Stakeholders: Govt/Regulators Archives

November 24, 2008

Apparently, It's the Government's Fault Detroit Is Bankrupt

Sometimes I think the Wall Street Journal editors are phoning it in. In a piece titled, "The Environmental Motor Company: Making Detroit a subsidiary of the Sierra Club," the Journal complained about those horrible Democrats in Congress that want to tie the $25 billion in loans to Detroit to "green retooling." I guess pushing U.S. automakers to make cars that get much higher gas mileage, and thus will sell better, is a bad idea.

The Journal also makes the ludicrous statement that the real problem for Detroit has been those awful fleet fuel-efficiency standards (the CAFE rules) "that force the companies to make cars domestically that are unprofitable." To add to the absurdity... the same day, in the same op-ed section, GM's CEO Rick Wagoner explains "why GM deserves support" and talks about the super-fuel-efficient cars GM will make with the loan. So even GM is saying it needs to make different cars.

We're seeing an amazing act of willful ignorance here. The knee-jerk response in some circles seems to be that these poor companies were just burdened by bad regulations (not to mention big bad labor). This crazy idea comes on top of the general fiction -- which Wagoner is pitching -- that Detroit is reeling because of the credit crunch and the economic downturn. But the proof on this one is in the data.

The U.S. automakers were having very serious problems months before the financial meltdown.

Let's look at May '08 sales in the United States, when high energy prices forced Detroit's hand. While the Fall has been the real Armageddon for U.S. auto sales, the spring year-over-year comparisons told a scary story. The overall car market was down 11%. But Ford was down 16%, Chrysler down 25% and GM down 28% (which in retrospect looks pretty good compared to GM's nauseating 45% drop year-over-year in October). But how did the other guys do in May? Toyota was also down after making some mistakes and trying to sell some big vehicles also, but only dropped 4%. Nissan was up 8% and Honda sales were up an astonishing 16%. Let's repeat that: Honda sold more cars this spring than the year before. If you look at total sales through October, the difference between U.S. and Japanese performance isn't quite as bad (only Suburu is up for the year). But the companies that sell smaller, more energy-efficient cars are doing ok.

My favorite media moment on this topic came on one of the 24-hour news stations yesterday. While covering the Congressional hearings with auto CEOs, one story explained that U.S. automakers spend an extra $1500 on each car (vs. competitors) to pay for pension and health care obligations. To be sure, these costs don't help Detroit. But the news anchor went on to say something like, "so Detroit is struggling because of that $1500...and the fact that it's known for making low-quality cars." Oh, just that little problem of making bad products.

The business guru Jim Collins, in his fantastic book Good to Great, focused on the importance of "Facing the Brutal Facts." Pretending that evil regulations are the primary cause of Detroit's fall does not help our automakers. Acknowledging that they were making the wrong cars at the wrong time is at least admitting we have a problem (in whatever 12 or 200 steps Detroit needs to heal).

The predicament that Detroit has found itself in is an American business tragedy. Let's not make it worse by lying to ourselves.

This post first appeared on Huffington Post.

May 29, 2009

Fuel Economy Standards are Only Half a Solution

In a remarkably bold regulatory move, the Obama administration is setting new, aggressive fuel efficiency standards for cars and trucks. The new goal will be 39 miles per gallon by a 2016 (which is around the corner in car model development time). This is big environmental news this week and for good reason. But as important wide-reaching as this kind of rule is, it seems like only half a solution.

The arguments against the ruling are of course being vociferously proclaimed from the usual suspects. But it's not easy to write them all off. It will cost more to make the technological changes, all at a time that the U.S. automakers are on life support. I tend to think the claims of expense from new standards that force innovation are generally overstated by alot...but it won't be costless to producers. The total cost of ownership to customers should go down with these kinds of fuel efficiency improvements, but that only matters if they buy the cars. And this brings us to the real problem -- what's the incentive for consumers. This concern, voiced by the industry and others, is far harder to dismiss. Unless gas is over $4/gallon, or we pay consumers to buy greener cars, why will they buy these new vehicles?

I've wondered since the car bailout packages why we didn't just take that money and commit to buying greener vehicles. GM wants $20 billion -- ok, we'll put $20,000 towards 1 million Chevy Volts as fast as you can make them. The government could buy them for government vehicles (imagine every FBI agent with a Volt -- if the bad guys saw one, I guess they'd know an agent was coming, but then again, they wouldn't hear it coming).

Remarkably, the industry is not responding quite as negatively as you'd think to all of this. they're happy not to face California's rules -- and then 49 other state regs. One national standard is preferable. And a very optimistic piece in the Wall Street Journal says "Car Makers Expect to Hit Fuel Goals."

But will they really hit the goals without the demand side pushing for it? It seems like a good time to have an even tougher conversation about what we can do to help consumers buy green. We have a remarkable consensus brewing that we need to move off of fossil fuels. The report from retired generals and admirals that just came out in the last few days was astonishing. As BusinessWeek reported, these military leaders believe fossil fuel, if it included the costs of transport and security, would run the army (and all of us) hundreds of dollars a gallon. Only 10% of the oil supporting the troops is actually moving the vehicles -- the other 90% went to "other vehicles delivering and protecting fuel and forces." As the report sums up, "This is the antithesis of efficiency." In a telling passage, the article reported:

"Our energy posture is not sustainable. It can be exploited by those who want to do us harm," retired Air Force Lieutenant General Larry Farrell, a co-author of the report, said in an interview. Finding a suitable alternative fuel and scaling it up to the size of the U.S. economy "is a 30-year project," Farrell said. "We've got to get started now."

It seems that starting with cars and trucks now would be a good idea then -- at the very least, maybe it frees up fuels for uses that are harder to avoid like flight and military. But we won't get there if people don't buy the cars. And why would they at $2 a gallon? With even the military saying we need some massive shifts, can we actually talk seriously now about giant subsidies to car buyers or, better yet, a tax on gas that puts a $4 floor on the price? Without those demand-side measures, we have only half a solution.

[This first appeared on Huffington Post]

January 22, 2010

Top 10 Green Business Stories of 2009

Happy New Year all (ok, I'm a bit delayed, but I entered the new year and promptly got really sick -- lost over a week in there). So let's start fresh now!

Anyway, I took a bit of time at the end of 2009 and early 2010, with a couple weeks' perspective, to think about the stories that really grabbed me in 2009. The top 10 is below, but see my brief write-ups and logic on each at my e-letter site here.

1) Copenhagen fails or does it?
2) The debate over climate science rages on (in the U.S. at least)
3) The EPA steps in
4) Wal-Mart keeps the pressure up (and saves the rainforest?)
5) Domino's employees deliver a new kind of openness.
6) IBM starts building a "smarter planet"
7) GM goes bankrupt
8) Some of our biggest capitalists get serious about carbon
9) China emerges as a green tech leader and the world's biggest emitter
10) The bottom of the pyramid becomes a source of innovation

And the bonus, theater of the absurd, wacky story...
10 1/2) Forbes names Exxon green company of the year

February 8, 2010

Failure at Copenhagen Doesn't Mean Businesses are Off the Hook

It's been a couple months since the global climate negotiations in Copenhagen. Whether you're a fan of a global cap on carbon emissions or not, it's important to think about what COP15's failure means (that a global agreement is going to be unlikely in the near term) and what it doesn't mean for business (that companies will be off the hook for tackling carbon emissions).

