Green Begets Green: Plotting a Clear Course Through the Carbon Age
By Sharon Tregaskis
On Valentine's Day 2008, the United Nations assembled 500 of the nation's top investors and asset managers, a group that collectively manages upwards of $20 trillion, to consider the role of climate change in shaping how they do business. The keynote speaker, Nobel laureate Al Gore, had a message of tough love for Wall Street's heavy-hitters: carbon-intensive assets have a corrosive potential to rival the speculative real-estate ventures that sent the U.S. economy skidding toward recession in late 2007. "If you really take a fine-tooth comb and go through your portfolios," declared the former vice president, "many of you are going to find them chock-full of sub-prime carbon assets."
Climate change spurred by human emissions of greenhouse gases primarily carbon dioxide released by the burning of fossil fuels threatens not only a re-ordering of the natural world as we know it, with rising sea levels, erratic weather patterns, mass extinctions, and agricultural disruptions, but also a transformation of global markets. Already, foreign governments have begun regulating carbon emissions in hopes of slowing climate change, and it seems merely a matter of time until the United States institutes controls of its own. Success in that emerging context will demand a paradigm shift, in which efficient use of natural resources and energy prevails, entrepreneurs monetize and exploit the niche carved from carbon constraints, rising fuel prices drive out inefficiencies, and exploding consumer sophistication forces new accountability and transparency in green marketing.
"There is an incredible opportunity if you can change the thinking of capital markets and corporations," says Peter Knight '73, a founding partner and president of Gore's three-year-old London-based Generation Investment Management, whose strategy emphasizes rigorous analysis of the long-term environmental, social, and geopolitical opportunities and challenges facing global equity prospects. "Our mission is to prove the business case [for sustainability] through achieving superior performance."
Gore and Knight aren't alone in their vision for the transformational role businesses can play in the face of climate change. Lehman Brothers has declared global warming a "tectonic force" likely to "gradually but powerfully change the economic landscape." Google has invested millions in its "Renewable Energy Cheaper than Coal" initiative known by the shorthand Re>C a quest to produce a gigawatt of non-intermittent clean energy more affordably than it could be derived from the fossil fuel responsible for most electricity in the United States. Citi has committed to investing $50 billion over the next decade to address climate change.
Dow Chemical's 2015 Sustainability Goals cover everything from local protection of human and environmental health to green chemistry, energy efficiency, and an emphasis on products that meet the challenges facing humanity. "As human beings, we have a moral obligation not to allow our activity to significantly harm the lifestyle of our descendants," says Dow director of sustainability William McNeill. "Any radical change in the environment or weat her patterns, sea levels, will impact Dow and Dow employees as citizens of the earth."Theuncertaintyprinciple
Such truths became painfully obvious as the nation reeled in the aftermath of the hurricanes that blazed a trail across the southeastern U.S. in 2005. Hundreds of employees went missing, places of business were obliterated, gas prices spiked, and in some areas, corporate supply chains proved more resilient than the federal government's emergency response capacity. Two years later, meteorologists caution against blaming global warming for the trifecta of storms, but the destruction wrought by Katrina, Rita, and Wilma served as a powerful wake-up call for corporate America. "The impacts of climate change are going to hit our facilities, our workers, our supply chain," says Jennifer Layke, deputy director of the World Resources Institute's Climate and Energy Program. "Most companies have never worked through what climate change will mean in terms of the volatility of the political systems in which we work in the developing world, where there are going to be natural resource conflicts. There's a whole lot of planning just basic, good strategy that's being done now."
And while scientists may have reached near certainty on the fundamentals of climate change, they still lack the hard data executives crave to inform tactical moves: how high will the oceans rise, and when? How will drought affect access to the water required for manufacturing? How will commodity supplies shift, sending price volatility rippling through the markets? Given those uncertainties, Dow's McNeill says he gets a lot more traction with managers by focusing on immediate returns. "We have a lot of facilities on the coastline that would be impacted [by rising sea levels and volatile weather patterns]," says the executive. "But if I were to go to a business guy and say, 'Twenty years from now the water levels are going to rise six meters, what are you going to do about it today?' I don't know that I would incentivize him very much." So McNeill takes a different tack: "If I go to him and say, 'Look you can save a million dollars by putting in this technology and reducing your CO2,' I can get him to act."Thecarbonequation
Much of the response to climate change has focused on energy particularly the relationship between fossil fuels and carbon emissions. "Many of our clients are involved in sectors of the economy that rely on reliable, affordable energy," says Citi vice president for environmental affairs Bruce Schlein '88. In February, the bank partnered with JPMorgan Chase, Morgan Stanley, and Sustainable Finance to establish "The Carbon Principles," a guide to rigorously evaluating the risks associated with financing coal-fired electric power projects and clean alternatives in light of expected carbon taxes. "We need to be in a position where we understand the intersection of these very complex issues, where we work with clients in a way that helps all of us transition to energy that is reliable, affordable, and not damaging to the environment."
