For many senior executives, sustainable development is nothing more than the latest crusade of fringe environmental groups and liberal economists. They believe that granting legitimacy to sustainable development would incur costs while blurring focus on the core business, and would invite further unwanted government intervention. Such a view is shortsighted and ultimately harmful to business performance. It represents a denial of the realities of doing business in a multinational, interconnected world in which national priorities increasingly emphasize sustainability and governments turn to corporations for support and expertise. Accumulating evidence supports a positive correlation between performance on sustainable development and performance in the stock market. ExxonMobil, BP and Royal Dutch/Shell all have high market capitalization and strong commitments to sustainable development, albeit expressed in different fashions. Among investors, success in addressing sustainable development is becoming an important proxy for management quality. Sustainable development offers new avenues for growth and value creation--but only for companies that can adapt their business designs to respond to the new realities. A few companies have started down this path, making major strategic commitments to the principles inherent in sustainable development. While it is early in the game, these companies have an advantage of several years over their competitors, who may not be able to catch up if they wait much longer. The sustainable development movement started with environmental issues. In recent years, however, the notion of sustainability has expanded to encompass a broader array of social and political issues. Most simply put by the United Nations World Commission on Environment and Development, sustainable development "meets the needs of the present without compromising the ability of future generations to meet their own needs." This broader definition includes several goals: social progress, which recognizes the needs of everyone; effective protection of the environment; prudent use of natural resources; and maintenance of high and stable levels of economic growth and employment. The challenge is particularly acute in the oil and gas industry because of the ways that demand and supply trends are converging. Worldwide demand for oil and gas continues to grow, and most forecasts suggest that it will continue to grow in the future. During the past 25 years, demand for oil and gas in the U.S. and Europe has been steadily increasing. Forecast demand growth is even higher for developing countries in Asia, the Middle East, and Central and South America, which are expected to double their energy consumption by 2020. At the same time, U.S. and European production of oil and gas has declined sharply, a shortfall that has been offset by increased imports. The world is far from running out of hydrocarbon-based energy, but the sources can be found in different countries than in the past--countries that have not been part of the traditional business model and that place great emphasis on the importance of sustainable development. For example, the top dozen oil-producing fields in the world are in Saudi Arabia, Iraq, Abu Dhabi and China. Giant new fields are also being developed, mostly in the Middle East, Russia, West Africa and other locations outside Europe and the U.S. Like it or not, as major players on the global stage, oil and gas companies must engage the subject of sustainable development. It's not a question of making value judgments about a government's priorities. It is all about access to energy reserves. Those companies that resist will likely see value migrate to others that accept the situation and apply their resources to carving out new competitive positions incorporating sustainable development principles. The evolution In some respects, this trend is a natural evolution of the public debate that began more than 40 years ago over safety and pollution issues. The accumulation of events such as the accident at the Three Mile Island nuclear plant; the Exxon Valdez tanker grounding; the explosion at Union Carbide's Bhopal, India, pesticide plant; and the Piper Alpha drilling platform disaster in the North Sea reinforced public views that these industries were at odds with social norms. In the energy industries, moreover, many companies were delivering chronically poor business performance. When investors criticized senior management of these firms, the typical response from executives was that low returns on invested capital should be expected in a business defined by massive projects and high risks. Industry attitudes began to change during the boom years of the 1990s, when investors demanded better returns on their investments. Investors shifted their capital to high-technology firms, including many start-ups, and away from mature, asset-intensive companies. Many old-line companies felt compelled to address investors' demands. At the same time, corporations learned that safety and environmental responsibility were good for business, as social mores in the West evolved to make it unacceptable for corporations to ruin natural areas in the process of extracting energy. Public perception became critical to the business. By 2000, it was an oil and gas firm-BP--that had taken a leadership role in defining a sophisticated and broad-based role for sustainable development in corporate strategy and operations. The challenge now is to conduct business profitably in those parts of the world where demand is growing sharply, where the hydrocarbons can be found, and where the political risks are high. In Venezuela, for instance, class warfare has pushed the state into virtual paralysis. Caught in the middle are the oil and gas companies that have made large investments there with hopes of capturing part of the country's massive hydrocarbon reserves base. For large oil and gas firms, the traditional business design is not capable of meeting this challenge. As exemplified by many refining companies, pipeline companies, and major upstream companies, as well as nearly all of the national oil companies, the traditional model emphasizes physical assets and projects, using technology to reduce costs and raise production volume. Any concessions to sustainable development might include a commitment to safety and environmental responsibility, but not much more. While this model is well understood by industry players, its track record has been poor. Returns on capital employed for the industry have been in the single digits for decades, while those for other asset-based industries were much higher. Legacy assets have been strangling many oil and gas companies