The climate negotiations brought together committed activists and world leaders, but led almost nowhere; instead, the gathering only highlighted and revealed some major structural hurdles getting in the way of a multinational agreement.

So it might seem that near-term regulatory or policy pressure on companies is unlikely. But actually there are some significant sub-national initiatives affecting business as usual that every company should know about. The pressure to measure, be transparent about, and reduce carbon is still on.

First, even without a global carbon trading system, other major multinational cap-and-trade systems are in place or in the works, including the EU's trading program, which has already been running for a few years. In North America, three separate carbon trading programs are in the process of setting regional caps covering states that include half the U.S. population (and provinces with three-quarters of Canada's). And city-level initiatives like the Mayors' Climate Protection Agreement are driving new local rules and fomenting competition among municipalities to cut emissions.

Second, within the U.S., the Environmental Protection Agency is not sitting idly by either. The series of climate-related rules that the powerful EPA has announced in the last year began with the National Climate Reporting Plan, which forces the largest 10,000 facilities in the country to measure and report their carbon emissions. This new system has much in common with the Toxics Release Inventory (TRI), a very public, and mandatory, database of toxic pollution by facility mandated by the federal government in the 1980s. TRI raised awareness within companies about their own footprints and drove aggressive efforts to reduce toxic pollution (along with cost and risk) that continue to this day. The same awakening about the carbon pollution companies cause -- and the financial costs of this form of waste -- even without an agreement from Copenhagen..

Going well beyond the regulated transparency of the reporting plan, the EPA recently declared greenhouse gases a public health threat. After a 2007 Supreme Court ruling that basically said CO2 could be regulated, the EPA's "endangerment finding" was no surprise. What's still unknown is what it will mean for business.

So far, virtually all the action -- from the regional trading schemes to new EPA rules -- has been aimed mainly at utilities and the biggest factories. What does all this activity mean for the average company?

The caps and efforts to reduce utility emissions could result in higher energy prices. Any business that, well, uses electricity will be affected. And the EPA's intentions for the longer term, while up in the air, are getting clearer. There is almost no chance that forced transparency for the big guys is the end of what the EPA will do. One glimmer of what will come: rules newly proposed in 2009 (in conjunction with the Department of Transportation) to reduce emissions from light-duty vehicles.

The bottom line is that business must still plan for rising restrictions on greenhouse gases by legislative means or by regulation. Despite the confounded state of international climate policy negotiations, companies will continue to face new mandates to measure, report, and reduce their carbon emissions.

[This post originally appeared on Harvard Business Review]

March 26, 2010

The Coming Policy Debate Even Uglier Than Health Care

We are coming out of our long, national nightmare. One of the dirtiest political fights in memory is over (sort of). But if you think the health care debate got rough, wait until President Obama and Congress turn to energy and climate -- which they're most definitely going to do.

You see, the worst claims about health care -- that it's a huge expansion of government power or, okay, let's say it, a plot to kill Grandma -- were never based in reality. What we've ended up with is actually a fairly mild bill, including access to coverage for millions more people and restrictions on the harshest practices of insurance companies. But it's not remotely a government program. The so-called "public option" did not even end up in the bill. There is no new giant government health care program beyond the existing giant government health care programs that people seem to love (like Medicare).

But putting a price on carbon and changing our energy mix over the next generation? That kind of law will be a large program by definition. To tackle an economic externality -- those pesky costs to society that are not currently priced into markets -- you do have to get muddy, and it most likely will entail an awful lot of mud-slinging.

So many of the complaints about a cap-and-trade law that we will hear over the coming months will be different from the health care claims in one very important aspect: they will actually have some basis in reality. A cap will affect the cost of all energy and thus all aspects of our lives. It will, for some, raise the cost of doing business. There will be winners and very definable losers in a new energy and carbon regime. When it comes right down to it, there will be blood.

Those who produce mainly fossil fuels could be in trouble. Businesses that operate inefficiently will see their costs rise -- fast -- compared to the competition's. Companies that stick with a portfolio of less sustainable, more energy-intensive products -- anywhere in their value chain -- will face life-threatening challenges (think GM in 2008 when oil hit $145 a barrel).

I believe strongly that decoupling our economy from carbon will benefit us greatly (regardless of the debate on climate change). The benefits include...

  • lowering our costs and increasing our profitability and resilience
  • costing much less than inaction on climate (see the famous Stern Report for the macro-economics on this)
  • reducing our reliance on fuels from parts of the world that fund our enemies
  • making us healthier as we reduce air pollutants
  • making us more competitive globally in the great race to multi-trillion-dollar environmental technology markets

Those impacts will not be felt equally across all aspects of the global economy. As we invest in efficiency, the sector that provides our energy will not fare well if it doesn't adapt. But the general position of organizations like the U.S. Chamber of Commerce that climate action is bad for business is absurd; these groups are placing the interests of one sector -- albeit a large and powerful one -- against the interests of all the others that will benefit from higher efficiency and lower operating costs.

So, in the place of death panels killing grandma, we'll have stories of how high energy prices will make heating homes in winter expensive... and, you guessed it, kill grandma. These arguments will ignore the countervailing levers of energy efficiency, retrofits, and weatherizing that will lower energy costs overall. And instead, we will hear (mostly made up) stories of businesses that will go under from new carbon laws.

But in this case, unlike with health care scare tactics, there will be some gems of truth hidden in the argument. So, yes, it will get ugly, but I have hope today that the forces of reason -- and the voices of the companies representing literally trillions in revenue that want climate action and more regulatory and market certainty -- can win out.

[This post originally appeared on Harvard Business Online]

April 1, 2010

Can Anyone Explain This Offshore Drilling Decision?

On the heels of one of the most active weeks in Presidential history, President Obama has confounded his supporters on the green side of the spectrum and opened up major areas of the U.S. coastline to offshore oil drilling.

The reaction to the decision has been in some cases predictable, but often surprising -- the New York Times came out in favor today. Of course key environmental leaders are dismayed (see this helpful, quality debate on the Times blog featuring varying perspectives from leading thinkers).

But I've been scratching my head and I'll admit that I'm completely confused by this decision, or at least by its timing. I can only come up with a few plausible reasons the President would support this, but none make real sense to me. Please comment and offer other reasons. Here are some lines of logic that some may support...

Answer One: President Obama, like all politicians, is 'in the pocket' of big oil and big industry.

This is way too easy an answer and is just part of the 'a pox on both your houses' attitude that's growing in the country. Yes, all politicians are beholden in different ways to different donor groups, but I don't think anybody can say with a straight face that Obama has tried to do just what some industries and donors want.

