Risk Management Archives

March 18, 2008

Large-Scale Green Business Risk

[posted here in Huffington Post]

I wrote a few weeks ago about Virgin Airline's biofuel test flight. While it was a bit of a publicity stunt, it was also a good thing — we need experimentation to find ways to reduce carbon emissions in all industries. But another news item HuffPo linked to this week brought my attention back to the airline industry. Apparently, the EU is saying that US airlines will need to pay for carbon emissions, or risk losing flight slots in and out of Europe.

For me, this story is about risk, which is a big part of the equation in green business strategy. Reducing risk is a solid strategy for creating value in your business, and in the green realm, it used to be mainly about avoiding regulations. Or about avoiding brand-killing incidents like the discovery of something dangerous in your products (see Mattel last year with lead in its toys). But green-related risk is getting much broader and more challenging to manage. The EU's position, for example, creates market access risk for airlines that don't play the game and either manage or pay for their carbon sins.

But many industries face bigger risks from the changing attitudes of consumers and other stakeholders. To stick with airlines for the moment just a few years ago, nobody knew what a carbon footprint was, and now we hear statistics all the time about the footprint of everything we do, especially travel. There's even data on how much airlines contribute to total global emissions (2-3%). So the pressure is rising. Customers may develop a distaste for flying in general given its high environmental toll. As I mentioned in my last post, business customers now have another option to help their companies reduce travel emissions and keep their green promises: high-quality teleconferencing.

This customer-driven risk may not threaten airlines too badly, but customer tastes and public perceptions are fickle and in other areas they can turn against a industry or product quickly. Take the somewhat strange trip of attitudes toward bottled water, which has turned south in the last year. Is bottled water a smart use of resources? Of course not; tap water is pretty good so why wrap it in plastic? But is an extra bottle here and there the worst environmental offender in our lives? Not likely, especially compared to what we drive to the store to get the bottles in the first place. I don't know if bottled water sales are slowing — it may be too early to tell — but the focus hasn't been easy for companies like Coke, Pepsi, and Nestle.

Fast Company ran an excellent analysis of the pros and cons of the bottled water business. The article concluded with one important insight: "Bottled water is not a sin, but it is a choice." We can't always see it coming, but consumers and business customers will make choices that avoid products with perceived environmental problems. When business customers make a new 'choice' it can move much faster than customer attitudes — just watch what's happening to plastic bags, with bans in place in some retail environments and now cities and countries around the world are eliminating the bags as well.

So on top of customer choice, businesses face new risks through market forces and government mandates that make the EU carbon tax look quaint. Most people don't realize that the last energy bill passed by the U.S. Congress basically banned regular, incandescent light bulbs. In the coverage of that bill, the press focused mainly on the rise in automobile fuel efficiency standards (to a 35 mpg average by 2020, which seems to me like a no-brainer). But the real story was the light bulbs.

The bill set new standards for energy efficiency that regular bulbs won't be able to meet (hello, compact fluorescents). It's really an astonishing law when you think about it — we're banning something that isn't inherently unsafe. I can't think of another example like that. And to add to it, we're replacing current bulbs with products that are less save in your home — CFL's have mercury in them. don't get me wrong: the tradeoff is worth it for now — as a society we'd rather deal with a pile of mercury bulbs that we're not sure what to do with than climate change. Of course this kind of mandate creates opportunity for anyone who can innovate and avoid the problems associated with either kind of bulb. LED lights anyone?

If you make incandescent bulbs, or plastic shopping bags, you're facing the death of your business. I bet some manufacturers wish they had something as "easy" to deal with as an EU carbon tax. This kind of risk — a market being redefined out from under you — is a bit scary. The risk is complete irrelevance. But companies that don't keep an eye on all these forces, from shifts in customer attitudes to wide-reaching laws and mandates, will disappear. The smart ones will innovate and profit in a newly defined market.

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.

July 28, 2009

Wal-Mart Asks, Where's the Beef (From)?

[Post #2 of 3 on Wal-Mart's activity in the last couple of months. This appeared at Harvard Business Online and then on BusinessWeek online]

In the last month, what event had the greatest potential for changing business as usual forever? If you said the passage of the climate change bill in the U.S. House of Representatives, it would be hard to argue with you. But I'm going to make the case for another event as the most influential (or at least a very close second): the Wal-Mart Sustainability Summit held in Sao Paolo, Brazil.

