – I think this would perhaps be a topic for a future date.

Allow me to draw one interim conclusion from the points I made up to now and to add one further point with regard to a company’s responsibility in matters of sustainability before I move on to part 5 of my presentation:

Media and academia often separate economic sustainability from social sustainability. In certain individual aspects, this may even be correct.  All in all, however, economic success is not an end in itself in my opinion, but instead by definition the prerequisite for improving people’s social position.

And, my additional point, an extension of the overall responsibility for a company’s managers: optimising the use of the funds they are responsible for and the attendant balancing of the needs and requirements of the various interest groups, also related to sustainability. 

We are often asked why we don’t do more of this thing or the other, why we don’t invest more in the environment, why we don’t give more money to aid organisations, etc. It’s like having a duvet that’s too short: if you pull it up so that your neck is covered you run the risk of having your feet out in the cold. 

We have to ensure that the duvet sits properly, so to speak. In other words, as the managers of a company we must continually seek to find the balance between the legitimate interests of our various stakeholders, different countries and different areas of responsibility. Simultaneously we must strive to have a balance between the present and the future, this being the specific requirement of sustainable development. 

The principle of not seeking unilateral or even short-term maximisation also applies to shareholder value.  In the 1990s, we clearly opposed the one-sided maximisation of short-term shareholder value, and paid a heavy price for this on the stock exchange and among investors.  In my opinion – then and now – our actions must be determined by a clear, long-term vision, by long-term responsibility.

This also means that we must go further than simply balancing out the various interests and – to continue our analogy from above – must contribute to ensuring that there is a bigger duvet.  Because then it is easier to provide sustainable cover for everything that is necessary and desirable. 

And now I would like to come to the fifth part of my presentation, namely our responsibility to the environment. In the current debate on sustainability and the environment you often hear ideas about what others should do.  We start by looking at ourselves and check every year where we stand.

It is no coincidence that water is at the top of the list – in developing countries in particular it is still the No. 1 environmental problem.  As you can see, since 2000 we have reduced water consumption per unit produced by more than 37%.  We have also made significant savings with regard to energy consumption, and, as a result, achieved a reduction in CO2 emissions.  Theses improvements in our efforts to protect the environment required major investment, which was only possible because the company was prospering.

The figures in the chart are taken from the environmental report in the Nestlé 2004 Annual Report, where you can also find a raft of other important indicators that confirm the comprehensive improvements being made.  By publishing these indicators in the main section of the Annual Report, we in senior management at the company underscore the importance we attach to preserving the environment.  With this we not only send a message to people outside the company, but – and this is very important – to the employees inside the company as well, thereby ensuring that they take environmental concerns more seriously.
 
Environmental concerns have been taken seriously at Nestlé for a very long time. For example, we took on a pioneering role in protecting against water pollution and adopted a sustainable approach in this regard more than 70 years ago.  We created the first water purification plant in Switzerland in 1932, i.e., long before the phrase "environmental protection" was coined.

My sixth and final point centres on dialogue and acceptance.  Linked to this there is another question: who sets the framework in which we operate, and who is responsible for controls?

At this point, I would like to emphasise again that companies are part of society and base their activities on certain generally accepted values.  In this regard, any truly global company is faced with some rather fundamental questions. Ethics are per se linked to the specifics groups within a society.  What is ethical in Zurich is not necessarily ethical in Geneva.  What is ethical in the USA is not necessarily ethical in Europe, and what is ethical in Switzerland is not automatically ethical in the Middle East.

Let us take an everyday example. Our tins of condensed milk have a picture of a milkmaid on them, wearing a long, high-necked dress with a traditional apron. For us this seems almost boringly conservative, but in strict Muslim countries this label is not acceptable because our milkmaid not wearing a veil.

In dealing with questions regarding the pertinent values, we must therefore take cultural differences into account.  At the same time, there are overarching universal principles we must adhered to, and we therefore decided to participate in the "Global Compact".  The principles set out by this initiative with regard to human rights, employee rights and environmental protection are accepted by all cultures worldwide. They offer a global framework and a platform for discussing improvements with the groups concerned all over the world.

