Stakeholders: Finance/Wall Street Archives

November 6, 2011

You Can't Impress Stock Analysts...and Shouldn't Try

ExxonMobil reported last week that its net income reached $10.3 billion...in just the third quarter. The oil giant is arguably the most profitable corporation in history. Ten billion in three months is historic, but as the New York Times reported, "analysts were not impressed."

chasing%20the%20carrot%2C%20iStock_000015547281XSmall.jpg

Is there a better distillation of the serious problem with our economic system? Not to put too fine a point on it, but the relentless pursuit to satisfy analysts, and not customers or other stakeholders, is killing our economy and our planet.

Earlier this year, I asked a CEO of Fortune 100 company how he dealt with analyst pressure. Even though he answered on stage in a public forum, I'll keep this anonymous in case it was a moment of mistaken honesty. What he said was this: "I don't know any CEO that would want to run a company the way analysts would want us to."

And yet...I keep hearing from top executives at large, profitable companies that they're under "P&L pressure." This pressure comes not from being anywhere near unprofitable; no, it stems from fear of not hitting growth targets for earnings per share. What all senior executives seem to have forgotten — in some mass delusion — is that these growth targets are arbitrary.

Who declared 7 or 10 or 15 percent growth in earnings a sacrosanct pursuit, above all other corporate goals — like the innovation that leads to novel solutions that address customer needs? If you believe the best-selling business books from the last 25 years, companies are "In Search of Excellence" or trying to go from "Good to Great." Nobody writes a paean to the search for 9 percent EPS growth.

Moreover, pure growth targets are even wackier right now. The debt and overleverage explosion artificially inflated our economies and corporate earnings. So expecting growth in earnings today, while we re-set the economy to a more "normal" growth level, is absurd.

Now imagine for a moment that a proverbial alien lands on the planet and looks at the financial statements of many of our largest companies (I know, aliens might have better things to do, but go with it). They would see massive profits, tons of free cash flow, and healthy balance sheets. Since they wouldn't know that the companies had set and missed growth targets, they'd declare them very successful. But not the analysts.

Our big, profitable companies have the resources to do everything they might consider a priority in the long run — invest in R&D, pay shareholders well, build new businesses and hire people, create a more sustainable enterprise...whatever.

The strategic decisions that would lead to these outcomes require broader thinking, not quarterly focus. But the pressure to "impress analysts" means that leaders can't pursue the long-term perspective that creates truly lasting, great, and sustainable organizations. It's a strategic and operational straight-jacket.

A few leaders — from companies such as Google and Unilever — have told Wall Street that they won't provide "guidance" anymore. In essence, they'll report their results to GAAP standards and as the SEC, FASB, and other quasi-regulatory bodies require...but they won't answer to analysts. Not coincidentally, these CEOs are also deep sustainability thinkers.

I have a sneaking suspicion that most CEOs and CFOs would enjoy this kind of freedom from analyst conversations. Wouldn't it be more personally rewarding for them — and all the layers of management beneath them — to build and lead fundamentally more profitable organizations (versus maximizing short-term profits)?

As Unilever CEO Paul Polman told the crowd at the World Economic Forum in Davos in January, "The worse thing would be to do what is probably right for the long-term benefit of society and being forced out of that because you don't get the short-term results...I want people to focus on cash flow, which is a much longer-term measure than short-term profit."

Sustainability is about the real long-term health of both the planet and enterprise. I hope we see more leaders walking away from these absurd pressures that keep them from building innovative, profitable, sustainable companies.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

Related Posts

"Wall Street Doesn't Get It"

January 22, 2012

A Vision of Real Corporate Leadership on Sustainability

[This piece appears on Sustainable Brands' site as part of a special monthlong focus on leadership. Chris Laszlo and I are guest editing. We have laid out a framework for true sustainability leadership to help shape the discussion. We each are also offering a deeper dive on one half of the two-by-two matrix we suggested. I'm focusing on the “external” side of leadership which focuses mainly on (a) how a company responds to global sustainability pressures and (b) how it does business in a way that’s visible to the outside world…its products, processes, relationships, and so on.]

New%20paradigm%20ahead%2C%20iStock_000015202734XSmall.JPG

The basics of sustainability excellence are fairly well known by now: reduce your footprint, create products and services that help customers do the same, drive employee engagement, think value chain, track data and enable transparency, and on and on. But real leaders will go further and address the scale of the sustainability challenges we face by fundamentally remaking their companies. Here’s what I envision in a few key areas:

Science-Based Goals

Footprint reduction targets are important, but if the goals are not based on what scientists tell us – i.e., we need an 80% reduction in absolute greenhouse gas emissions – they’re not good enough. Sony and a few others have targeted zero impact by 2050. This level of commitment needs to become the norm, and then a few brave souls can go beyond reducing harm (even to zero) and set goals to build restorative enterprises.

Policy

While uncommon today, the basic level of performance on policy should be to make lobbying efforts consistent with core business strategy and public messaging (for example, are you proudly launching products that use less energy, yet lobbying hard against higher efficiency standards?). Real leaders go much further and lobby for stricter standards and aggressive action on climate. CEOs can demonstrate their external leadership by promoting this agenda with corporate peers and government leaders. Some companies are on track, committing to the recent “2 Degree Challenge Communiqué” or joining groups like BICEP (led by Ceres, Nike, and others) which demand strong climate policy action.