Following the model of the historic meeting Wal-Mart held for its Chinese suppliers last year, the President of Wal-Mart Brazil, Héctor Núñez, decided to hold a similar event for his suppliers. (Full disclosure: I was hired to give a keynote about the greening of business for larger context setting, but I have no consulting relationship with Wal-Mart).

Speakers at the event included the Brazilian Minister of the Environment and the director of Greenpeace Brazil, an organization that just a few weeks ago produced a damning report titled "Slaughtering the Amazon" that points the finger at the cattle industry as the primary cause of deforestation (growing soy is another leading cause). I had an interesting talk with Hector about his conversations with the aggressive NGO. He commented that "when you talk to Greenpeace, it's hard to argue with what they're saying."

But, I thought, arguing with the environmentalist perspective is exactly what business leaders normally do. But the world is changing fast. In fact, Hector's speech at the summit, with its soaring rhetoric about global environmental damage, made him sound more like a Greenpeace activist than a hard-nosed manager.

At the Summit, Wal-Mart announced significant goals and mandates to tackle some of the thorniest environmental and social problems in the world. Wal-Mart Brazil will now, in essence, ensure that its supply chain uses...

— No companies that employ slave labor; "forced" labor (read, slavery) is a rampant problem in developing countries.

— No soybeans sourced from illegally deforested areas; 20% of the world's carbon emissions (and 70% of Brazil's emissions) come from burning down trees.

No beef sourced from any newly cleared Amazonian land; globally, deforestation emits more carbon than all vehicles. Brazil and Indonesia are at the heart of this enormous challenge.

[For the rest of this column, please see BusinessWeek]

December 4, 2009

More to Deal with Than Just Climate: 25 Years Since Bhopal Disaster

Yesterday was a sad anniversary -- it's been 25 years since the Bhopal disaster raised the specter of chemicals and toxics as a deadly serious environmental issue. In the late 60s and 70s, rivers catching on fire and dense, opaque air above cities forced our attention on solving the pressing, tactical issues of air and water pollution.

But perhaps no environmental disaster grabbed people's attention quite like the gas leak at a Union Carbide plant in Bhopal, India on December 3, 1984. Estimates vary, but at least half a million people were exposed to toxins and thousands died within a few days. Birth defects and other serious lingering effects still plague the population in the region, affecting hundreds of thousands of people. (See the Bhopal Medical Appeal for more info).

This one event drove awareness and contributed mightily to the momentum building to reduce human exposure to toxicity. It was the beginning of a quarter century of action. One of the first real industry-driven initiatives in any sector, Responsible Care, grew out of the tragedy. A few years later, the U.S. created the Toxics Release Inventory which mandates transparency on a range of industries. The measurement and disclosure of toxic pollution by facility has forced a lot of soul-searching and kicked off long-standing sustainability efforts at companies like DuPont (which discovered it was the #1 polluter in the first TRI reports).

The movement has evolved a great deal in recent years as part of the larger green wave that's swept business, especially the powerful trends of supply chain greening and transparency in all we do. Wal-Mart, never one to pass up a chance to increase pressure on suppliers on sustainability issues, quietly introduced a new tool, GreenWERCS, to assess products on its shelves on chemical composition. Companies like SC Johnson, Nike, and HP have made significant efforts, some for years, to reduce toxicity.

High-profile stories of lead in toys, toxic drywall, and melamine in milk products (all tied to Chinese supply chain practices), as well as concerns about chemicals like BPA leaching from baby bottles here, have also raised awareness dramatically. As the world contemplates vast policy action on climate, it's worth noting that government pressure has continued to rise on toxics, with a large number of powerful laws around the world. Regulations in EU over the last decade, such as RoHS and REACH, have changed the game dramatically (shifting responsibility to prove safety from government to business). The U.S. has gotten into the act in recent years as well, with bans on phthalates in toys, the controversial and stringent Consumer Product Safety Improvement Act, which targets toys in particular, and regional actions like California's new regs. Companies cannot avoid questions about what's in everything and how their products might affect human health.

But what's really interesting is how the approaches companies take to handling toxics have been shifting over years from end of pipe solutions to pollution prevention to a new movement under the banner of "green chemistry." Rather than demonizing chemicals and chemistry -- when they continue to play a critical role in meeting human needs -- this new approach seeks a third way.

