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Ride the wave or go under—A Commentary by Daniel C. Esty ’86

The following commentary was published in The Guardian (UK) on November 5, 2007.

Ride the wave or go under
By Daniel C. Esty ’86

Business attitudes towards the environment have undergone a big change in the past year. Companies - big and small, in manufacturing and services - have begun to see the environment as not just about regulations to follow, costs to contain, and risks to manage. Instead, they have recognised that big market opportunities exist for companies that can provide solutions to problems such as climate change, water scarcity, chemical exposures, air pollution, and declining natural resources from fisheries to forests.

As environmental concerns have moved up the public agenda, environmental factors have become a matter of core business strategy. No company or industry can afford to ignore higher energy prices, pollution control requirements and costs, and natural resource management pressures. Companies that carefully think through these issues and develop thoughtful ways to address them are likely to be advantaged in the marketplace. And those who solve the environmental problems of others will find opportunities to drive revenues, build markets, and enhance their corporate brands and reputation.

I see four major drivers of the green wave sweeping the corporate world. First, with oil at £40 a barrel, energy conservation has become a major factor in almost all industries. At these prices, many more efficiency investments will make economic sense today as compared with a few years ago when the price of oil was much lower.

Second, regulations are evolving in ways that make a focus on the environment ever more essential. Across Europe, carbon constraints are kicking in. This means that companies must manage their energy consumption and greenhouse gas emissions much more systematically today than in the past. The failure to do so creates exposure to substantial costs in some industries. Indeed, the recent report of the Carbon Disclosure Project makes plain the greenhouse gas emissions of thousands of companies and highlights a set of companies that are particularly energy-intensive and thus highly exposed in a carbon-constrained world.

Of course, companies that can sell climate change solutions, including energy efficiency, alternative energy, and potentially carbon capture and sequestration technologies, stand to benefit as greenhouse gas emissions come to bear a price tag. For example, Unilever (a company that I have worked with for more than a decade) has seen renewed interest in its concentrated washing powder as customers have become concerned about the cost of shipping large packages of detergent with the accompanying packaging waste and greenhouse gas emissions. And Unilever has launched a partnership with the Carbon Disclosure Project to track the greenhouse gas emissions (and by extension the energy efficiency) of its suppliers. This information will position the company to manage for a reduced carbon footprint across the entire value chain in the years ahead, potentially saving money as well as the environment.

New regulations are being put into force with regard to chemical exposures, recycling, and waste disposal. So the logic for bringing an environmental lens to business strategy goes beyond climate change.

Natural constraints on growth

Third, some companies are finding the natural world imposing limits on their market opportunities. Another company I've worked with, Coca-Cola, faces real constraints on growth where it cannot get access to water. As climate change reduces water availability in some areas, Coca-Cola faces further stress on its growth trajectory. Coca-Cola has therefore launched a series of water initiatives worldwide.

Some companies see opportunity in helping others adapt to climate change. BASF, for instance, has launched a joint venture with Monsanto to produce drought-resistant crops. Business is booming as climate change reduces rainfall in critical agricultural zones.

Fourth, a new set of stakeholders are asking questions about environmental performance. While companies have long known that they need to deal with government regulators and respond to questions from environmental groups, they are suddenly facing questions from a whole new array of entities. Communities where companies operate increasingly want to know about the environmental exposures their residents face. And employees have become a vocal constituency for more aggressive environmental strategies. Customers have become a very critical driver of environmental focus. More and more firms are setting environmental standards for their suppliers and auditing their chains. Finally, the capital markets are waking up to the fact that environmental performance, may determine profitability and stock value.

Companies that have invested in relationship management have advanced themselves by being seen as good corporate citizens; other companies are facing significant pressures because of their inability to manage these new environment-related stakeholder relations. Apple, for instance, has come under considerable pressure from Climate Counts, Greenpeace and other groups for its greenhouse gas emissions and the toxic substances in its iPhones.

Environmental issues must be managed thoughtfully, seriously, and strategically - and folded into core business strategy. Recognising the importance of the green agenda is not enough. Committing the company to a day of beach clean-ups is woefully inadequate. In fact, if the environment is seen as a matter of corporate social responsibility, the approach is likely to focus too narrowly on "doing good" rather than on doing well. What makes environmental efforts sustainable is their alignment with business goals.

The failure to be rigorous with regard to environmental strategy and management can prove disastrous. The Ford Motor Company offers a cautionary tale in this regard. The fact that Ford is losing money hand over fist and has seen its market share decline precipitously is actually somewhat ironic. Bill Ford, the CEO until last year, was actually quite an environmentally focused guy. He spoke at many green business conferences, but he failed to get the company to think about the environment as a core element of strategy. Instead, the company invested $2bn in "greening" its famous River Rouge factory outside Detroit. The redesign included natural lighting and ventilation, and even grass on the roof. Unfortunately, the company did not focus on its critical strategic issue - its vehicles. As car buyers quickly turned against the gas-guzzling sports utility vehicles that Ford is famous for, the company suffered.

One might think that this is a bad time to be in the auto business. But this is not so. While Ford teeters on the brink of bankruptcy, Toyota made record earnings last year of almost $13 billion. Toyota's success is a function of having centered its vehicle design in the early 1990s on a car of the 21st Century that had a major environmental focus. Beyond the hybrid engine that has got so much attention, Toyota has "lightweighted" all of its vehicles with extensive use of carbon fibre and other advanced materials. In addition, the company has used computer-driven "smart systems" to reduce the energy consumption from heating, air conditioning, and the stereo system as well as the drive train. Simply put, Toyota has been strategic in its focus on the environment. Ford has not.

There can be no doubt: a green wave is sweeping the business world. Those who learn to ride the wave and fold environmental thinking into all aspects of their business, stand to profit. Those who fail to take note of the wave are likely to be swept under by it.

Daniel Esty is Hillhouse professor of environmental law and policy at Yale University and chairman of Esty Environmental Partners. His book, Green for Gold, is published by Yale University Press, £14.50.