Answer Two: This is a political maneuver to buy Republican (and energy-state Dems) to the coming climate and energy bill debate.

This answer has the most currency right now. But I have two problems with its logic. First, the timing is odd. Why announce you're giving up one of your better negotiating positions before the real climate debate heats up? Why not hold that in reserve to get those votes you need? Or -- if can go out on a naive imaginary limb here -- why not hold it over the oil companies' heads to get some concessions -- like much higher fees for access, reduced subsidies elsewhere for fossil fuels, or demanding that they stop spending money on undermining climate science.

The timing just seems oddly nonstrategic, but, as environmental strategist Will Sarni pointed out (via a mini Facebook debate amongst my colleagues), it's just like the public option in health care -- Obama gave it up early on.

Second, and this should be obvious given the way health care went, Obama is not going to get any Republican votes on anything -- Senator McCain made that pretty clear by stating recently, "There will be no cooperation for the rest of the year." So maybe Obama is looking to shore up weak support for cap-and-trade in the Democratic ranks -- that makes some sense.

(As a funny side note on politics, has anyone noticed that he's opened up drilling pretty much around Republican stronghold red states? It's as if he's saying, "ok, you want a world of 'drill, baby, drill'? Then you can have it on your coastlines.")

Answer Three: The President and his Interior Secretary Ken Salazar actually believe this is a good decision and will help us achieve a measure of energy independence.

This answer actually seems the most believable to me, but it seems even more odd. I'm going to vastly oversimplify the economics and market structure of fuels here, but isn't oil fundamentally a fungible, global commodity? Meaning, even if we dig off our own shores, it's not exactly like it comes only to us. We're not operating a state-run oil company. If ExxonMobil digs up the oil, it basically enters the global market, continuing our addiction to oil and propping up what Thomas Friedman calls the "petro-dictators" around the world.

And even if the oil only came to our refineries and cars, there's nowhere near enough oil out there to make us independent anyway. True energy independence -- if that's even a worthy goal -- is only feasible through distributed generation, meaning a solar panel on every roof and wind turbine in every neighborhood. That's the energy shift we need to be moving toward as fast as possible, so I hope we use the rights and tax revenue to help support renewable energy.

In the end, I suppose this decision came from a bit of all three (and mostly the latter two). I welcome your comments on other plausible reasons, and please let me know if my Econ 101 assessment of global oil markets is fundamentally off-base.

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November 2, 2010

Are Green Marketers Still "Sinning"?

[Note: Below is the blog I posted at Harvard Business Online last week about Terrachoice's new "Sins of Greenwashing" report. It received some passionate commentary, particularly from friend and green marketing guru Jacquelyn Ottman. I've reposted her comment and my response below the blog. See also Joel Makower's excellent criticism of the report.]

The green marketing research firm Terrachoice released its annual "Sins of Greenwashing" study last Tuesday. I got a sneak peak on Monday and spoke with Scot Case, one of the key execs behind the report.

For the past few years, this study has been one of my favorite reviews of the pitfalls of green marketing. It's always a clever piece of analysis based on painstakingly assembled data about thousands of consumer products. This time their researchers explored 34 stores in Canada and the U.S. (from chains that have over 40,000 locations) and looked for any product that made a green claim — all while managing not to get arrested as they trolled store aisles for hours. They then counted how many products made any of seven mistakes, or "sins," that Terrachoice has previously identified.

Check out the report (page 10) for the exact definitions of the Seven Sins, but they include making claims that are vague ("all-natural"), having no proof (from, say, third-party certification), or stating irrelevant details (such as "CFC-free" on aerosol cans —the substance has been banned for 30 years).

This year's report is very well timed. The U.S. Federal Trade Commission just proposed changing its Green Guidelines, the standards for what marketers can legally say. The new, stricter rules are open for public comment (PDF) now. I'll be keeping a close eye on that story, but in the meantime I'll point out what I see as the key findings of the report. This report houses some of the best data on what marketers are trying to do and the pitfalls you should avoid. Here are the big picture findings:

1. The number of products making some kind of green claim is rising fast.
This year, Terrachoice cataloged 5,296 products. In just the two dozen stores it visited both in 2009 and 2010, the number rose from about 2,700 to 4,700, a 73% increase. Given the economic climate, this increase is particularly impressive. Because greener products are often considered to be (or actually are) more expensive, marketers would be forgiven for avoiding that pitch in a recession. Clearly there's a belief that consumer interest is still rising. (Side note: The overall increase in green claims has not gone unnoticed by certification and safety giant Underwriters Laboratory, which bought Terrachoice this year to help round out its UL Environment business.)

2. The vast majority of products with green claims are still committing at least one "sin"
In the first report in 2007, literally one product avoided all the sins. Terrachoice tries to put a positive spin on the new data, which shows a moderate increase of "sin-free" marketing. But the percentage of products that are still sinning remains very high at 95%. This level of greenwash, no matter how minor, leaves companies wide open to significant risk in the marketplace.

3. The mix of sins committed is shifting, and the sin of "worshipping false labels" is on the rise. An amazing 70% of these products now have no proof of their claims, and 31% go so far as to include some kind of label that looks like a third-party certification. As the report put it, "ease of access to false, completely meaningless eco-labels has become almost comical." The labeling world is much in flux and it's incredibly over-populated - the group EcoLabel Index is currently tracking more than 350 labels officially, and something like 600 in reality. Companies have to be very careful about this one - inventing your own label to make a claim is dangerous for the brand and could bring actual penalties.

4. The product and industry sectors with a longer track record of green marketing are doing better. Almost 30% of products in categories with a history of green claims, such as building and construction materials, include a legitimate certification (but still may sin in other ways). In newer categories such as toys, less than 15% include a certification. This finding bodes well for the future though, as companies learn and get more careful.

5. Claims about toxicity are on the rise, particularly in toys and baby products. A few years ago, nobody had heard of the chemical BPA or of phthalates. These substances help make plastics malleable or line the inside of canned goods, among other things. The focus on these chemicals, which may mimic hormones and screw up our endocrine system, has increased greatly. States and countries like Canada are banning the substances in kids' products. Not surprisingly, this year the number of products making "BPA-free" or "phthalate-free" claims rose 577% and 2,550% respectively.

Finally, the report comes to one interesting conclusion that I'm not sure I agree with. Larger retailers apparently have a lower percentage of sinning products than boutique and specialty green stores. Terrachoice uses that data to conclude that larger retailers are more trustworthy. But as far as I know, retailers are not really checking the product-level environmental claims that their suppliers make at this point. There are a number of initiatives in the works to provide some standards in the B2B world, the largest of which is the Sustainability Consortium, started by Wal-Mart. But none of these groups are close to rating or checking every product.

I believe that retailers, out of necessity from lack of data, are accepting the claims pretty much the same as consumers are. My explanation for the discrepancy that Terrachoice notes is that the bigger retailers carry a different product mix with more of the larger brand names that face more scrutiny and are thus more careful about claims. No matter what the reason, there are fewer false claims in larger stores. But even so, nearly every product surveyed made some mistake.