The leaders are starting to design chemicals and products in new ways to reduce toxicity. Do this right, the thinking goes, and avoid tons of regulation, liability, and health problems altogether. There's enormous upside potential for the companies that can innovate and find ways to create the same material or chemical properties that we need with much lower risk to humans and the environment. So this is not all about regulations and risk-reduction - it's about getting smart about your own products, and it's about profit.

With all the extensive, and justified, coverage of climate change and the Copenhagen Summit, it's easy to forget that there are other serious environmental issues out there. This anniversary today certainly reminded me. From water to biodiversity to waste, a range of other problems continue evolve and create pressing challenges, for society and for business. Of course most of these, especially water, have deep connections to climate change, so it's right that we make that a priority issue.

But the issue of toxicity and chemicals is one that lies somewhat separate from the climate discussion. While it gets lost in the shuffle sometimes, the pressure on companies to deal with it just keeps rising and rising. It's worth, today, remembering why.

[Originally posted on Huffington Post]

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February 14, 2010

Toyota, Getting Squished Like a Grape

Reality 1: Last year, the Toyota Prius was the bestselling car in Japan. On the back of innovations like the hybrid gas-electric engine, Toyota also became the largest car seller in the world by volume. Toyota is clearly the best, most forward-thinking auto company.

Reality 2: During the same period, a number of Toyota models developed (or exposed) a serious quality problem that has caused deaths and led to one of the largest recalls in product history. In its delayed response, Toyota has not won any prizes for openness and customer care. Furthermore its line of trucks took a huge hit when the auto industry collapsed. Toyota is clearly the worst, most slow-moving auto company.

F. Scott Fitzgerald once said that it takes "a first-rate intelligence...to hold two opposing ideas in the mind...and still retain the ability to function." But how can Toyota still be one of the best companies in the world and still make horrendous life-threatening mistakes?

In the green/sustainable business realm, this dichotomy is actually not so unusual. Wal-Mart is arguably the most important company in the greening realm, with its aggressive actions to reduce its own — and all its suppliers' — environmental impacts. But, according to a large segment of the population, it's also a force for thoughtless consumption and low-price-above-all. A consumer survey last year proved the point: Wal-Mart topped the list of most sustainable companies, and sat atop the list of the least sustainable as well.

Toyota itself has for years been prompting head-scratching about how green it really is. At the same time that the Prius was rising in popularity and winning the company accolades for a good chunk of the 2000s, Toyota was also embracing a big vehicle strategy and focusing sales efforts on its giant Tundra truck. Most pundits agree that Toyota's quality and revenue problems stem from trying to grow too fast — partially by putting a big push behind the Tundra. By pursuing truck sales, Toyota grew, but it also found itself in the same whirlpool of anti-big vehicle sentiment when oil prices peaked in 2008.

But it's not just that Toyota grew too fast. Comparing figures from the first eight months of 2008 vs. the previous year, it's clear that Detroit was already hemorrhaging sales before the economic collapse because they had missed the green wave. Meanwhile, Detroit's Japanese competitors, with their more energy-efficient, greener product portfolios, were selling more vehicles year over year. Toyota's results were right in the middle because it was trying to be all things. It was trying to be smart — to maintain two opposing strategies at once.

This kind of integrative thinking is a skill all modern leaders will need (see an interesting piece on this opposing-views idea and President Obama). Holding opposing views can lead to innovative ideas, and we desperately need radical innovation, or what I call "heretical" innovation, to solve our environmental ills.

For example, we can't forget that when Toyota asked why cars couldn't have solid power, good midsize interior space, nice design, and get better gas mileage, it was on to one of the most important innovations of our time — even if today the Prius is getting caught up in the quality concerns as well. As has been already argued, we shouldn't use the Toyota saga as a warning against innovative thinking. Instead we should look more closely at where their strategy worked, and where it failed.

What matters is holding the right kind of opposing views, because not all of them are safe or sustainable. As the wise Mr. Miyagi once told Daniel-san, "Walk on road, hm? Walk left side, safe. Walk right side, safe. Walk middle, sooner or later get squish just like grape." Pursuing leadership in lean manufacturing and design while at the same time trying to grow at all costs has badly damaged Toyota.

Sustainable growth, the kind that isn't going to get squished, is found by using the kind of integrative thinking that allows us to provide goods and services that are the same or better and also to use drastically less stuff: that's heretical, and involves the right kind of opposing views to try and hold in your mind. But where Toyota got in trouble with integrative thinking was when it combined sustainable growth in one part of its portfolio with uncontrolled, unsustainable growth in another, exposing it to the very risk its Prius strategy sought to mitigate.