For Google, Re>C boils down to that chestnut of Economics 101, supply and demand. "Just like other companies that have data centers and lots of computers, Google has to use the electricity that's available," says green business and operations strategy associate Sam Arons, noting that the firm relies on cheap energy to remain competitive. But realizing a corporate commitment to carbon-neutral operations and a vision for doing so without the purchase of carbon offsets takes more than conservation and efficiency. Enter Re>C, which moves the search-engine giant another step closer to compliance with its internal goals and promises to spare the company from future price volatility associated with fossil fuels. An added bonus, should the investment in clean energy research and development bear fruit: a Google-funded breakthrough could open up rich new markets for the firm in power-hungry India and China, and throughout the world.
"The market, broadly speaking, is beginning to come around to the idea that burning fossil fuels and generating a lot of carbon is not helpful, and unnecessary," says professor Mark Milstein, director of the Johnson School's Center for Sustainable Global Enterprise and an advisor to the Cornell administration as they slash emissions in line with the Presidents Climate Commitment, a 500-college consortium dedicated to carbon neutrality in higher education. "Address the carbon issue with high functionality, high quality, and good value, and you will have success in the marketplace."
Layke, who coaches companies as they determine how to measure, manage, track, and report the emissions associated with their operations and manufacturing, set targets for reduction, and evaluate potential investments to reduce their emissions, sees reason for optimism in her clients' efforts. "They're looking at opportunities to have their products succeed in future markets where energy consumption is an issue, or the energy associated with the manufacturing of the product becomes a cost in that product," she says, "and therefore finding ways of producing materials and products with a much lower carbon footprint."
Paul Tebo, visiting senior lecturer, Johnson School
Lehman Brothers senior vice president Peter Ying, MBA '02, who works in global mergers and acquisitions with a focus on renewable energy generation, utility, and infrastructure sectors, says carbon has become a critical consideration for his clients. "Eighteen months ago when we were presenting to CEOs and CFOs, the concept of carbon was there, but it was never the first bullet point and neither was it factored into the valuation," says Ying. "Now, virtually the first bullet point for anyone in the sector is focused on the prospect of some sort of carbon regulation. What we're seeing is this heightened awareness that carbon dioxide is basically a pollutant that's never been taxed."
Peter Ying, MBA '02, Lehman Brothers Global Mergers and Acquisitions
And yet no one knows for sure what a U.S. carbon tax might look like, how it might be priced, or when it might be levied. Every major presidential candidate has some plan for limiting emissions, and Congressional support is growing; the matter is likely to figure prominently in federal politics following the November elections. In January 2007, corporate leaders launched a campaign for national standards, forming the U.S. Climate Action Partnership, a consortium of businesses and NGOs representing $2.8 trillion in market capitalization and 3.8 million employees, urging the federal government to enact legislation to limit greenhouse gas emissions and eliminate the uncertainty that hampers international players already contending with the Kyoto Protocol in signatory nations. "Consensus is forming that there will be a price on carbon," says Lehman Brothers chief investment officer Steven Berkenfeld '81, who chairs the firm's transaction approval committee, a role he likens to overseeing quality assurance. "If you made investment and risk decisions assuming there would be continuous free emission of carbon, you'd be making a decision that isn't grounded in today's political realities."
Yet today's political realities have forced executives into a maddening reliance on dummy variables the cost of carbon emissions, the timeframe for implementation, the target threshold for reductions as they weigh how to proceed. Meanwhile, energy demand rises exponentially, and corporations continue testing new markets, evaluating fresh business ventures, and constructing facilities to make it all possible. "One of the hardest things for business people to deal with is uncertainty," says Dow's McNeill. "If I'm trying to make a decision to invest or build a plant or hire people or do whatever, I'd like to be able to project what the return on my investment is going to be, and if I can't project my costs and I don't know what regulations or environment I'm going to be operating under, then it's very hard for me to decide whether that's a good investment or not."
