Chapter 2: Why Act Now — The Business Case for Climate Protection

This is the second of three sections which each serve as individual arguments:  Drivers of ChangeThe Business Case for Climate Protection and Risk Mitigation. Feel free to use these three sections individually or together.

Table of Contents:

SECTION 2: The Business Case for Climate Protection

– No Regrets Strategy

– Businesses Face Growing Pressure to Reduce Emissions

– The Emerging Greenhouse Gas Marketplace

– Not Waiting for Regulation

– The Impact on Small Businesses

– Combining Energy Efficiency and Renewable Energy

– Ability to Capture Opportunities

– Cities and Companies—The New Leaders

– Tax Savings

+ CASE STUDY: States of Michigan and Oregon

– Coast-to-Coast Pioneers

+ CASE STUDY: U.S. Army

– Business Risks of Failing to Address Climate Change

+ Legal Risks

+ Risk of Shareholder Resolutions

+ Higher Insurance Costs and Burdens

+ Credit Risks

– Conclusion

DOWNLOAD the “Business Case” section (555 KB .pdf)

 

The Business Case for Climate Protection

Consumers’ desire for a healthier, more sustainable world has driven even mainstream institutions to make major changes.  Perhaps most exciting, the business community is joining the effort to reduce global warming and to implement more sustainable practices.

In May 2005, Jeffrey Immelt, the man who replaced Jack Welch at the helm of General Electric (GE), stood with Jonathan Lash, the President of World Resources Institute (WRI), a leading environmental organization, to announce the creation of GE Ecomagination.  The two co-authored an article in The Washington Post titled, “The Courage to Develop Clean Energy.”[1]

Immelt committed GE, the sixth largest company in the world, and the only company that would have been on the Fortune 500 list if it had existed in 1900 and is still on it today, to implement aggressive plans to reduce emission of GHGs, spending $1.5 billion a year on research in cleaner technologies.  As part of the initiative, Immelt promised to double GE’s investment in environmental technologies to $1.5 billion by 2010, and reduce the company’s GHG emissions by 1% by 2012.  Without any action, GE’s emissions would have gone up 40%.[2]

GE’s announcement was rapidly followed by an even more significant environmental commitment from Wal-Mart, now considered the largest company in the world.  In 2006, Lee Scott, the CEO of Wal-Mart, announced that his company would undertake a major effort to reduce its emissions of GHGs.  He set a goal of supplying his stores with 100% renewable energy.  Wal-Mart is experimenting with green roofs and green energy (which is now used to power four Canadian stores, for a total of 39,000 megawatts—the single biggest purchase of renewable energy in Canadian history).  The company pledged to become the largest organic retailer and to increase the efficiency of its vehicle fleet by 25% over the next three years.  It will eliminate 30% of the energy used in store and invest $500 million in sustainability projects.[3]

An unabashedly astonished article in the San Francisco Bay Guardian reflected: “Wal-Mart’s rationale for all of this, of course, has absolutely zero to do with any sort of deep concern for the planet (though it does make for good PR), nothing at all about actual humanitarian beliefs or honest emotion or spiritual reverence, and has absolutely everything to do with the corporation’s rabid manifesto:  cost-cutting and profit.”

The reason Scott promised that Wal-Mart will double the fuel efficiency of their huge truck fleet within a decade?  Not to save the air, but to save $300 million in fuel costs per year.  The reason they aim to increase store efficiency and reduce greenhouse gasses by 20% across all stores worldwide?  To save money in heating and electrical bills, and also to help lessen the impact of global warming, which is indirectly causing more violent weather, which in turn endangers production and delivery and Wal-Mart’s ability to, well, sell more crap.  Ah, capitalism.[4]

In reviewing the leading business stories of the year 2006, columnist Joel Makower, a veteran commentator on green issues wrote:

Two thousand six may be the year that green business crossed the line from a movement to a market. It was long in coming, of course, with several watershed moments…In 2006, GE initiatives to harness “green” as an engine for topline growth hit their stride… ahead of its plan to reach $20 billion in annual sales of Ecomagination products by 2010.

Dupont launched its own initiative, committing to $6 billion in new revenue from “business offerings addressing safety, environment, energy, and climate challenges.” Dow came on board with the aforementioned water initiative. Carpet maker Interface introduced a consulting service to help organizations as diverse as Sara Lee and NASA get their sustainability programs off the ground. Caterpillar launched an ambitious business unit to develop a remanufacturing industry in China. And a wide range of innovators developed new, clean technologies for everything from bottles to buildings to boats — part of the year’s overall boom in clean-tech activity….

Shareholders — specifically, large institutional investors like pension funds and university endowments — are emerging as the real power brokers in the climate arena…

The leading investment firms are jumping in, too. Merrill Lynch, for one, issued a report profiling seven companies it believes are best positioned to capitalize on what it calls the “clean car revolution.” Citigroup, JP Morgan Chase, and Morgan Stanley also published research reports analyzing the financial performance of the carbon markets, sometimes identifying who’s naughty and nice — that is, the leaders and laggards in their various sectors.[5]

The business community is actually often ahead of the government in being willing to take an aggressive stance on protecting the climate.  For years, many American businesses succumbed to the concerted media campaign claiming that taking action against global warming will harm businesses and the economy.[6]  Now, business leaders are recognizing that, in fact, quite the opposite is true:  The conventional wisdom that businesses will oppose efforts to implement programs to protect the environment is increasingly antiquated thinking.