Luckily for business, these sins are not actually all that difficult to avoid. So take a good look at this report and explore some of the solutions offered by Terrachoice and in other guidelines — such as the Ogilvy & Mather greenwash guide I've discussed previously.

The standard marketers need to reach is not perfection, but speaking honestly about environmental impacts and not over-positioning the benefits (which is why it's sometimes hard for marketers to avoid). If you don't manage this communication well, you'll confuse your own customers and increase risk to the brand. On the up side, being known as an honest broker of green claims can only build loyalty. We all sin sometimes, but our products don't have to.

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Jacquie Ottman's Comments on HBR Online

“Sinning”, Really? “Painstaking” research, Really?

Andrew, you and I are friends and we usually see eye to eye on all things green, but I have to use my the little bully pulpit provided by this comment box to come clean on what I have long thought of this research —and it’s only been reinforced by Terrachoice’s new “Home and Family edition” (What is this, some type of board game?)

On his webinar Thursday afternoon, Scot MacDougal admitted his firm has not intended to be malicious in their use of the word “sins”. Ironically, however, this report is having the effect of maligning the entire green marketing-related industry—creating skeptics, even cynics, out of the press and consumers. (How many people, especially in the press, do you know who now use the terms “green marketing” and “greenwashing” interchangeably?)

The big issues here in my opinion are as follows. This research admittedly sheds light on some of the issues associated with making green claims in the current environment, but it isn’t close to being credible, “painstaking” research. Terrachoice are third parties themselves, but their research wasn’t even conducted by a respected third party — Roper, Gallup or even the guys in the suits with the briefcases on the academy awards— but probably a bunch of twenty somethings who don’t know beans more about green than the average Joe.

Macdougal also admits that he believes that most of the “sins” being committed today are likely to be inadvertent, the side effect of a fledging industry without self-regulation. Pity then, that this “research” is having the net effect of wiping out an important tool in a market-based economy loath to regulate consumer product manufacturers.

Any research that finds that 99.98% (or whatever astronomical percentage) of the world is not doing one thing or the other, in my experience, has set the bar too high; I can only surmise that Terrachoice, who has a stake in third party labeling, is likely on a witch hunt in self-interest.

The nerve of calling the world of largely well-intended marketers “sinners”! A 35-year marketing veteran, I understand the power of hyperbole —and most consumers do, too. However, as you pointed out in your April 2010 HBR blog post, most “sins” can be classified as mere missteps, and in my opinion, this is not surprising in a fledging market.

As reported, the number of green claims is rising fast, likely in response to consumer demand for greener products. Let’s hear it for a 2,550% increase in (hopefully legitimate) “phthalate-free-claims” to try to protect our children. Rather than maligning their activities and inviting the shackles of wary in-house counsel, let’s encourage this activity by first giving this growing group of green marketers credit for trying to make a difference. (Do you realize how many of these folks are putting their life savings on the line to support their efforts? One of my clients cashed in his entire IRA to support his fledging new green product.)

Let’s put the energy expended by and about this specious research to positive, not negative effect. Let’s work together to: fill in the gaps in what businesses can do to improve internally, perfect life cycle assessment and multi-attribute labeling schemes, certify industry professionals, work positively with FTC , NAD and other bodies to put out comprehensive guidelines and to enforce them, and celebrate the successes. Only by doing these things can we help green marketing live up to its promise of voluntarily skewing the marketplace to the genuinely greener goods and services.

Andrew, thanks for this post — and the opportunity to express my opinion on this. Our respective opinions won’t be agreed with by all, but hopefully airing them in this way, we’ll cause others to chime in, and ideally help trigger some positive change for our industry and economy.

------------------------------------
My response

Jacquie,
Thanks as always for your passion and strong opinions. While it may seem like it on the surface, i don't think we disagree that much. I have a few reactions/comments.

- I can't really comment on the quality of the research they've done -- i'm not sure why it's inherently lower-quality than Roper or Gallup. It seems like a fairly straightforward analysis, which i'm sure has flaws, but is directionally correct.

- I think I take the "sin" language a little lighter than you do. Terrachoice has always used this funny cartoon character, so I think it's meant to be a bit tongue-in-cheek. But, perhaps the "Goofs of Green Marketing" or something like that would be less judgment-laden.

-I’ve actually never heard someone say ‘greenwash’ interchangeably with ‘green marketing’ and I certainly don’t consider them the same. It’s like the difference between testimony and perjury. And I actually think there’s very little of what I would truly call ‘greenwash’ out there—outright lies or misrepresentation on purpose. Only one of the “Seven Sins” is that egregious, and it’s very rare.

- I certainly can't speak for Terrachoice at all, but for myself, and I certainly do not want to belittle or damage the green efforts companies are making, or their attempts to communicate with their customers. Going BPA or phthalate-free is a good thing, full stop.

But this is where I think reports like this are important. It’s because so many companies are working so hard and putting out mostly legitimate claims (even if they haven’t secured a third-party certification yet), that we need to be very careful about claims in general. One high-profile case of outright lies (like something that says it has no BPA, but does), and it casts the entire green marketing world in a bad light. For that reason, setting a very high bar which, yes, only 5% perhaps reach today, is appropriate. The number of claims is confusing to customers, so why not proceed with extreme caution and put fewer claims out there until every ‘i’ is dotted and ‘t’ crossed?

Overall, I’m certainly with you on your call to improve measurement, LCAs, and guidelines, and then make sure they’re enforced.

Thanks for your thoughts!

Andrew

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November 3, 2010

What the Election Means (Or Doesn't) For Sustainability

Obviously some things have changed in Washington and around the country in the last 24 hours. But what will this shift in power mean for the green business movement and for the sustainability agenda in general? It may not change as much as you think, and I see a number of reasons to maintain hope.

Here are my three big takeaways from the elections in general, and the defeat of Proposition 23 in California specifically. (Quick reminder: Prop 23 was an oil-company-funded ballot measure that would’ve suspended the far-reaching environmental law AB32).

1. Federal legislative action on climate and energy is dead. But we knew that already -- the defeat of the climate bill this past summer, even when Dems held huge majorities in both houses, sealed that fate. But to be more nuanced about this point, this election does not mean that all government action is stymied. At the national level, the EPA will move forward with plans to regulate carbon, and it will continue its transparency initiatives, such as the mandate for the largest facilities in the country to measure and release data on greenhouse gas emissions. But let's not kid ourselves: the new majority in the House, with some Democratic support from coal states, will be attacking the EPA aggressively. So all federal action will be a tough slog right now.

But the regional and local players will continue to advance sustainability agendas that affect businesses and consumers alike. Yesterday, I gave the keynote address at the State EPA Innovation Symposium in Wisconsin. I sat in on some sessions and heard about some really innovative ways states are using stimulus funds (or continuing existing programs) to reduce emissions and save money in schools, businesses, and homes. The innovation will not stop. Cities are promoting green lifestyles and business aggressively. Cleveland recently announced a program to give sustainable businesses a leg up on getting city contracts, for example.

