July 30, 2015

Taking Action on Climate is the Ultimate No-Brainer Business Strategy

[Just some summer catch up on re-posting things I've written in other places. I posted this on The Guardian's site a few months ago. It's one of those "going green is a win-win" stories that I wish were not necessary anymore. For the knowledgeable sustainability folks, this is a 'duh'...and I could've written this in almost the same way years ago -- except for the part of the story about the precipitous drop in the cost of renewable energy. So I expected more pushback from readers on 'we've heard this before', but I got almost entirely positive feedback on how I'm making the case (again). The larger point is that we do need to tell this story over and over -- the misperception remains that if it's green, it must cost more. Let's put a stake through that.]

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(Photo: Flickr by h080)


Recently, as I finished speaking to a group of fund managers, I was asked two questions that have become increasingly common. The first was: “What if scientists are wrong and the climate thing doesn’t turn out to be so bad?” The second was: “Will companies regret doing something about it?”

On the bright side, these questions are a big improvement over the one I kept getting asked a year or two ago – namely, whether climate change was happening at all. While climate change is more than reason enough for a deep reconsideration of how we do business, I suppose it’s not an unfair question to ask if going green has other benefits. The short answer is yes.

To get a feel for how tackling climate change can benefit a business, it helps to look at the four major categories of corporate action that fall under the banner of “doing something” about carbon:

No regrets

It’s hard to see which of these actions might be regrettable. The first category, eco-efficiency, saves money and makes companies less dependent on resources that can disappear or get more expensive. Most companies looking at these investments tie themselves to an arbitrary two-year hurdle rate, but even if a company went further down the payback list, what would the regret be? Lowered operating costs after payback?

The second point, renewables, has often been a harder sell. Renewable energy has been the poster child for the most expensive – and, presumably, anti-profit-maximizing – way to go green. But this view is incredibly outdated: solar and wind prices have dropped 60-80% over the last five years, and “grid parity” – the point at which unsubsidized renewables are as inexpensive as fossil fuels – is quickly approaching in most countries.

Because of these trends, more companies are now able to sign power purchasing agreements to buy renewables for the same price or less than they’ve been paying for non-renewables. Financing options also mean they don’t have to start off with any capital investment, which further eases the transition.

Of course, it’s possible that these companies will regret locking in a price if energy costs plummet. But that contingency seems unlikely: recent oil price drops aside, basic commodity prices have been trending upward since the beginning of the century. In fact, even at recent lows, oil costs twice what it did in 2000.

More importantly, energy prices are incredibly volatile, so locking in prices brings stability, risk reduction and increased resilience. All of these benefits are real, even if we don’t put numbers on them.

But what about those companies that buy their own power-generating equipment – like solar panels – and face a longer payback than the normal hurdle rates? Even in this case, there isn’t much to regret: getting a significant portion of energy at zero variable cost holds zero risk.

The same logic broadly applies to pressing the supply chain to reduce carbon. Driving suppliers to lower operating costs and increase reliability and resilience is good for their businesses.

As for the final point, putting a price on carbon accelerates the benefits of all of the other actions. The only regret might be if we go too fast for the economy to adjust to rising prices for dirty fuels. Then again, I wouldn’t bet on global policy action moving too fast any time soon.

The big picture

Moving beyond the corporate level to the macro perspective, these benefits multiply. Cutting carbon means cutting overall pollution, not to mention the serious and expensive health consequences of burning fossil fuels. Perhaps most importantly, it makes us more energy independent. After all, nobody can raise the price of sunlight and wind – or cut off the supply.

This isn’t to say that there won’t be any losers in a clean economy. The entrenched technologies and the workers in those sectors – like coal miners – will be hurt. But we can, as a business community and society, work to ease that transition rather than deny the overall benefits that will come from doing so.

Looking at the situation as a whole, asking about the regrets that we might face if we slash carbon emissions is a bit like asking what would happen if smoking wasn’t as bad for our lungs as doctors say. Would we regret avoiding all the other problems like increased risk of heart disease and stroke? Would we regret eliminating the $10 per pack expense from our lives?

The question about whether we’ll regret moving to a clean economy is usually put in terms meant to sound careful and risk averse. The truth, however, is that not going clean is riskier. After all, a key part of risk management lies in considering the “tails” of the curve of probable outcomes. In other words, if you’re asking what happens if science is overstating the problem, then you have to ask what happens if they’ve understated the problem. And, given the consistent trend of headlines like this, this side of spectrum seems far more likely.

How much will a company – and all of us – regret not taking action if the outcomes are much worse? Given the day-to-day benefits of moving to a clean economy, corporate action on climate is the ultimate no-brainer.

(This post first appeared on The Guardian online.)

(Andrew's new book, The Big Pivot, was named a Best Business Book of the Year by Strategy+Business Magazine! Get your copy here. See also Andrew's TED talk on The Big Pivot. Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

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