Product and Service Innovation

Reducing the customer’s footprint will need to be the core aim of all innovation efforts and all product lines (not just a sliver of the portfolio as it is today). Sustainability innovators will open up their creativity process, inviting customers and partners to offer innovative solutions (GE’s Ecomagination Challengeis a good example). Innovators will embrace disruption and heresy (which I’ve written about before) by helping customers use less of their products. For a glimpse of the future, see Unilever’s campaigns to get customers to reduce water use and Patagonia’s Common Threads, which offers a grand bargain: “We make useful gear that lasts a long time…You don’t buy what you don’t need.”

Valuation and Investments: Financial and Operational Metrics

Leaders such as P&G and GE have set aggressive revenue targets for their greener products. A few companies put a price on carbon for internal capital allocation decisions or, like DuPont and Owens Corning, set aside a percentage of capex for eco-efficiency investments. These actions help correct the inherent flaws of ROI decision-making by valuing sustainability more explicitly. The next step is fully incorporating intangible value – employee engagement, customer loyalty, brand value, and the like – as well as measuring and including all externalized costs in investment decisions. Two trendsetters, Puma and Dow, have begun this important journey.

Investor Relations

I believe that the relentless pursuit of short-term, quarterly profit goals to please Wall Street analysts is bad for companies – great enterprises very rarely seek profit alone – and certainly isn’t good for the planet. Like Unilever’s CEO Paul Polman, the real leaders will stop providing quarterly guidance and ask managers to focus on the real measures of success: making great products, serving customer needs, creating good jobs, and driving both cash flow and long-term profitability. The most sustainable companies will become “benefit companies” or “B Corps”, with a broader charter than just pursuing shareholder value. Seek greatness and sustainability, and the money will follow.

Resources Dedicated

Most companies give their sustainability execs woefully inadequate resources to do their stated jobs, let alone transform their companies. A truly committed organization will allocate resources equal to the challenge and will give the sustainability function real power. I suggest creating a “skunk works” team run by sustainability, along with perhaps corporate strategy and R&D, to question everything and challenge the core business model (e.g., What if the product were a service? What if we used no fossil fuels?). This is how companies can systematize heretical innovation.

Employee Engagement

Educating all employees on sustainability principles and creating green teams are good first steps. Tying all executive compensation directly, and substantially, to sustainability goals is even better. But real leaders should work to convince those hostile to change throughout the organization…or eliminate them. In the words of Jim Collins in Good to Great, “get the right people on (and off) the bus.” Leaders will also help employees pursue sustainability in their own lives and communities and provide an outlet for organizing campaigns, such as the awareness-raising “climate ride” conducted by apparel company Eileen Fisher. If the workplace is appropriate for United Way drives, why not for climate action?

In short, I’m imagining a very different kind of company. The overwhelming challenges we face demand profound shifts. Of course, much more than I’ve mentioned will need to change – on the social side of the equation for sure – so please let me know what you would add to my vision of true leadership.

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @GreenAdvantage)

November 8, 2012

The Fantasy of the "Sad Green Story"

(Note: This blog is co-authored with my colleague Jigar Shah, a partner at Inerjys and a board member of the Carbon War Room, where he served as its first CEO. Jigar also founded SunEdison, helping to create the multibillion-dollar solar services industry.)

To get back to some non-election topics...A couple weeks ago, New York Times columnist David Brooks wrote an op-ed entitled "A Sad Green Story" about the (supposed) travails of the green movement over the last 10 years. The idea that the clean technology sector is failing, or that it's a bad investment, is common enough in the business world and pundit class. But it's patently false. So what is Brooks talking about and what's really true here?

true-false%2C%20iStock_000015398554XSmall.jpg

Brooks focuses in part on whether Al Gore has made money on clean tech — a total distraction that has no bearing on the reality of climate change or the growth of clean tech. What's more important is Brooks' absurd logic that an entire sector of the economy is a "sad story" because some government-supported companies struggle, go under (Solyndra), or get acquired (battery maker A123). And how can Brooks tear down the government's involvement in promoting the deployment of American green innovation while providing no tangible idea of how he would do it better?

Most of us watching or working with the clean tech sector agree that government shouldn't try to pick winners (see Jigar's take on Solyndra's failure here), but we can propose a plausible model of how the government might play a more productive role. This ranges from providing a roadmap for remaking the multitrillion-dollar energy sector, to providing leadership by example (and scale) when purchasing new technologies.

For proof of how crazy all of this criticism of clean tech is, we need look no further than a recent Times-reported story on natural gas. Natural gas is a booming industry. But as the paper of record reports, it turns out that one key part of the natural gas value chain — that is the step of actually digging it up — is struggling financially. Small, scrappy entrepreneurs like Exxon Mobil are, according to its CEO, "losing our shirts today... Were making no money. It's all in the red."

This is exactly the same economic story that Andrew described a few weeks ago about the solar industry. The manufacturing end of the chain, experiencing a glut of supply, is losing money. But downstream users of the product, solar panels in one case or natural gas in the other, are doing very well. The financial struggle for some companies in both solar and natural gas is a sign of a boom, not a bust.

So we assume David Brooks and other green skeptics will soon write about the "sad brown tale" of the (also) highly subsidized industry of fossil fuels, which, since some people are losing money, must be shut down and mocked. We'll hold our breath.

