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By Ellen Pearlman
Strategic Thinkers: Andrew Hoffman and John Woody
Credentials: Hoffman is the Holcim Professor of Sustainable Enterprise at the University of Michigan, he also serves as Associate Director of the Erb Institute for Global Sustainable Enterprise and has published six books and more than 50 articles on environmental and social issues as they relate to business. Woody is a Deal Associate at MMA Renewable Ventures. Prior to that, he was the Business Solutions Fellow at the Pew Center on Global Climate change. He has worked extensively with Fortune 500 companies on climate policies and strategies.
Big Idea: Don't think of climate change as an environmental issue, think of it as a market issue
Book: "Climate Change: What's Your Business Strategy?" Published by Harvard Business Press, May 2008 (part of the Memo to the CEO series)
Blog: Memo to the CEO
The authors of Climate Change have a strong background in analyzing the intersection between business strategy and environmental issues. Their book is not about the environmental reasons for addressing climate change. It's not a book that seeks to prove to skeptics that climate change is a real problem. It's a book that informs executives about the business reasons for addressing it.
Controls on the emission of greenhouse gases (GHG) will "affect virtually all sectors of the economy," they say, although not every industry will face the same risks. Companies have the responsibility to determine what type of response is necessary and whether or not there are opportunities for new products and services that emit lower levels of GHGs. Doing nothing is not an option; there are financial, competitive, legal, regulatory, physical and reputational risks at stake.
Many regulations are being developed globally that will affect energy pricing and availability. In the U.S., 47 states have some type of climate-related policies. And as of September 2007, there were more than 100 climate-related bills in Congress. Moreover, experts are exploring how climate concerns might change the fiduciary responsibility of the CEO under the Sarbanes-Oxley Act.
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The costs of reducing GHG emissions will be high globally-estimates are in the 1% of global GDP range. But the authors believe that asking whether or not it pays to be green is a "nonsensical" question, like asking: "Does it pay to innovate?" They say the right question to ask is whether there exists "an economic opportunity for your company to be green vis-à-vis your competitors." After that you need to determine how and when that opportunity can be realized. For some companies it will make sense to be a leader, for others follower status will be more appropriate, and there will be others for whom a climate strategy does not make sense at all.
As the push for change gains momentum, three questions will be at the forefront: What will the mandatory standards be? What will the time frame be for action in the short-, medium-, and long-term? What market mechanisms will be put in place to spur innovation and action? On the last point, the authors say, "There must be a market price for carbon to send a signal to the economy to spur technological innovation while allowing the market to pick the winners." Market pricing, they say, is coming. But while those questions get sorted out, what can your company do to prepare?
The authors identify three key steps executives need to take:
1. Immediate Step: Know your carbon exposure.
This involves analyzing your GHG emissions throughout your value chain and assessing how vulnerable your business units are to constraints on those emissions. There are many different measurement tools and techniques for doing this and the process can be daunting. After information is collected it must be stored and analyzed. Some companies have developed information systems to track ongoing GHG emissions. Alcoa, for example, has a centralized system that collects detailed energy consumption information for 41 facilities worldwide. Other companies are looking for data management tools that they can integrate with performance measurement systems so they can link emissions reductions to financial measures. Companies must also determine how carbon emissions impact their products and services. The authors say: "The entire question of carbon vulnerability is an assessment of how a price for carbon alters the economics of your business models, and then how it affects the models of your competitors."
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2. Next Step: Take action to reduce your carbon footprint and assess business opportunities.
Reducing your carbon footprint will require the entire organization's participation. Senior-level support is critical in any climate strategy. Leadership must make the business case for these changes and create a sense of urgency around addressing the issue. To get employee buy-in, education and incentives to motivate action are needed. Once the agenda is set, new positions will be needed to focus on climate strategies. A Hill & Knowlton study found that three quarters of business leaders believe there is a need to create a new position of chief energy officer (CNO) to manage, implement and measure the company's "return on environment." Cross-functional teams are also effective in implementing strategies and some companies have created energy-efficiency teams to look for global opportunities. Challenging goals are needed to spur innovation. "Inspirational goals call an organization to act beyond conventional boundaries," says Craig Heinrich, leader of the global energy team for DuPont's Titanium Technologies division. Many companies set energy-efficiency goals rather than GHG reduction goals since they are easier to monitor, measure and monetize. They key is picking the target that's right for your organization.
3. Advanced Step: Gain a seat at the policy table and help set the rules.
There is no better way to influence climate change rules than to get involved. At the very least you'll want to monitor and anticipate the options under consideration. The authors quote an appropriate old Oklahoma adage that sums this up well: "If you're not at the table, you're on the menu."
The era of cheap energy is over. Innovators will be looking for solutions that didn't exist before. As David Horne, group climate change adviser at Shell says, "What is the iPod for energy? Is it out there? You have to be on the watch." Investors are already there, putting their money where the opportunities are. Robert Metcalfe, the founder of 3Com, puts it bluntly: "You'd have to be an idiot not to notice the huge opportunity in energy."
Will your company be one of those that seize the climate change opportunity?
Reprinted by permission of Harvard Business Press. Excerpted from
Climate Change: What's Your Business Strategy? Copyright (c) 2008 Harvard Business School Publishing Corp.; All Rights Reserved.
Also of interest:
Book: Earth: The Sequel by Fred Krupp, published March 2008 by W.W. Norton.
Book: Carbon Strategies: How Leading Companies Are Reducing Their Climate Change Footprint by Andrew Hoffman, published by University of Michigan Press, September 2007
Blog: HBRGreen.org. Staying Green in a Tough Economic Climate, by Sir Stuart Rose, posted on March 4, 2008
Report: "A Cost Curve for Greenhouse Gas Reduction" from McKinsey & Co.
Organization: Pew Center's Business Environmental Leadership Council (BELC)
Organization: Global Roundtable on Climate Change
CIOZone Questions to consider: Does your company have an energy strategy? Who is responsible for it? How does it impact the IT organization?
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