In her consultation with manufacturers and utilities, the World Resources Institute's Layke counsels executives to focus on the elements they can count on. "I tell them not to get stuck in this question of how you operate in a vacuum," she says. "We know there will be a carbon constraint. We know with some certainty the level of reductions that scientists tell us are critical, and we know that society's expectations are growing and the consumer base is looking at this issue with a much more critical eye towards the role of corporations in creating and preventing pollution."
Alex Sloan, MBA '98, a principal of the expansion-stage clean-tech venture capital firm Expansion Capital Partners, sees the focus on the regulations coming down the pike as a bit myopic. "People get very hung up on the regulatory element when will the state or federal or international [regulatory entities] set up a market, and who will price it, and will it be voluntary or compulsory," he says. "That's all fine and real, but how do you actually quantify the carbon, how do you monetize the carbon? Who's actually doing it? There are some real issues that are much more real-term just to get the wheels rolling in conjunction with the market being set up." Sloan and his partners see the gap as a lucrative opportunity and they've invested accordingly.
Tips for a greener lifestyle are a dime a dozen: Take public transit. Carry reusable bags to the store. Eat less meat. But follow-through can be hard. And just because it's all over the mainstream media doesn't necessarily make it easier for employees to think strategically about greening the workplace.
At Dow, managers have developed change management programs to speed the attitude shift necessary to reach the company's Sustainability 2015 goals. Presentations to suppliers promote green chemistry and lifecycle analysis, while an intranet site for employees offers tips on more sustainable living relevant at home and on the job. "There are issues around change management that we're having to deal with," says Dow sustainability guru William McNeill. "It's a learning experience the whole organization is going through."
At Cornell, a signatory to the Presidents Climate Commitment for carbon neutrality, administrators have tapped employees' passion and expertise, asking custodians to evaluate environmentally friendly cleaning products, consulting faculty on biofuel prospects, and introducing chefs to area farmers. "Employees across campus make decisions on a daily basis about recycling, energy use, green purchasing, whether to buy local food," says sustainability coordinator Dean Koyanagi. "At Cornell, our goal is to foster a culture of sustainability across campus, throughout our supply chain, and within the regional community, where everyone can make a difference."
At Boston-based EnerNOC, a firm that helps utilities optimize power supply by strategically reducing demand, employees get cash bonuses for swapping out incandescent bulbs for compact fluorescents and replacing energy-sucking appliances with high-efficiency models. "We're not just maximizing net income and shareholder value," says Marshall Chapin, MBA '99, the firm's senior director of business development. "We're out there doing it ourselves. We recycle, take public transportation, change out light bulbs." That means even off the job, employees trim demand on the power grid, reducing the likelihood of a brownout. To extend the program, the firm added a viral marketing component: staff get additional cash bonuses for every non-EnerNOC family they convince to implement the changes the firm rewards. "I don't know that anyone signs up [to work here] because there's an incentive if you drive a hybrid," says Chapin, "but people feel good about the company and we stand behind what we say as a business model."
At Generation Investment Management, the commitment to sustainability extends to long-term social and geopolitical considerations, so GIM analysts delve into such questions as a company's approach to regional stakeholders. And when execs don't share that mindset, it's a big red flag, says GIM president Peter Knight '73. In the case of a firm with natural gas holdings, GIM's research exposed a critical weakness. "People thought this company was just fabulous," says Knight. "They had a lot of reserves, but they were in pristine areas, and the question was whether they'd been thoughtful about how they'd get them out of the ground." Turns out no one had engaged the local stakeholders whose mobilization could shut down extraction. "Subsequently they put together a stakeholder plan," says Knight. "We didn't invest, because we didn't have faith they wouldn't make the same kind of mistakes again that's the kind of analysis you have to do."
Much of the corporate struggle to respond to climate change boils down to attitude is this an opportunity to deploy fresh entrepreneurial vision, craft new business models, and transform corporate priorities, or a looming regulatory nightmare? Sloan puts his money on opportunity. "These are not only ought-to markets, but can-do markets," he says. "These are markets where the cleaner, greener, healthier version will grow faster than its alternative." Start-ups long on changing the world and short on staying in business don't get much traction with Expansion Capital, says Sloan. "The challenge is and there's a real opportunity here to create products and services that are attractive to customers based on their functionality and their pricing and their contribution to the environment or energy efficiency or natural resource efficiency," he says. "It's doesn't have to be a trade-off."