Brooks' column is also filled with fantasies and misstatements that would be easy to correct with a simple Google search. As Andrew mentioned in his previous blog post, the percentage of our electricity coming from green energy has doubled in just four years — that doesn't seem like much of a sad story. Brooks also dismisses the idea of green jobs with no data to back up his position. Of course there are green jobs — there are 100,000 people working in solar in this country today. And, not for nothing, but the fastest growing green jobs markets are in politically red states. (We'll stop there and let climate blogger Joe Romm tear apart some of the more subtle Brooks fallacies.)

From a practical perspective, green technology is succeeding in part because we have oil prices that are stuck near $100/barrel, and water challenges that are creating deep competition between agriculture and oil and gas in places like Colorado. At some point Brooks and others will also have to acknowledge what the U.S. military, particularly the Navy, has already determined: future conflicts will arise over resources like oil and water; climate change is a security threat; and pursuing a renewable energy future is a safe, logical path.

In the end, fact-free attacks on all things green need to stop. Like in all industries, some paths are profitable and some are not. But we'll only find out what works if we invest in new growth sectors and not act like the sky is falling — or that there's some devious green investing cabal secretly making money — when some companies fail. Sad business stories become happy ones through persistence and overcoming failure. Not understanding that is Brooks' greatest fantasy.

(This post first appeared at Harvard Business Online.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

February 1, 2014

The Largest Risk (and Opportunity) Investors Are Ignoring

Tackling climate change — and thus keeping the world inhabitable — is an achievable goal, but it will become prohibitively expensive if we wait to act. This is the key message from a leaked United Nations study that The New York Times reported on last week. Journalist Justin Gillis wrote about the risk of “severe economic disruption” and “wildly expensive” solutions — ones that may not even exist — if we don’t leverage existing technologies to shift the global economy away from carbon over the next 15 years.

oil%20rig%2C%20stranded%20%28small%29%20Stock_000019312165Small.jpg

Talk of potential risk to humanity is not new. And we’ve seen more recently the actual devastation of record weather events like Hurricane Sandy and Typhoon Haiyan. But neither the scientific warnings nor the extreme storms have prompted enough action. However, now the risk we’re talking about is financial, which, along with the enormous economic upside of taking action, may finally get the investment community moving.

The day before the stark story in the Times appeared, I attended a related conference, the Investor Summit on Climate Risk, held at the UN and run by the NGO Ceres. Hundreds of financial executives gathered, including some heavy-hitters, from state comptrollers to executives from large pension funds to former U.S. treasury secretary Robert Rubin, who declared, “climate change is an existential risk.”

The conferencewas focused on the release of Ceres’ new report, “Investing in the Clean Trillion.” Created in conjunction with Carbon Tracker, the study lays out a plan for mobilizing much more capital toward building the clean economy. The trillion-dollar number is not random: TheInternational Energy Agency (IEA) has estimated that the world needs to pour $36 trillion of investment into the clean economy between now and 2050 in order to keep the planet below the critical warming threshold of 3.6 degrees Fahrenheit (2oC). That’s $1 trillion per year.

A key target for Ceres’ work, and the main audience at the conference, is the group of institutional investors who manage tens of trillions of dollars in assets for long-term performance. The core argument to compel institutional investors to change how they influence companies and where they invest their money is simple: as the world pivots away from carbon-based energy to avoid devastating climate change, fossil fuel assets, like coal plants or off-shore oil rigs, will be “stranded” — a wonky term for “worthless.” The value of the companies owning and managing those assets, the logic goes, will plummet. As Nick Robins from the bank HSBC described to the audience, in a scenario of global peak fossil fuel use by 2020 “implies a 44% reduction in discounted cash flow value of fossil fuel companies” — or in simpler terms, a decline in share price of 40 to 60 percent.

In another Ceres meeting last fall on this topic of stranded assets, Craig Mackenzie from the Scottish Widows Investment Partnership ($200 billion in assets) spoke about the “wake-up call” investors had gotten from recent shifts in the U.S. coal market. The 20% drop in coal demand was driven mainly by the incredible increase in natural gas production due to fracking technology, not from any concern over greenhouse gases. But the rapid shift demonstrated to Mackenzie and his firm the dangers of overexposure to a class of assets. So, he says, the fund “reduced exposure to pure play coal companies to nearly zero.”

It’s easy to point out a big flaw with the stranded assets discussion: uncertainty. I spoke with executives at a few big banks who said the big question for them is when will the assets be stranded. Nobody wants to leave profitable investments too early that gets you fired. But trying to time a bubble bursting is a dangerous game. How many investors got the timing right on the implosion of mortgage-backed security assets in 2008? Nearly none, and that systemic failure of vision contributed mightily to a global financial collapse.

Given what’s at stake now — not just financial system stability, but planetary, human-supporting system stability – it’s more than prudent to avoid the game of timing the market perfectly. The investment community should be much more proactive about using its weight to a) pressure fossil fuel companies to quickly migrate their own portfolios to new forms of energy; and b) dedicate significant funds to investing directly in new technologies.

With the chilling, “it’s going to be very costly” message of Gillis’ article, and the warnings of trillions of stranded assets in the Ceres report, it’s easy to miss the very big silver lining running underneath all the dire warnings: we have the technologies today to make the shift and do it profitably.