But the best indication that climate action in particular is not on hold comes from California. The state announced yesterday that it's moving ahead with a cap-and-trade program, and the defeat of Prop 23 ensures that the program will continue. Which brings me to...

2. A broad consensus on building a clean economy future is not dead. The defeat of Prop 23 shows that coalitions for clear economic and environmental winners can be surprising. As green job advocate Van Jones put it a few days ago, defenders of the landmark clean energy legislation AB32 put together “a beautiful coalition,” including clean tech business leaders, faith-based groups, Governor Schwarzenegger, President Obama, and people from "every political, ethnic, faith, and socio-economic spectrum."

But I believe that one of the main reasons the logic of AB32 won the day was that a range of business interests saw that tackling climate was good for the economy. The greening of industry and society makes perfect business sense. Thus...

3. Business can, and will, lead the sustainability movement. It will have to. With federal support on the ropes, business will continue its leadership. For some that statement may sound odd, but I believe that over the last five years, the private sector has shown more sustained, creative drive toward a lower-carbon, resource-efficient economy than the government has. Corporate giants such as Wal-Mart, HP, IBM, and P&G have set tough goals for suppliers that are often much more strict than federal standards. They have also reduced energy use aggressively in stores, data centers, and fleets saving billions of dollars.

Clearly not all companies have kept up the momentum during the recession. But most of the leaders have. And the green business movement continues for one fundamental reason: it's profitable. As GE's Jeff Immelt said a few years back, "green is green."

So on some level, when it comes to green business, the election doesn't matter at all. Economic logic always wins out and sustainable businesses will be more profitable. Of course, without government support, the pace of change may not be fast enough to fully beat back the challenges of climate change, water scarcity, or biodiversity loss. But business and some unusual coalitions will continue on the sustainable path nonetheless.

For those of us who are working for a more sustainable, healthy, and profitable future for companies, communities, and our country, we should channel Martin Luther King, Jr. who once said, "We must accept finite disappointment, but never lose infinite hope."

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December 2, 2010

Why Climate Negotiations Keep Failing

The world is meeting in Cancun this week to talk climate change. Is there any hope of a large-scale agreement on capping emissions around the world? Most pundits would say no.

Why can't we agree to do something? The answers are varied and all contain some truth. There are, for example...

* The inherent challenges of tackling a problem so diffuse and long-term with responsibility laying with all 7 billion of us
* Psychological barriers to change
* A media that paints all issues as having two equal sides even if it's 99 to 1
* Powerful, vested interests in the old, fossil-fuel-based economy
* The fact that the U.S. has no federal climate policy, which makes global negotiations nearly impossible. (And with the recent U.S. election bringing to power more climate deniers, we're moving further away from ever having a federal policy.)

All of these problems, and many more, contribute to the repeated failure of global climate summits. But the hurdle that keeps coming up year after year and is perhaps the hardest to get over is the radical difference in perspective between the developed world and the up-and-coming powerhouses of China, India, and Brazil.

I spoke at a meeting of corporate execs in Beijing a couple of weeks ago and got a glimpse of these different viewpoints. Before my talk, a Chinese academic gave an overview of climate science and policy. He spoke in Chinese, so I understood little (ok, none) of the language, but the charts he put up were crystal clear...carbon dioxide levels over time, commitments for greenhouse gas (GHG) reductions by country, and so on.

But first he set the stage with a chart that gets to the core of the issue. It's data that we rarely discuss in the West, but seems to be pretty important over there. I'm talking about the cumulative CO2 emissions, by country, since the industrial revolution.

In his version, China was responsible for a tiny sliver. I looked up the numbers myself and created the pie chart below - it may not be perfect, but it's close enough. China is responsible for about 8% of the historical emissions from 1850 to 2002, but clearly the developed world is primarily responsible for the climate problem to date.

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This historical responsibility is irrefutable. But at the same time, the projections for emissions growth show that the new economic powers will be contributing the lion's share going forward. According to the International Energy Agency, China will be responsible for over one-third of the worldwide growth in energy demand over the next 25 years (full pdf report here).

This reality about future responsibility has been very convenient for those who want to drag their feet on climate action; it was one of the main reasons President Bush used to avoid climate negotiations. Why should we join the Kyoto Protocol, he'd say, if China and India don't have responsibilities?

This is not a new debate, especially to anyone who has watched the climate policy world at all. But I still found it useful to be reminded of the historical figures. It's sort of surprising to see it in hard numbers...and it explains so much.

Here's the crux of the problem: When the West/North says, "you will be the largest emitter going forward, so you have to cut back" and the East/South says, "you created the problem, so you should go first," they're both right. Can you think of a tougher situation for negotiation than when both parties are absolutely correct and yet their positions are so far apart?

But the reality is that Nature doesn't care who started this. When you find yourself in a boat that's leaking and sinking, you start bailing. You can't spend too much time worrying about who poked the hole. So while I believe the developing world's moral position is unimpeachable, it doesn't matter. The science will win, and the data tells us that putting any more carbon in the air is incredibly dangerous for our species. So everyone has to change.

I'd like to think that the world is moving away from these old debates, but they're still seething not too far from the surface. China's negotiating position in Cancun, according to the New York Times, is that the West should cut emissions, pay for the shift to a cleaner economy, and provide technologies to developing countries. Again, this is sort of hard to argue with - everyone must bail out the boat, but the responsible parties can pay for buckets. But given the fiscal and political realities in the developed world, us paying more for anything seems remarkably unlikely.

So my hope is what it always is: the business community will take the lead from the governments of the world and continue investing in and implementing clean technologies, regardless of the success or failure of the global negotiations.

Given how deeply felt the convictions are on every side - and the fact that they're all based in reality and truth - hoping for the business world to lap the policy world may be the only reasonable hope we have.

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April 10, 2011

Corporate Citizenship Should Include Paying Taxes

General Electric paid no taxes in 2010. Or at least that was the major takeaway from a recent bomb-dropping exposé in the New York Times. At a time of obsessions with federal fiscal austerity, this was a big story, and everyone was talking about it last week.

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I'll admit to having a visceral negative reaction, in part because GE is an important company that most people have high expectations for. So I wanted a bit of distance before composing some thoughts. I thought it would also be interesting to see GE's reaction and response before jumping to conclusions. But even after mulling it, I feel like the whole affair is not good for anyone — the country, the business world, or even GE itself.

Ok, so the facts are these. GE made $14 billion in profits in 2010, $5 billion in the U.S. Its tax bill in the U.S. will be negative $3.5 billion (as in getting money back). Is this legal? Of course it is. But the question on everyone's lips is whether a company can be a solid, contributing member of society and pay no taxes.