Secondly, we are of course subject to controls in the form of laws and other regulations.

Thirdly, a steering mechanism that is possibly just as important is competition.  The competition that has been heightened significantly with globalisation is certainly one of the most challenging controlling factors there is as far as we and other international firms are concerned.

Fourthly, there are the public, the media and non-governmental organisations.

Fifthly, there are explicitly formulated corporate principles, against which our performance is measured.  We use them for our day-to-day operations. Every organisation, especially one as large and as complex as Nestlé, makes mistakes, and can and must learn from them.  We defend ourselves against sweeping and disparaging generalisations.  However, if specific accusations are made we look into the matter, and if there is a problem, we remedy it.

Acceptance requires dialogue.  Here you can see some pictures of a discussion in Moga in northern India on the UN Global Compact. We operate a milk factory in Moga, with a milk district that is almost as large as the one in Pakistan I mentioned earlier.  I was in India three weeks ago, and had the opportunity to engage in dialogue – again on the subject of the Global Compact – with a number of people including a village primary school teacher and in particular also with dairy farmers.

I took along some brief films clips of one of these discussions on the Global Compact. You probably won’t understand anything as the workers, farmers and other people taking part in this lively debate are speaking Punjabi. What I want to stress with these pictures is that we must above all pursue the dialogue on sustainability with the people directly concerned; and we must also expect that not everyone will respond in the lingua franca English.

The dialogue with the world around us is not always this constructive.  We had some graffiti sprayed on our headquarters at the time of the G8 meeting in Evian a couple of years ago – I was painted as a man with a bloody axe slaughtering people. 

Other pictures were somewhat friendlier, one suggested there should be ‘Chocolate for all’, something we very much agree with, even if the painters meant it to be ironical.

For the past three years, I have taken part each January in the Open Forum in Davos. There too there were repeatedly harsh attacks both on the company and me personally, and this is not pleasant for anyone.  The last time someone compared Nestlé with the Colombian drugs mafia.  He at least came to apologise bilaterally after the debate.

Dialogue is necessary for us to take matters forward.  We want to continue to build on the acceptance of Nestlé – not over the short term with tactical manoeuvres and cheap concessions, but instead in an open dialogue with long-term and effective solutions.

This involves taking part in public debate, contributing specific ideas and proposals from our own experience without giving the impression that companies hold the key to solving all the world’s problems.

Ladies and Gentlemen, I would now like to bring my presentation to a close.

We at Nestlé started dealing with sustainability at an early stage, and not just for PR purposes but rather as an integral part of our corporate strategy.

In conclusion, I would like to highlight a few points I feel are particularly important:

Sustainability does not mean stagnation, and instead requires growth.

Shareholder value does not contradict sustainability, it is a part of sustainability.  I illustrated this with the pension funds.  Comprehensive sustainability also results from more employment, training, more well-being and opportunities for development through the local procurement of goods and services, not least farmers’ products. 

Many aspects must be also looked at from the specific angle of optimisation, of balancing different interests and needs.  Here we believe that a consistent, long-term orientation of a company can balance out many contradictions.  However, there are issues where we cannot make any compromises.  One such example is ensuring stable underground water tables at our mineral water springs.  Or to take another example: there can be no compromises when it comes to the safety of our products and thus the health of the consumers.

I started my brief history of sustainability with the Swiss Forestry Act of 1876.   This law was very successful.  When it was passed, 788,000 hectares of land in Switzerland were covered by forests.  Today this number stands at 1.25 million hectares, and the forests are continuing to expand.

We have some wonderful old trees in the grounds of our head offices in Vevey.  We too have therefore made our own small contribution to the success of the forestry act.

But our strengths lie elsewhere.  We make our truly significant contribution to sustainability:
- via the value of our shares,
- by adding value for consumers,
- via employment and training,
- through our work in developing countries,
- and with our investments for the environment.

All this represents one way, one contribution towards ensuring greater sustainability.  Other ways are possible and also necessary.  The best results for all parties will be achieved if we all contribute what we can do best.

Many thanks