The Clean Trillion report cites the uplifting flip side of the IEA’s calculations — the $36 trillion of investment we need will yield $100 trillion in fuel savings between now and 2050. That’s a lot of money to leave on the table, and a very good investment.

(This post first appeared on the Harvard Business Review blog network.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

February 12, 2014

How Exactly Will We Move Away from Fossil Fuels?

Investors who have significant money tied up in the fossil fuel industry — every pension and market fund, essentially — are facing a massive risk. The logic, according to the International Energy Agency (IEA) and banks like HSBC, is this: as the world migrates away from carbon-based fuels, trillions of barrels of oil and billions of tons of coal — the assets sitting on the books of energy companies — will become “stranded,” or worthless.

Gujarat%20Solar%20Park%20%28600%20MW%29.jpg

It’s a compelling argument, but only if we can answer a key question: How exactly will those assets become stranded? That is, what will prompt a fast enough migration from fossil fuels to cause their value to plummet? I see a few plausible paths: government regulation, straight economics (when cleaner energy crowds out fossil fuel investment because the returns are better), or a social movement that propels voluntary action. Let’s quickly look at each.

1. The Stick: Regulation

The organizations talking about stranded assets seem to assume that governments will price carbon at some point. As a recent report on the subject from the NGO Ceres said, “According to the IEA, more than two-thirds of the world’s proven reserves of fossil fuels will be unusable prior to 2050 if necessary carbon regulations are enacted [emphasis added].”

That’s a mighty big “if.” While some regions are experimenting with carbon taxes, and Clean Air Act regulations in the U.S. are making coal plants more expensive, regulation is not truly impeding global fossil fuel use.

Ultimately, the political will for fundamental change is lacking. In the State of the Union speech last Tuesday, President Obama said that climate change was a fact and touted the growth of solar energy in America. But he also bragged about increased production of natural gas and oil. Very few politicians will take on those powerful lobbies, so a price on carbon is likely a fantasy in the U.S. for now. And partly because of America’s intransigence, 19 years of global negotiations on binding limits on carbon have led nearly nowhere.

2. The Carrot: Money

On this path, we choose renewables because they’re cheaper, which is far more plausible every day. In significant swaths of the world, wind or solar power is more than competitive with fossil fuels. About half of the new energy capacity put on the grid globally is now renewables, and the picture going forward is even better. Bloomberg New Energy Finance has estimated that between now and 2030, around 70% of the power generation the world will add will be renewables.

This level of investment is happening because the economics work. But it doesn’t mean we’ll be stranding many assets any time soon – the installed base of carbon-based energy systems is really large. Renewable energy does provide 21% of electricity globally, but modern renewables (like solar and wind, not hydro), which would really displace coal and natural gas, only provide 5%. Renewables are a long way from dominating electricity enough to make fossil fuel energy a bad investment.

And when you look at mobile energy use (that is, cars), the story is even clearer. To strand oil assets, we’d need to drive mostly electric vehicles or use a lot more public transportation. And while the new electrified vehicles market is growing fast, it’ll be many years until those technologies dominate.

3. The Guilt or Enlightenment: Moral Suasion

We could, in theory, see a vast voluntary movement toward clean energy by companies and individuals — even faster than what they’re purchasing already where the economics do work. But it is tough for public companies in particular to spend money when they think it doesn’t pay back in traditional ROI terms.

That said, organizations could recognize that the additional benefits from a larger, quicker move to onsite renewables — including having a hedge on fuel prices, inspiring employees and customers, and building resilience to extreme weather and grid outages — adds up to real value, even if it’s hard to measure. Companies and consumers could also decide it’s cool to use clean power. The Toyota Prius sold millions of units not because it saved money on fuel, but because of what detractors noticed was a certain smugness or pride in driving it (I’m guilty as charged).

We could also see moral pressure to move away from fossil fuels. The growing divestment movement, led by the NGO 350.org, is an attempt to make investing in fossil fuel companies morally equivalent to investing in South Africa during the anti-apartheid movement. The next generation — the students leading the campaign now — may never work for or buy from the old energy industry.

But moral campaigns are highly unpredictable and we can’t count on this path to get us there.

Ultimately, the second path is clearly the most likely, and the clean economy will dominate over time on purely economic terms — a variable cost of basically zero for renewable energy will win out. But will it be fast enough to turn fossil fuels into stranded assets any time soon? I doubt it, since companies and countries aren’t even doing all the clean energy projects that pay back quickly, or don’t require any money down. It’s not just about economics.

That’s why we need all of these efforts to work in conjunction — movement on any one of them will give momentum and credibility to the others. The social and government pressures will accelerate investment and thus improve the economics. And in return, if companies start buying a lot more renewable energy, they will help build the market, improve the economics, and give cover to politicians to take action.

In short, all three paths are valid and tough, but together, they should do the trick. They’d better.

(This post first appeared on the Harvard Business Review blog network.)

(Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

December 30, 2014

The 10 Most Important Sustainable Business Stories of 2014

Happy holidays and (almost) New Year.