That's much less clear. After all, as I've long argued, responsible corporation, particularly one that is responsible with environmental resources, can create real value. GE has been a green leader for a number of years now with its ecomagination products and growth strategy through clean technology. And we always have to include the obligatory, but not insignificant, mention of providing jobs and livelihoods. We should also remember that this story is about income tax, not all taxes — I assume the company is still paying social security taxes on all employees (please tell me they are).

So what did GE have to say? The company's response to the clear implication of wrongdoing was not overwhelming. The perfunctory letter to the editor mainly says that GE Capital lost a bunch of money in previous years, so the losses carried forward. Verifying that point is really not easy, and the company didn't offer details.

I looked at GE's SEC filings and didn't see losses (please, someone educate us on this). The 10-K's show a run of profits — and positive return on equity — ranging from $11.0 to $22.2 billion over the last five fiscal years. On income taxes, the latest 10-K has this to say: "Income taxes (benefit) on consolidated earnings from continuing operations were 7.4% in 2010 compared with (11.5)% in 2009 and 5.6% in 2008." More numbers follow, but all are far lower than the statutory tax rate of 35%.

The morass of numbers and complicated logic involving foreign earnings is really the point here. GE, according to the Times, has dedicated some significant resources to legally gaming the system. The company employs 975 full time tax attorneys who have been told to spend half their time focusing on ways to reduce the companies tax bill (it was at this point that I wondered what 500 focused FTEs could accomplish on some more productive task, like inventing more ecomagination products). On top of this extensive internal tax law firm, GE spends $200 million on lobbying, much of which is dedicated to changing tax laws.

So let's look at the business logic here. GE has clearly seen the value in its socially-conscious programs, and the company has seen massive growth in its ecomagination portfolio to $18 billion in 2009 alone. Corporate social responsibility, the larger umbrella of environmental and social initiatives, also creates value, even if it's harder to put a number on. How your company is perceived on CSR issues affects sales, employee recruitment and retention, and brand value (I doubt that the coverage this tax story has driven is what GE is looking for).

But on a more tactical point, GE has a number of major business units that serve industries supported heavily by government spending: energy systems and the grid, transportation networks, and water systems to name a few. It's not silly to suggest that companies which need consistent and aggressive societal spending to thrive should consider it a good investment to pay into that system. I'm reminded of Henry Ford greatly increasing wages so that people could buy cars.

So there's a distinct possibility that tax strategies like GE's could destroy real brand and tangible business value and, given the fact that GE is not alone in this, impoverish the country.

But, to be blunt, it's also unfair.

As individuals, we all face taxes that we can't avoid in the form of the Alternative Minimum Tax. The landmark Citizens' United Supreme Court Case of 2010 continued a long tradition of giving companies the rights of citizens, in this case a form of free speech related to political donations. I could be convinced that "corporate personhood" is deserved, as long as it comes with accountability. A person with all rights and no responsibilities is basically a sociopath or, as one colleague joked, a teenager. It should be no different for a company.

GE is not a bad guy for doing what's in its charter and maximizing profits. Their actions are not illegal, or even immoral probably. But they are unfortunate at the least, and at the most, reduce the value of a great American company.

(This post first appeared at Harvard Business Online.)

July 26, 2011

Innovators, Meet Your Old Friend: Government Regulation

In the midst of the debt ceiling debacle, the House recently found the time to vote on (and fail to pass) a bill that would've repealed the so-called "light bulb law" that raised energy efficiency standards for lighting. The mandate was considered by authors of the repeal attempt — and apparently by 233 House representatives — as a "government intrusion."

Hear, hear! I'm tired of all these higher government standards. I want to retain the "freedom" to buy a refrigerator that uses as much energy as possible (and runs on coal you can shovel into the front), buy clothes and furniture as flammable as possible, purchase food without any safety standards and take my own darn risk of e.coli. Oh, and I want drive my car without that annoying life-saving seatbelt.

Kidding aside, this vote was absurd. If the bill hadn't been brought to the floor under some arcane two-thirds majority rule, it would've passed. The House has continued its attack by trying to defund enforcement of the bill. This is a really bad idea.

It may seem heretical in today's anti-government mindset, but I'll say it: many regulations and standards are very good for business. Here are a few reasons that the continued attack on the light bulb bill makes no sense, and in fact, why we should be passing a lot more laws like it:

1. Government standards, and particularly energy efficiency standards, are, well, standard.

Quick history: President Bush, who I think was a Republican, signed an energy bill in 2008 which raises efficiency standards for all new light bulbs starting in 2012. And the anti-freedom Congressman who put those standards into the bill: Rep. Fred Upton, also a Republican (he has now, as the Times put it, "reversed his position on the standards he authored").

In short, before recent hyper-political times, this country passed bipartisan safety and energy standards for decades on everything from boilers to cars and trucks to heating and cooling systems.

Critics claimed this particular law was the end of the incandescent bulb. But the bill does not pick technologies; it says how much energy the bulbs can use. It's the classic and most effective use of government mandates: set the standards and let the market decide how to meet them.

2. Efficiency standards drive innovation and save lots of money.

To be fair to critics, the standard did effectively rule out most incandescent bulbs at the time it passed. But then something totally expected happened: companies got creative. As the New York Times reported on July 5, "Incandescent Bulbs Return to the Cutting Edge." Apparently, some people didn't get the message that regular bulbs were dead. Instead, companies like Philips — while innovating around the new CFL and LED technologies — took the 100+ year-old bulb and made it 30% more efficient and last three times longer.

This pattern in common in industries affected by efficiency standards. Look no further than the dramatic innovation in refrigerators. Art Rosenfeld, the godfather of California's energy efficiency movement, likes to show the powerful chart shown here (from NRDC's David Goldstein). Due in large part to aggressive efficiency standards, the energy use and price of new refrigerators has plummeted — all while the size more than doubled. The innovation has saved consumers many billions of dollars.

(Note: Rosenfeld's work has been at the core of California's amazing record of holding per capita energy use flat for 40 years while the rest of us increased energy use 50%).

3. The companies most affected by these standards aren't complaining that much anymore. (Hint: higher product quality and efficiency makes companies more competitive)

One of the biggest battles over efficiency is often waged around automobile miles per gallon targets. The creativity of the auto industry over the last decade or two has been driven (sorry) by higher oil prices at times. But high standards on vehicle miles per gallon around the world have been even more effective (see page 18 of this UN report for chart comparing EU, Japan, China, and the trailing US on mpg standards).

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The U.S. is in this game also — the Obama administration is proposing a new rule that would force automakers to raise their fleet average to 56.2 mpg by 2025. The Washington Post reports that this rule could save us 4.7 billion barrels of oil and $705 billion over the next 20 years. Even with these benefits, we'd normally see the auto companies fight hard, and there's always haggling. But this time it's a bit different. GM has broken from the pack and indicated that it would figure out a way to meet the standard. As GM's North America President, Mark Reuss put it recently:

It's our job to [figure out] what it takes to do it. The auto industry does not get easier. It always gets tougher. That's the challenge and that's what our jobs are. If even-stricter guidelines require billions more in investment, so be it. It's not an either/or thing. It's how we get there with cars and trucks that consumers really want to buy at a [price] that doesn't put unreasonable cost on them.

