A green giant warms up to Wal-Mart

Wal-Mart CEO Lee Scott.

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(Fortune) -- The outspoken head of eco-friendly consumer product maker Seventh Generation is changing his tune when it comes to the world's biggest retailer, Fortune has learned.

Seventh Generation CEO Jeffrey Hollender, who in the past has equated working with Wal-Mart (Charts, Fortune 500) to selling his company's soul, said last week in a meeting at Fortune's New York offices that he would now consider selling products to Wal-Mart, although he was quick to add that no decision has been reached. Wal-Mart, for its part, did not provide any comment.

Privately-held Seventh Generation's non-toxic products -- which range from laundry detergent to toilet paper and diapers -- will generate about $100 million in sales this year and are currently found everywhere from Target (Charts, Fortune 500) to Walgreens (Charts, Fortune 500) to Amazon.com (Charts, Fortune 500).

The change of heart, Hollender said, came as the result of the retailer's broad-based sustainability efforts, a private meeting he had with CEO Lee Scott late last year, and an internal review of 17 retailers that graded each on their commitment to greener business practices.

"Three years ago, I would have never imagined even considering doing business with them," Hollender said. "[But] the progress they have made is beyond what I imagined or hoped for three years ago."

This news comes as Wal-Mart has finally released its long-awaited, first-ever sustainability report, a 59-page study that details the goals and progress of the company's much-publicized environmental efforts since 2005. Wal-Mart has pledged to spend $500 million a year on initiatives like opening eco-friendly stores, increasing the fuel efficiency of its trucks, and reducing cardboard packaging.

The retail giant's pledge to green its business practices has made Hollender more comfortable with seeing his products on Wal-Mart's shelves, but he's well aware of the complexity and risks inherent in such a move. (He's probably more aware than most CEOs -- his company's name was inspired by an Iroquois saying about how every decision must be weighed based on the impact it will have on the next seven generations.)

First, Hollender is not even sure if Seventh Generation has the production capacity to handle a big order from Wal-Mart, although it could meet the demand of a small pilot test. Wal-Mart's market share in household products is well over 30%, and its Supercenters are the primary supermarket for 20% of U.S. households, according to TNS Retail Forward.

Then there's the issue of his highly opinionated consumer base, some of whom might boycott Seventh Generation if it supplied Wal-Mart.

"I do believe that if we were to make the decision to do business with Wal-Mart, we would lose some consumers," Hollender said. "This issue is very divisive -- it's almost as polarizing as abortion." Hollender said he would reach out to consumers and retailers before making a final decision.

Such a move might also not go down well inside the company's Burlington, VT, headquarters. Some employees think Wal-Mart's largely lower-income clientele should have access to Seventh Generation's products, while others recoil at the idea of selling to a company whose public image is so tarnished.

Finally, Hollender is well aware that Wal-Mart's promises in this arena have not always been, um, sustained. For example, the retailer has scaled back its plans to significantly ramp up its selection of organic food, after early sales proved disappointing.

Still, on the whole, Hollender is impressed with the progress Wal-Mart has made. A big factor in Hollender's thinking was a sustainability summit Wal-Mart hosted last month for 400 of its largest vendors. While he's not a Wal-Mart supplier, Hollender attended and came away convinced that CEO Scott is willing to make meaningful changes at the retailer, whose sales were $351 billion last year.

"I'm a cheerleader for Wal-Mart's leadership and progress," Hollender wrote on his blog during the meeting. "But as Lee Scott said, this was a graduation ceremony from kindergarten, and the toughest challenges lie ahead."

Hollender, currently sporting a sling on his right arm from a snowboarding accident, said one of his tête-à-têtes with Scott in Bentonville -- back in 2005 -- also left him impressed. "He was unusually open and disarming," Hollender recalls. "He was very willing to hear my most direct criticism." He also noted with a laugh that Scott surprised Hollender by being there at the door to greet him, displaying the utter lack of pretension that Wal-Mart is famous for.

Wal-Mart may have opened its doors to green crusaders like Hollender, but whether it opens up the shelves at its 7,000 stores remains to be seen.