For the 6th year now, I've taken a shot at summarizing the biggest themes in sustainable business over the last 12 months -- that is, stories about the biggest environmental and social challenges and how companies are navigating them. This year, given the incredible amount of activity on climate change, I devoted the first five themes to the biggest challenge of all -- the science, the costs and benefits (mostly the latter) of dealing with it, the deep impacts on energy and utility businesses, and so on.

lists.jpg

For the skimmers out there, here are the top 10 "headlines" I created...
1. The bad news — climate change is now.
2. The good news — tackling climate change is getting much cheaper.
3. The utility and energy businesses are changing fundamentally (well, some of them are).
4. Serious legislation like a carbon tax — even in the U.S. — is seeming possible again.
5. A powerful social movement on climate takes shape.
6. Strategy and mission start to gain the upper hand on short-termism.
7. Rivals embrace radical collaboration.
8. The absurd amount of food we waste gets more attention.
9. A teenager pressures Cola-Cola and Pepsi – and wins.
10. The fight against inequality finds new business allies.

The full article appears as usual on Harvard Business Review online, and began like this...

It’s been an amazing 12 months in the world of sustainable business. From climate change to inequality, the scope of humanity’s biggest environmental and social challenges came into much sharper focus this year — as did the scale and range of opportunities to do something about them. And citizens, using new social media tools and old-fashioned marches, rose up to drive change. Both in response and pre-emptively, the world’s leading companies continued to aggressively pivot their businesses toward more sustainable and innovative ways of operating.

To make sense of all of this activity, I made a list of the year’s big themes, looking for the bigger story across multiple examples. But I also ran across a few specific company stories that were just really compelling or cool. So here is my admittedly subjective look at the top 10 sustainability stories and themes of the year, with sustainability broadly defined as encompassing people, planet, and profits:

1. The bad news — climate change is now.
The subtitle of this year’s summary could be “reports, reports, reports,” with important and fascinating (no, really) studies from economists, government agencies, scientific bodies, and business coalitions — all making a compelling case for action on climate change.

Over the last two years, the Intergovernmental Panel on Climate Change issued its fifth, multi-thousand-page assessment of global climate science. But some new, more layman-friendly voices are telling the science story and explaining how costly to business a hotter world already is. The American Association for the Advancement of Science (AAAS) issued the clearest document from scientists I’ve ever seen, a pithy report telling us that “What We Know” is the following: (1) “Climate change is happening here and now,” (2) the risks of irreversible, highly damaging impacts are high, and (3) the sooner we act, the lower the cost. Another report, the U.S. National Climate Assessment, led with the statement that climate change “has moved firmly into the present.”

Adding a business perspective, a group of heavy hitters, including billionaire Michael Bloomberg and former U.S. Treasury Secretaries Hank Paulson and Robert Rubin, issued the persuasive Risky Business Report. This short paper outlines how climate is “already costing local economies billions” and describes how hundreds of billions of property are at risk...

To see the rest of the discussion, the 50 or so links to interesting stories, and my 5 themes to watch out for in 2015, check it out here...

Have a great New Year!

(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)

December 28, 2015

10 Sustainable Business Stories that Shaped 2015...and Some Questions for 2016

(I published the below, my annual list of the top 10 stories in sustainable business, last week in HBR. One change this year: I won't call evidence of climate change a "story." So consider the extreme weather that has devastated lives and businesses in Chennai, India. That’s not fodder for a top 10 list. It's unfortunately just part of the harsh reality of living life and doing business in the 21st century. It should be obvious that climate change is here and, as Citi calculated recently, will cost the world unfathomable amounts of money if it goes unchecked. And it's increasingly obvious that building the clean economy is good for business. So here it goes...)

The year 2015 was a pivotal time when humanity turned more decisively toward building a thriving and sustainable world. On our largest shared challenge, climate change, most of the major hurdles to action — both imagined and real – started to crumble. And an unlikely group of new voices joined the fight. From the Pope to global CEOs to almost all the world’s political leaders, the most powerful people got on board.

It was a year of amazing progress — mostly. Here are eight cross-cutting themes and stories from 2015 that are driving us toward a sustainable world (and two that are doing the opposite):

Pope%20Francis%20%28Foter%2C%20Flickr%29%2C%208658416032_44b01869f4_b.jpg

1. The Pope reminds us that we’re all connected. The Pope’s encyclical, Laudito Si, is a manifesto asking that we reconsider how we treat each other in a threatened and divided world. He challenged the current form of capitalism and made a powerful case for tackling climate change and inequality on moral and economic grounds (I’ve summarized his paperhere and here).

The Pope is, at least nominally, the moral leader of 1.2 billion Roman Catholics around the world. His voice carries enormous heft with all leaders. By adding a weighty moral dimension to the discussions of climate and equity, and for linking them effectively, I believe his manifesto and continued vocal support for the issues make this the top story of the year.

Ideas can affect the world more deeply than even historic treaties or agreements. Consider that other power brokers, such as Jim Yong Kim, President of the World Bank, echoed themes similar to those the Pope raised. Kim said in September, “we have no hope of ending extreme poverty unless we tackle climate change.”

2. In Paris, all countries say with one voice, “We will tackle climate change.” The deal reached on December 12 might be one of the first times in history that representatives of every human being on earth agreed on, well, anything. It’s big news and a very good start, but the deal has a major flaw: the commitments will not keep the world from warming 1.5 degrees Celsius, or even 2 degrees (the stated long-term goals). That said, with 187 countries pledging collective action to cut carbon emissions, the deal will have vast repercussions for business, particularly as governments put into place policies to remake our energy, transportation, and building systems.