GM, after lagging for many years on product efficiency — a strategy that basically killed the company in 2008 when oil prices spiked — seems to get it now. As Reuss indicates, high standards push companies toward what consumers will demand. And in a world of expensive energy and tight resource supplies, they'll want cars that sip fuel.

In short, those who complain that higher expectations on energy efficiency will "kill jobs" or be destructive to industry aren't giving our business leaders much credit. Companies can and will innovate. It's in their best interest for many reasons, including the fact that the rest of the world continues to raise the bar. Multinational companies need to keep up to stay competitive.

And it's in our vital national interest to continue getting more efficient as quickly as possible. While energy efficiency standards may not be a complete solution, they have represented a rare bright spot in the nearly defunct national energy and climate policy realm. So let's stop the silly votes, move forward, save everyone some money, and help drive innovation.

(This post first appeared at Harvard Business Online.)

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September 12, 2011

Weak Environmental Regulations Show Little Faith in U.S. Business

Before the big job speech, President Obama made an important decision about the economy and public health. About 10 days ago he reversed himself and his own EPA to stop a regulation that would've reduced smog-causing pollution. The U.S. Chamber of Commerce and the Republican Congressional leadership quickly declared this a major victory for "job creators" and business in general.

It's anything but.

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I'll give a major concession on this argument and put aside for the moment the danger of ignoring solid science and what it tells about public health (which is that, in the words of NRDC Director Frances Beinecke, "strong smog standards would have saved up to 4,300 lives and avoid as many as 2,200 heart attacks every year...[and] made breathing easier for the 24 million Americans living with ashthma...").

Ok, let's imagine those health benefits don't matter. Even from a business perspective these laws make sense and it's ridiculous to keep them weaker than they should be.

Choosing weaker environmental regulations actually makes our country less competitive and shows amazingly little faith in our business community to innovate.

Just because something may be difficult doesn't mean it will be expensive as well. For decades now, every major environmental regulation has met significant resistance from the industries most affected. That should be expected, but let's deal in reality, not hyperbole.

This time, industry opponents say it will cost enormous sums of money to comply with a regulation that moves the standard from 75 parts per billion to 60 to 70 ppb. We've heard this argument before. The claims of economic destruction, outrageous costs, and lost jobs are almost always seriously overblown.

Every now and then, a business leader admits the falseness of these Chicken Little cries. Former BP CEO John Browne once told Fortune, "Every time there's a new piece of regulation, we say it's the end of our industry...[we have] an appalling track record in this regard."

The most famous example, though, is the battle over the Clean Air Act Amendments of 1990, ultimately signed into law by the first President Bush. This law established the first major "cap and trade" system; it didn't restrict carbon dioxide as current iterations propose, but mandated reductions in acid-rain-causing sulfur dioxide. At the time, industry claimed compliance would cost up to $1,500 per ton of SO2 reduced. For the next decade, the industry never spent more than $200 per ton, and usually far less, as Dan Esty and I discussed in Green to Gold (see p. 75). So business was off on cost estimates by a factor of 10.

But it gets better every time. Friday's laughable assertion from Representative Eric Cantor that changing the smog standard would cost the economy $1 trillion and millions of jobs makes the acid rain cost claims seem quaint.

Granted, the fiscal logic for stricter pollution standards doesn't seem as clear as the cost-saving potential of energy efficiency standards such as those for light bulbs and cars. (Of course politicos are fighting those as well, even though the fact that they truly drive innovation and save everyone money has already been demonstrated repeatedly). But this seeming lack of economic logic applies if you only consider one side of the ledger, the cost to companies most affected. But on the other side we have public health savings, which are estimated at $37 billion per year, and the benefits to other industries.

What about the companies and entrepreneurs that create cleaner ways of operating or provide the pollution-reducing technologies? Those are real jobs too, aren't they? And our companies will be more competitive globally as every country struggles with pollution. Or just consider the productivity benefits to all companies of having their asthmatic employees breathe easier.

But here's what really galls me: saying that stricter pollution standards will cost enormous sums of money shows a staggering disregard for our capacity to innovate.

If American business is the engine of growth that our politicians make it out to be, why can't we find new ways to do things that save money, cut pollution, and make our companies more competitive. When given constraints, the tough and smart get going and innovate (and, by the way, the new standard wouldn't go into effect until 2013, giving us some time).

I have faith in our businesses.

Why don't our industry and political leaders?

(This post first appeared at Harvard Business Online.)

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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.]

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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.

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September 9, 2012

Politicians Who Deny Climate Change Cannot Be "Pro-Business"

It finally seems to be dawning on many Americans that there's something to this climate change thing. The historic drought has been hard to ignore. While belief in a long-term trend because it's hot out right now is a bit ridiculous, it's a start.

You can see a shift in how the media covers weather. The statement "because of climate change..." is often stated clearly without caveats such as, "what some scientists think may be a warming planet." You see it in the UN calling for action to help the hungry cope with rising food prices "in an age of increasing population, demand and climate change."

And you see it in the growing number of mega-corporations — including America's Alcoa, Coca-Cola, Cisco, HP, J&J, Nike, and P&G — signing on to the "2 Degree Challenge Communiqué," a call for the world's governments to take strong action to slow greenhouse gas emissions.

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Climate change is basically accepted as fact the world over. But you wouldn't know it watching our political conventions (or at least one of them). So while the world seems to be waking up to a fundamental, existential threat to our species (and not to "the planet," which will be fine with or without us), the US policy debate remains mostly deaf, dumb, and blind.

Climate change has become a political "third rail," harder to talk about than changing Social Security or Medicare. We didn't hear any mention of it at the GOP convention, except as a punchline, and we didn't hear much at the DNC convention...except for one quick, but important, remark from President Obama. Former President Clinton mentioned energy efficiency and Vice President Biden said the words "clean energy" once. But then President Obama, after duly noting the chance to create more natural gas jobs, spoke about building wind turbines and reducing dependence on foreign oil. Finally, he stepped firmly on the third rail: "Climate change is not a hoax. More droughts and floods and wildfires are not a joke; they are a threat to our children's future."

This is great, but let's not get too excited. One line does not a policy make.

Still, Obama's admission that climate change is real (a low bar for showing leadership these days) is light years from Governor Romney's dismissive attitude. His convention speech mocked President Obama for his earlier promise to "begin to slow the rise of the oceans." Romney offered instead to "help you and your family" — as if the health and state of our entire planet has nothing to do with the health of our families.

Here's what makes the general silence on climate and the mocking from the self-identified pro-business party so absurd: tackling climate change is the smartest thing we can do for both our public health and our private sector. Reducing carbon emissions from our power plants, cars, and factories cleans the air and saves a lot of money. At the macro level, the burning of coal alone costs the U.S. about $350 billion per year in health (asthma, heart attacks, and so on) and pollution costs. At the micro level, from companies down to households, the opportunities to get lean and save money are vast.