Many business leaders see a need to abate climate change for moral reasons.  Lee Scott, CEO of Wal-Mart, stated in the pages of Fortune Magazine:

There can’t be anything good about putting all these chemicals in the air.  There can’t be anything good about the smog you see in cities.
There can’t be anything good about putting chemicals in these rivers in Third World countries so that somebody can buy an item for less money in a developed country.  Those things are just inherently wrong, whether you are an environmentalist or not.[7]

There is an opportunity now to begin a new conversation between citizens, the companies that deliver the services we all desire, and the government we have empowered to set policy to achieve the sort of future we all desire.

 

No Regrets Strategy

Companies often start a program of GHG reductions because they realize that acting now is a “no regrets” strategy.  If climate change turns out to be real, they will already be in a leadership position by dealing responsibly with it.  Even if the scientists are wrong and there is no threat to the climate, these are actions that a well-managed business would want to take anyway, because doing so is profitable.  Enormous opportunities exist to reduce costs by reducing the energy they use to run their operations.  It just happens that this is exactly the same strategy they would employ to reduce their GHG emissions.

There is a very solid business case for such a position.  Adopting an aggressive program of GHG reductions can be highly profitable for companies and cost-effective for non-profit (including government) organizations.[8]  Reducing the amount of energy that a business uses reduces costs and directly enhances a company’s bottom line.  Failing to reduce energy use, and tolerating carbon emissions as part of “business as usual” is actually a high-risk strategy for a business or for a community.

Companies that reduce GHG emissions, especially in the context of a broader whole-system corporate sustainability strategy, will achieve multiple benefits for shareholders beyond reducing their contribution to global climate change.  Governments that take a similar course will accrue similar benefits to their citizen stakeholders.[9]

These benefits include:

  • Enhanced financial performance from energy and materials cost savings in:
    • industrial processes;
    • facilities design and management;
    • fleet management; and
    • government operations.
  • Enhanced core business value:
    • sector performance leadership;
    • greater access to capital;
    • first mover advantage;
    • improved corporate governance;
    • the ability to drive innovation and retain competitive advantage;
    • enhanced reputation and brand development;
    • market share capture and product differentiation;
    • ability to attract and retain the best talent;
    • increased employee productivity and health;
    • improved communication, creativity, and morale in the workplace;
    • improved value chain management; and
    • better stakeholder relations.
  • Reduced Risk:
    • insurance access and cost containment;
    • legal compliance;
    • ability to manage exposure to increased carbon regulations;
    • reduced shareholder activism; and
    • reduced risks of exposure to higher carbon prices.

Leading CEOs around the world know this.  CEOs surveyed by the World Economic Forum in Davos in 2000, stated that for them, “The greatest challenge facing the world at the beginning of the 21st Century—and the issue where business could most effectively adopt a leadership role—is climate change.”[10]  The Climate Group website[11] lists case studies of companies and communities that are reducing their emissions and saving money.

 

Businesses Face Growing Pressure to Reduce Emissions

In November 2004, essentially all of the world’s industrial nations ratified the Kyoto Protocol to reduce the emissions of GHG gasses (the U.S. and Australia are the only significant holdouts).  The Protocol came into force February 16, 2005, launching a new “carbon-constrained” era for the 141 countries that ratified it.[12]  Among its many provisions, the accord established regulations limiting the amount of carbon that nations can emit, and created a carbon market through which companies that reduce further than they are required can sell this extra reduction to companies unable to meet their targets.

European countries, as members of the Kyoto Protocol, are now bound by this mandatory trading regime.  The European Commission plans to cut energy use 20% by 2020 and increase European use of renewable energy to 12% by 2012.  This should reduce Europe’s emissions by a third.  The program is projected to save 60 billion Euros, create millions of new jobs and increase European competitiveness.  American businesses are at risk of losing ground to European competitors as they innovate to meet these goals.

For example, STMicroelectronics (ST), a Swiss-based, $8.7 billion, multi-national semiconductor company, set a goal of zero net GHG emissions by 2010 while increasing production 40-fold.[13]   The main sources of ST’s GHG emissions are 45% facility energy use, 35% industrial process (PFC[14] and SF6[15]) emissions and 15% more efficient transportation.  Its strategy is to reduce on-site emissions by investing in co-generation (efficient combined heat and electricity production[16]) and fuel cells (efficient electricity production).

By 2010 co-generation sources should supply 55% of ST’s electricity with another 15% coming from fuel switching to renewable energy sources.  The rest of the reductions ST is seeking will be achieved through improved energy efficiency (hence reducing the need for energy supply) and various projects to sequester carbon.  ST’s commitment has driven corporate innovation and improved profitability.  During the 1990s, its energy efficiency projects averaged a two-year payback (a nearly 71% after-tax rate of return).[17]

Making and delivering on this promise has also driven ST’s corporate innovation and increased its market share, taking the company from the number 12 micro-chip maker to the number six in 2004.[18]  By the time ST meets its commitment, it predicts that it will have saved almost a billion dollars.