The lead-up to Paris gave us a taste of what’s to come. For example, China committed to implement a carbon cap and trade system, Britain said it would phase out coal plants by 2025, and President Obama vetoed the Keystone pipeline. Besides possibly saving humanity, the deal has another big upside — it signals to financial markets and businesses that the low carbon economy is worth investing in. Multi-trillion-dollar markets are in play and there will be many more winners than losers.

3. Companies line up like never before for climate action. One of the reasons the Paris talks succeeded was the clear support of the business community. CEOs from some of the world’s largest companies put out public statements backing a strong climate deal. Sectors calling for action included banking (Bank of America, Citi, Goldman, JPMorgan, Morgan Stanley, Wells Fargo), the apparel industry (including Levi, Gap, Adidas, VF), and the World Economic Forum, which brought 79 CEOs together to urge action. Even oil giants from Europe (including BP, Eni, Shell, Statoil, Total) advocated for a price on carbon.

Some big names went even further than this nudging and took direct action to lower their carbon emissions and costs by buying large amounts of renewable energy. The giants contracting for hundreds of megawatts of wind and solar included Apple, HP, Kaiser Permanente, Google, Dow, Amazon, as well as GM and Owens Corning. Many of these companies are also shooting to use only renewables.

4. Companies and global governing bodies set visionary global goals. Goals matter. Big, aggressive targets drive organizations (like the ones above) and countries forward. And we’ve seen a lot of them this year.

To start, the UN, in a parallel with the climate negotiations, released in September the ambitious Sustainable Development Goals. Also called the Global Goals, these 17 statements (and 169 targets) create a vision and destination for building a thriving world — no poverty, zero hunger, health and well-being, equity and equality, and action on climate change, just to name a few.

Many companies also set visionary goals this year, often based on science — and some achieved big targets like Coca-Cola’s 100% water replenishment goal. A few examples:

This all leads to a huge breakthrough:

5. The vision of an all-renewable energy system comes into focus. In November, two professors from Stanford and the University of California at Davis mapped out how 139 countries could rely entirely on renewable energy by 2050. As the progress countries and companies are making shows, this isn’t just science mixed with wishful thinking. The world has already begun the shift — and the numbers bear it out.

Of all the new power generation built globally over the past two years, renewable sources accounted for over half. In the U.S., in the first six months of 2015, 70% was renewable. This is in part because every clean energy technology is rapidly getting cheaper. As Bloomberg reported in August, for example, “fossil fuels [are] losing cost advantage over solar, wind.” This means that solar will reach the point where it costs the same as traditional options — what’s called “grid parity” — in 80% of the world by 2017. To keep the renewable sector humming along toward that economic watershed mark here in the U.S., the congress passed tax credits for solar and wind at the last minute this year.

6. Wall Street wakes up. For years, asset owners with longer-term horizons, like pension or sovereign wealth funds, have pressed companies to better manage environmental and social issues. This year, the shorter-term investors (shorthand: “Wall Street”) started to join in.

Blackrock, with $4.7 trillion in assets, has been pushing the investment community to get serious on climate. Larry Fink, Blackrock’s CEO, also sent a letter in April to S&P 500 CEOs suggesting that they invest more for the long-term and stop putting so much money into stock buybacks and dividends (a $1 trillion boondoggle for investors this year). And at Morgan Stanley (in what I believe was a first), an analyst raised the stock price target for companies — in this case three apparel giants (Nike, Hanesbrands, and VF) — based on how well they manage environmental, social, and governance (ESG) issues.

In other investor news, the fossil fuel divestment movement grew quickly, gathering together universities, cities, and other institutions that have more than $3 trillion in assets. And Bill Gates gathered some friends to create the largest clean energy fund in history to invest in R&D. So-called “impact investing” is moving out of the niche world and into the mainstream. Blackrock, again, created a new ESG-friendly mutual fund.

7. Consumers (finally) show interest in sustainable products. Blackrock’s new fund was specifically aimed at Millennials, the group of workers and consumers that are demanding more environmental and socially sound products. A Morgan Stanley report found that Millennials are twice as likely to buy from brands with good management of environmental and social issues, and twice as likely to check product packaging for sustainability performance. For packaged goods and food in particular, it’s the era of what many call the “clean label.” It’s a sweeping change in expectations, as people want to know how everything is sourced, made, and delivered.

There’s real money here for the good actors. Mega-retailer Target, for example, assesses thousands of products it sells and scores them on sustainability performance. For a segment of the highest-ranked products, sold under the “Made to Matter” banner, sales at Target are growing much faster than regular products (and will total $1 billion this year). And Walmart took a fascinating step, trying to help choosy customers by labeling thousands of more sustainable products online as “Made by a Sustainability Leader.”

8. Companies challenged, and were challenged by, their supply chains. For many sectors, supply chains are becoming both a major source of risk and also an opportunity for positive change. The food business is an important case study. At a UN event I moderated in Paris, the CEO of Kellogg’s talked about the risk to the company’s supply chain from climate change. It’s one reason that the food giant set a new carbon reduction goal for its whole value chainas did competitor General Mills.