But more strategically, tackling carbon is an immense economic opportunity. Here's billionaire and entrepreneur Richard Branson on the upside potential:

"I've described increasing levels of greenhouse gases in the atmosphere as one of the greatest threats to the ongoing prosperity and sustainability of life on the planet. The good news is that creating businesses that will power our growth, and reduce our carbon output while protecting resources, is also the greatest wealth-generating opportunity of our generation. [There is no] choice between growth and reducing our carbon output."

This quest will drive innovation and create millions of jobs for some lucky companies and countries. Is this multi-trillion-dollar opportunity something we really want to miss out on? The other major economies are not sitting this one out. Germany is quickly moving its electric grid to renewables. China is committing hundreds of billions of dollars to energy efficiency and much more to the clean economy in general.

But let's say you don't buy the argument that fighting climate change keeps us competitive globally, saves trillions of dollars, and generates new wealth. Then how about the overwhelming national security rationale? Using less oil, for example, reduces funding to petro-dictators around the world. The former head of the CIA, James Woolsey, puts is very bluntly: "Your gas money funds terrorism."

On this score the difference between the parties is stark. The DNC's platform includes the words "climate change" at least 18 times and lists it as an "Emerging Threat" along with cybersecurity, biological weapons, and transnational crime. While "emerging" may not be the word I'd choose, it's leaps and bounds beyond the GOP' s party platform, which mentions climate change just once...and again, only to mock it. Their platform complains that the Obama administration has elevated "climate change" (with the sarcastic quotation marks) to the level of a severe threat to our security.

But let's be clear: it's not the Democrats or even President Obama specifically that declared climate change a national security threat. That would be the Pentagon in its Quadrennial Defense Reviewtwo years ago.

A strong plan to tackle climate change through government policy, business innovation, and citizen action is not just something that's not optional; it's preferable. Moving away from carbon to a cleaner economy makes us healthier, more profitable, and more secure.

My work is not political — I try to help companies create business value from sustainability and green thinking, so I normally avoid these kinds of discussions. But the discrepancy in party positions on this most critical issue has become too extreme to ignore.

There's blame on both sides, but let's not pretend the two parties neglect climate change equally. Yes, it's a shame that most Democrats will not stand up and proudly stand behind many of the positions in their own platform. But the GOP's denial of climate science, and all the risks and opportunities it presents, is surreal.

Their views and policies on climate won't help our businesses deal with, and profit from, the largest market shift we've ever seen. And they won't help prepare our country for the hard realities of life in the 21st century.

(This post first appeared at Harvard Business Online and on Bloomberg - see the active commentary on either.)

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

October 29, 2013

Two Critical Questions About Carbon Budgets

A few weeks ago, the Intergovernmental Panel on Climate Change(IPCC) put out its Summary for Policymakers, the latest, best estimate of our climate problem.

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It's not a pretty picture. The IPCC is brutally honest about where it can't provide certainty, such as the exact extent of specific kinds of extreme weather in the future. But the report expresses "near certainty" that humans are causing climate change – that's science-speak for "we know this" – and that we're heading for devastating consequences.

The IPCC provides some guidance on what we need to do, broadly speaking. The key idea is the carbon budget (which Climate Centralrecently summarised nicely). In short, we humans can "safely" put only so much carbon into the environment and maintain decent odds of holding warming to 2 degrees. I credit activist Bill McKibben for making this idea mainstream by writing a powerful piece in Rolling Stone last year.

The latest budget numbers this month are not good news. Here's the crucial paragraph with data on how many gigatons of carbon (GtC) we have left:

"Limiting the warming caused by anthropogenic CO2 emissions alone with a probability of >33%, >50%, and >66% to less than 2°C… will require cumulative CO2 emissions from all anthropogenic sources to stay [below] 1,560 GtC, 1,210 GtC, and 1,000 GtC [respectively]. An amount of 531 GtC was already emitted by 2011."

So to boil this down, if we want a 66% probability, we have about 469 GtC left. And the budget is even smaller if you also consider what IPCC calls "non-CO2 forcings" which Michael Mann – he of The Hockey Stickfame – described to me as "other human-produced greenhouse gases, including methane from agriculture/livestock and potentially now from leaks during [gas] fracking."

McKinsey and PwC have both taken previous IPCC estimates and translated them into annual targets. Basically, we need to improve our carbon intensity – the carbon we emit per dollar of GDP – by about 5% per year. These new IPCC numbers imply we have to go even faster.

All these numbers raise many questions, but let me pose two important ones:

1. Why aren't we trying to limit warming with a probability of 90%?

For a two-thirds chance of staying below the 2 degree threshold, we only have 469 GtC left. So how small would the budget be if we wanted a much higher probability? The next paragraph in the IPCC report provides some guidance: "A higher likelihood of remaining below a specific warming target, will require lower cumulative CO2 emissions."

What I suspect – and this is scary – is that there is no realistic number that gets us to a 90% or 95% chance of holding to 2 degrees. Meaning, we've already emitted enough to lock in substantial warming. The report backs up my suspicion by declaring, "a large fraction of anthropogenic climate change resulting from CO2 emissions is reversible on a multi-century to millennial timescale."

So we're rolling the dice here and only have a two-thirds shot, even with aggressive reductions.

2. How should companies think about the carbon budget concept?

We have to break down the global budget into smaller bites. The reasonable starting point is for every organisation to set a goal of moving at the required pace, which means reducing emissions intensity by roughly 5% per year.

Of course it's much more complicated to set equitable targets by sector or company, and it's a fair question to wonder if companies can take this on given their short-term focus. Meaning, why should a company do more on carbon than it can easily justify with regular investment hurdle rates?

It's a very tough issue to reconcile. The short answer is that companies should accept the budget logic because, as many have said, business can't succeed in a world that fails. Climate change threatens society, of which business is a subsidiary.

But the macro logic is hard for companies to act on in a quarter-driven economy. So we need to slash carbon in ways that pay off in traditional terms with one major caveat – we should expand our thinking about what payoff means and include all the business value that we can create from clean economy strategies, value that we don't currently measure well (like reduced risk and brand value).

But will voluntary efforts get us there? Unlikely. We'll need an actual mechanism for driving carbon emissions out of our economy fast enough. And that means government help. So companies are also going to have to get off the sidelines, pivot from the normal "all regulations are bad" attitude, and then actually lobby for carbon pricing and limits.

Logic and survival instinct dictate that we work backwards from the budget scientists give us. Our current path – cutting emissions where we can do it cheaply – is not much better than doing nothing. When 5% a year is the best estimate of what's required, holding carbon emissions flat or cutting a little is nice; but it's like taking one pill in a 10-day course of antibiotics.

It'll seem cheaper and easier at first, but you won't actually solve the problem or feel much better.

Note: This post has been corrected for one error related to carbon budget math -- see following blog.

(This post first appeared at Guardian Sustainable Business.)

(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.

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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)