– Bruce Schlein '88, vice president for Environmental Affairs, Citi
Paul Tebo, retired head of DuPont's sustainability efforts and now a visiting senior lecturer at the Johnson School, consults with clients in the pharmaceutical, petrochemical, aluminum, and glass industries. He makes a point never to hard-sell the environmental features of a project. "If it's not driven by regulation or activism, but based on good projects internally, it's a gold mine," he says. "Simply holding energy flat while you grow, with prices the way they are, is a tremendous benefit. Eliminating waste means you don't have to pay people to take it away." And going carbon-free means bolstering the independence of a national manufacturing system currently dependent on foreign oil. But for any sustainability initiative to succeed, says Tebo, environmental responsibility has to be an integral element of the overall business strategy, not an after-the-fact add-on.
It's a concept Milstein highlights in his work with the Johnson School's Center for Sustainable Global Enterprise. "We're saying you ought to be making money by addressing social and environmental issues," says the professor. "Not making money and then figuring out what your negative externality is and then figuring out how you can minimize the cost to address it or shift the responsibility for it."Futurevalue
As fuel prices continue rising and consumer demand for green products continues growing, green shows no signs of slowing. "I don't see a green bubble," says Lehman's Ying, who predicts long-term activity around environmentally conscious business initiatives. "The only way I see it being fractured is if the U.S. doesn't put in the right framework to promote innovation." That framework poses a big question mark for Knight, president of Generation Investment Management. "Businesses want certainty over the long term," he says. "Once they get that, they can dig down for innovation, but until they get that certainty, it won't be there. I think the stars are lining up, but the question is whether we're willing enough to go deep enough to make the changes we need, and with leadership to get the policies we need."
Yet even the uncertain prospects of federal tax credits and regulations designed to bolster new technologies seem inadequate to stem the tide, says Sloan. "As a driver of purchasing decisions, energy and natural resources will continue to be a major concern," he says. "You may see adjustments in the market, but I don't see that there will be a flight away from energy efficiency or clean technology or climate change as drivers." That sentiment applies equally to the executives with a vision for long-term sustainability of the corporate entities they shepherd. "We've been in business as a company for 100 years so we think about being in business 50 years from now," says Dow's McNeill. "Just look at what's happening with population growth, resource constraints, and climate change. That's the world we're going to be in business in 50 years from now. We have to be thinking about it and planning for it."
GREENWASH few words in the English language match its power to undermine claims of virtue. An elegant rhetorical device, it's simple and devastatingly effective. So when corporate players combine environmental stewardship with marketing appeal, charges fly with staggering velocity. But in a country where consumption of fossil fuels, clean water, and natural resources proceeds at a clip brisk enough to deplete several planet Earths, isn't any effort better than nothing? Conversely, isn't anything short of a radical overhaul of our personal and corporate consumption patterns laughably inadequate?
"There will always be critics [arguing] that what's being done isn't enough," says Citi vice president for environmental affairs Bruce Schlein '88, citing the frequency with which detractors target corporate profit and cost-saving motives. "The criticism that it's not purely a green-play, that it's also a business play, really falls off to the side."
"I think greenwashing will always happen," says the World Resources Institute's Jennifer Layke, "but I think there are some really interesting lessons we can learn from people who are first movers, who are willing to take risks. My hope is that we're in learning mode, rather than in a criticism mode, because in fact these markets are all really new. Where I see people taking risk and experimenting is also a space where we'll potentially need to regulate in the future to make sure that we have less of the greenwash effect, whether it was intentional or not. People are going out and doing things they really believe in but we may determine as a society are not the steps that we think have the right values."
Furthermore, anything short of perfection doesn't necessarily imply hypocrisy, suggests the Johnson School's Mark Milstein, director of the Center for Sustainable Global Enterprise. "They're human, they make mistakes, and in a large, complex organization that's doing all kinds of activities at once, some [projects] will be in conflict with each other," he says. At the same time, corporations face extraordinary temptation to tap into the lucrative green market. "Environmentally friendly is worth something to us," says marketing professor Wesley Sine. "The Toyota Prius is a great example of how you can create a brand that has value because the brand represents being environmentally conscious."
Third-party certification itself a robust business opportunity poses a promising mechanism for verifying advertising claims and promotes market participation says Sine, who's studied how federal certification bolsters the startup fundraising efforts of renewable energy entrepreneurs. "Many uninformed consumers don't necessarily know how to express these values through their lifestyle, the products they buy," he says. "We certainly need certification processes that help establish, legitimately, which products have a smaller impact on the environment."
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