Why? The previously mentioned clean label movement is a key part of what the New York Times called “a seismic shift in how people eat.” This shift in consumer demand is rippling up through supply chains as food giants race to change the food system. This year McDonalds experimented with organic beef, Subway committed to buying antibiotic-free meat (following many others in the sector as well as Perdue and Tyson), General Mills said it will drop artificial flavors and colors from cereals, as will Kraft with its mac and cheese. The list goes on, and the trend won’t stop at food and personal care products.

In addition to these steps forward, 2015, like all years, included some steps back.

9. Commodities continue their relentless plunge in price. During the 20th century, the price of nearly everything that goes into making our society – energy, metals, food, and so on – dropped steadily. Then from 2000 to 2014, everything got wildly more expensive, doubling and tripling at least. But since the end of last year, the prices of most commodities have plummeted. Oil is nearing a 14 year low.

This massive shift has many fathers, from overproduction and over-investment in capacity to a general slowdown in China’s economy. And it’s worth noting that lower costs are good for most businesses (except commodity producers) in the short-term. But the rising cost of doing business was a core driver of the move to a more circular, sustainable economy. The logic of tight resources has not vanished, and investments in renewables have not slowed as much as lower fossil fuel energy prices would’ve suggested. But making investments in dematerializing value chains, or in designing products for end-of-life, is harder to justify right now. That’s unfortunate in the long run.

10. VW cheats and Exxon’s true colors. Warren Buffet once said, “It takes 20 years to build a reputation and five minutes to ruin it.” VW quickly learned this this harsh truth when it came out that the company had cheated on emissions tests to make its diesel cars seem cleaner burning. Credit Suisse says VW’s actions could cost the company $86 billion, andsales in November in the U.S. dropped 25%.

But this story does not call into question every sustainable product claim out there. No, this was about fraud. But it does perhaps make diesel less compelling as a clean transportation technology. VW found it was difficult to achieve high fuel efficiency, power/torque, and low emissions … but not impossible. It turns out, by the way, you can get all three: just look at Tesla.

And as for Exxon, it was the least surprising “scandal” of the year that the company knew about climate change for decades and spent millions of dollars calling the science into question. At least the exposure of VW’s and Exxon’s misdeeds demonstrates that transparency is a powerful tool coming for everyone.

Looking Back — and Forward

This year will likely go down as the time we began, in earnest, to make some important and deep changes in “business as usual.” Climate change is becoming an accepted reality to address; renewable energy is starting to outcompete fossil fuels; the private sector is taking the lead in building more sustainable products and pleasing ever-more demanding customers and workers; and investors are following the money toward a cleaner economy.

The coming year will be filled with more companies facing global challenges and considering tough questions about their purpose and role in society. But of course many predictions will go out the window as reality intrudes. Some questions that we can only answer with time:

· Will commodity prices stay low or skyrocket again?

· What companies will take advantage of, or get tripped up by, the increasing demands for more information and transparency?

· Will another storm like Hurricane Sandy hit the U.S. and elevate climate to a top tier issue for the 2016 election?

· As Millennials become a larger part of the economy (half the global workforce by 2020), what will they demand?

· How will technology, big data, and sharing economies drive change in business and help make the world more sustainable?

I look forward to a fascinating and more sustainable year to come. Happy holidays and best wished for a wonderful 2016!

(This post first appeared at Harvard Business Review 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)

March 9, 2016

Short-termism is Dead! Long Live Short-termism!

Two competing stories I saw recently about the relentless pressure on companies to meet short-term financial goals:

1) Larry Fink, the CEO of Blackrock, the world's largest investor ($4.6 trillion in assets) sent a new letter to S&P 500 CEOs urging them to think about long-term value creation (He also sent one last year lamenting stock buybacks and other short-term games).

A few choice phrases:

· "Today’s culture of quarterly earnings hysteria is totally contrary to the long-term approach we need."

· "We are asking that every CEO lay out for shareholders each year a strategic framework for long-term value creation."

· "Over the long-term (ESG) issues – ranging from climate change to diversity to board effectiveness – have real and quantifiable financial impacts."

Fink also commented on the macro-economic impacts of our short-term obsession: a lack of investment in infrastructure. That unfortunate political reality, I'd argue, is also due to a rise of an anti-governing coalition in the federal government.

Ok, so far so good -- so the scourge of short-termism in business is finally facing some strong, mainstream opponents. But then I saw this story...

2) "Alcoa CEO: The World is Getting More Short-Term"
Kalus Kleinfeld, Alcoa's chief executive, explains the break up of Alcoa into a core commodity business in aluminum and a "value add" business that sells to aerospace and auto. He makes the case that he needs to separate the high-value business to "have a different investor base" that would care about innovation and growth over time.

We've been hearing this argument more these days, as utilities have been splitting up to separate fossil fuels from clean energy...in part to satisfy different types of investors (although consider NRG CEO David Crane's take on whether short-termism drove his departure from the big energy company).

Kleinfeld isn't super-optimistic on this front, telling Fortune "the whole world is getting more short-term."

So which is it? The end of short-termism or the continued pressure?
Could it be both?

A short-term focus is deeply ingrained in what executives and managers have been trained to do (maximize short-term value) for the last 30+ years. So perhaps we're still heading in that direction...but we're finally slowing the ship and beginning to turn it around.