because the assets are located far from regions where supply and demand are growing rapidly. An opportunity to develop huge oil reserves in Kazakhstan now looks more appealing, despite the political risks, than tapping small reserves in Colorado. And while upstream companies that do the exploration and drilling have been the most vulnerable, refineries, distributors and others throughout the energy value chain have also been affected. To maintain the perception that they were growing and viable, many of the traditional companies have been consolidating. Acquisitions were also driven by the failure of these firms' exploration and drilling to find sufficient hydrocarbons. But the new breed of super-major is just a bigger version of the old business model. And even more troubling, as the consolidators get bigger, their asset base spreads over countries outside the U.S. and Europe, further exposing them to nations that have put a premium on sustainability. For decades, there was an implied double standard in which oil and gas companies operated differently in the U.S. and Europe, where environmental and labor regulations were more strict and entrenched, than they did in other regions. But now, to access the hydrocarbon reserves in those regions, companies will not be able to simply "show up" with their traditional business design focused on operating assets. Nations that own the reserves are less willing to part with them than in the past. The standard arrangement will likely move toward services and away from asset ownership. Ownership of reserves and assets will continue to be up for negotiation, but will increasingly be held or directed by national interests. Capital sources, meanwhile, are more willing to strike deals with unusual configurations of service providers and national oil companies such as Pemex in Mexico, Petrobras in Brazil and PDVSA in Venezuela. Increasingly, capital will flow directly to the owners of the hydrocarbons. Nations that own the reserves thus will set the agenda for the industry in the future. And these nations, often through the national oil companies that they run, set sustainable development in some form as a core strategic goal. Service providers are expected to align themselves with those objectives. In time, as national oil companies move closer to privatization or market-driven business models, sustainable development will have to become part of the value proposition of any company that wants to gain access to reserves. What it looks like Each country has a different version of sustainability priorities, and this translates into different views on how companies will develop oil and gas reserves, establish refining and build basic infrastructure. Consider the different approaches to sustainable development now being taken in Mexico, Venezuela and Russia. In Mexico, Pemex is owned by the Mexican people and managed through the government. The company is charged with day-to-day operation of the business across the entire value chain. Pemex is currently contemplating a massive capital-spending program to increase its proven reserves, raise production volumes, and expand transportation and administrative units. The company expects this activity to improve business performance, but just as important, the investments are part of a broad sustainable development program backed by President Fox that aims to improve the economic, social and environmental well-being of the nation. Mexico allows little or no participation by foreign companies in its oil and gas value chain. Venezuela, on the other hand, encourages participation of foreign companies in developing its huge hydrocarbon reserves. The nation wants to attract the necessary capital to develop projects; to gain outside expertise in improving PDVSA's access to technology; and to provide training and skills for citizens employed on these projects. Despite political unrest, most of the world's super-major companies have entered into agreements with Venezuela to help develop reserves. These companies have made a commitment to additional trading with the country, to expanding social programs for employees and the local economies near production facilities, and to providing access to new technologies. The needs of Russia are different altogether. Given the vast expanses of the country, it needs to develop a large infrastructure and a large, skilled workforce to maintain the infrastructure. Working with such countries will require astute political skills, to be sure. Groups of people in Nigeria, Gabon, Colombia and elsewhere stage protests along oil and gas pipelines demanding jobs and better education. The current crises in Venezuela and the Middle East remind us of the volatility and risk involved. Companies will need to determine which business design will provide the strength and agility to attract investors and still meet the particular demands of the host country. Already at bat Some companies are already stepping up to the challenge. ExxonMobil has built training facilities around the world to upgrade the skill levels of employees in the countries where it conducts business. Conoco has long supported environmental initiatives in Africa to protect mountain gorillas from extinction. Some executives will question why they should get involved in education and species survival, rather than leaving these matters to governments. But the reality is that some governments do not have the resources or capabilities to address their priorities without help from the private sector. They view any company that wants to participate in that country's energy sector as a logical source of support and expertise and capital. Look at Qatar and Kuwait to see the impact of sustainable development efforts. With the help of the private sector, these countries are not just pumping oil; they are also building universities and medical centers, improving their agricultural sector, promoting tourism--in short, opening themselves to a more valuable future. Ultimately, the winners will be those companies that take the lead in identifying and providing solutions to the sustainable development needs unique to each country. They will turn the traditional mindset--create the project, find the capital, develop and manage the asset--on its head. Instead, they will start with the customer--a government--and develop plans for hydrocarbon development that are compatible with that customer's priorities for sustainability. Companies that delay this inevitable transition will find it hard to catch up and will likely find themselves swallowed up by the leaders. Jim Miller is a Houston-based vice president of Mercer Management Consulting, heading the firm's oil, gas and chemicals practice.