Fink suggests a solution in a way -- keep giving us quarterly reports and data as a measure of progress along the way to something larger -- like an 'electrocardiogram' of health today vs. a long-term plan for greater health. This seems like a good compromise.

But we clearly need to aggressively ramp up long-term thinking to get them even remotely in balance.

(Andrew's 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.

If you enjoyed this blog, please sign up for Andrew Winston's RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

April 20, 2016

The Data Says Climate Change Could Cost Investors Trillions

[Last week, on HBR online, I posted the article below on an important new study that estimates the risk climate change poses to global financial assets. Yesterday I did a streaming interview with HBR on Facebook Live (on HBR's page -- sorry about the bad audio). An interesting new outlet for getting ideas out -- 25,000 views and counting for a spur of the moment video. Fyi, I'm also appearing on Bloomberg Friday at 11:45am to discuss this topic.]

HBR%20Live%20interview%2C%204.19.16.jpg

The Data Says Climate Change Could Cost Investors Trillions

An important new study, published in the journal Nature Climate Change, says that climate change will be expensive. Extremely expensive. It turns out that if you mess with the planet’s thermostat, it’s not great for the economy or investments. Forget the polar bears; your pension and retirement funds are in trouble.

It’s not the first time economists have warned us about the costs of a changing climate. Some past studies on climate economics, like the famous Stern Report a decade ago, assessed the macro-level risk to GDP as a whole. Others have drilled down to explore what worldwide action to control carbon would mean for fossil fuel investments specifically. But this new report, by estimating the risk to all financial assets and portfolios, finds a powerful middle ground that should get investor attention.

If we stay on the current emissions path, the study predicts, the value at risk in global portfolios could range from about $2 trillion to $25 trillion. In a bit of understatement, Simon Dietz of the London School of Economics, the lead author of the report, told The Guardian, “long-term investors…would be better off in a low-carbon world.”

Estimates of climate risk in the trillions are unfortunately getting more common. Last year,Citi produced a powerful study of the costs and benefits of shifting the energy system toward low-carbon technologies. Unchecked climate change, Citi said, could cost the world $72 trillion by the middle of the century. But the big surprise in Citi’s report was the cost of building the low-carbon economy: the world can spend $2 trillion less in total on energy infrastructure and ongoing fuel costs than it would in the business-as-usual scenario. So we save $2 trillion and avoid losing up to $72 trillion in economic activity.

As compelling as that sounds, the numbers in the Citi study may be too macro to get the attention of investors. When investors look at climate risk – if they do at all – they’ve focused mainly on what worldwide action to reduce carbon will do to the fossil fuel industry. Holding global warming to 2-degrees Celsius will require keeping huge quantities of fossil fuels in the ground. These so-called “stranded assets,” sitting on petro-company balance sheets, are essentially worthless. And thus those companies are massively overvalued.

The stranded assets argument sounds (financially) scary, but it hasn’t been quite enough to truly shift capital flows toward the clean economy. Dietz’s new research, by saying that climate change is a threat to all assets, could get a much broader coalition of investors moving. Some longer-term investors, mainly pension and sovereign funds, are already very concerned and taking action. Norway’s $900 billion fund divested from coal last year, for example. These funds need to think decades ahead, which is well within the time horizon of some very real – and frightening — climate impacts.

Consider another recent scientific study with enormous ramifications for anyone living in, or investing in, coastal property. Some eminent scientists concluded that the sea level rise that they thought would occur over centuries is now likely to happen in just decades. The obvious implication is that any investment tied to physical, coastal assets could be at real risk. These time frames are not theoretical for long-term asset owners. A 20-something teacher contributing to her state pension today will expect a payout 50 years from now… around the time that huge areas of Boston, New York, Miami, and New Orleans could be unlivable.

But it’s not just the investment community that should rethink where its capital goes. Any large company needs to take a hard look as well. A couple of key questions to ponder:

  • Do you, or your suppliers, have significant coastal assets? And what is the risk of devaluation? In other words, does it really make sense for a hospitality or real estate company to build a new hotel, apartment, or office complex right on the coast in Miami? Or should any company build a factory with significant water needs in a water-stressed area? Will that asset be operational or retain its value over the normal depreciation period?
  • Where are your financial assets invested and in what classes? Do you have significant exposure to coal or fossil fuels in your holdings? What about your employees’ 401Ks or pensions? If you ignored warnings a few years ago about the imminent demise of the coal industry, you may be losing your shirt now.
  • On the upside, what opportunities might arise from a popping carbon bubble? There will be winners and losers, so where will those winners be?

There aren’t easy answers to these questions, but I know very few companies that are even considering them. Thinking about systemic risk playing out over decades is out of the realm of normal business experience, particularly in today’s climate of short-termism. We have no practice dealing with issues like this.

Putting a value on the risk or opportunity is an important first step to make it all understandable to business. And the numbers these banks and academics are coming up with certainly help stir the souls (or wallets) of the investor community. But on some level they’re absurd. When you get into the tens of trillions, you might as well say infinite. The scale of the downside is so large, it’s worth significant effort and investment to avoid it. Let’s hope business leaders and policymakers heed the warning and seize the opportunity to build a more profitable and resilient low-carbon world.

(This post first appeared at HBR online.)

(Andrew's 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.

If you enjoyed this blog, please sign up for Andrew Winston's RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)