No matter how green your company is elsewhere, that kind of unthinking growth is not a worthy or, it turns out, a profitable pursuit.

[This post appeared first on HBR]

June 9, 2010

Five Lessons from the BP Oil Disaster

It's very easy to pile onto BP right now. The "accident," which may be due more to negligence, is bad enough. The company lost 11 employees — after losing 15 in a high-profile explosion at a refinery 5 years ago. The damage to the Gulf, its species, and the people who depend on it is almost incalculable. But surprisingly, it's even easier to criticize BP's behavior since the explosion — the company has tried hard to downplay the scale of the tragedy and it has moved slowly to stop the torrent of oil pouring into the Gulf.

The nightmare is not over and the repercussions in terms of regulations and the future of BP are far from certain. But it's high time to start sifting through the wreckage for some learning so we can avoid similar catastrophes. I'm sure there are literally dozens of good lessons (please post yours), and I think many companies already have a solid understanding of the key principles of good behavior. But why do we need to wait for each fresh disaster to relearn the lessons we already know?

Here are my top five lessons, running from geopolitical and philosophical to corporate-level branding and strategy.

1. Our reliance on old, fossil-fuel based technologies is devastating for the planet, for society, and for business. This spill is in many ways an expected result of the path we have chosen. Given the declining stocks of easy-access oil, our addiction is forcing us to dig up extremely remote oil — something very, very hard to do that comes with enormous complexity and myriad risks of catastrophic failure.

The assumption that we will continue to dig up more carbon-emitting fossil fuels may be called into question in a serious way by the Gulf oilpocalypse. Governments may very well ask for companies to invest far more in safety. It's a reasonable outcome that regulators demand that companies invest not only in the technologies to dig oil up, but also in cutting edge ways to greatly reduce the risk of it going all over the place. So far, the oil giants seem to be pursuing only the first part. Which brings me to...

2. Preparing for a world where things only go right is extremely dangerous. To hearken back to the recession for a moment, one of my favorite tidbits about the financial meltdown was something I read about the ratings agencies (you know, the groups that gave horribly risky investments triple-A ratings). In the spreadsheet models they used to estimate the value of mortgage-backed securities, analysts could only plug in a positive number in the "growth" cell. That is, they could not predict the value of those derivatives if housing prices actually went down. You have to wear very large blinders to build a model like that.

But the oil companies have done the same thing. They've invested heavily in exploration technologies, finding ways to do things — like dig a mile under water — that were only space-age fantasies until recently. But where are the technologies to avoid spills, contain them, and clean them up?

3. Downplaying your mistakes is, well, a big mistake. It's gospel in business schools that Johnson & Johnson set the bar on handling a disaster when it dealt with the poisoning of Tylenol (and thus murder of some of its customers) in 1982. The massive, and immediate, recall was unprecedented and set the standard for corporate behavior in the face of existential threats to a business.

Cut to 2010 where BP leaders apparently never read the J&J case study. CEO Tony Hayward infamously said that the spill was "relatively tiny" compared to the "very big ocean." That statement is both scientifically baseless and beside the point - the amount of leakage that the CEO should accept from his operations is approximately zero. Unfortunately, Hayward hasn't learned much in the way of media training as he told a reporter this week that he wants to end this disaster because, "I'd like my life back." Wow.

And the response has seemed awfully slow. Why, for example, has each attempt to stop the leak been done in a serial fashion? Meaning, when the "top kill" failed, why didn't BP have the next containment dome in position already instead of waiting a few more days? BP has been acting like a child that doesn't want to clean up its mess and drags its feet, which is strange, given the monumental risk to the company.

4. Environmental risks can threaten the viability of a business. Reducing risk was the core focus of environmental efforts for many years so it got a bit passé as a forward-looking argument for sustainability. But it certainly is making a comeback now. As someone who's written for years about how going green can drive profits and growth, I've probably also downplayed the role of risk reduction in creating green value. So let me make the very easy case for BP's poor risk management.

As of today, BP has lost over 40% of its market value, worth about $75 billion. The New York Times went so far as to suggest that BP could be vulnerable to takeover once all its liabilities for this spill are accounted for.

Of course for most companies, sustainability-related, enterprise-threatening risks are not quite as tangible as miles and miles of your product killing an entire ocean. But even harder-to-measure threats can destroy a business model. Think of the "stroke of the pen" risk from regulations that outlaw a component of a product due to toxicity (one recent candidate: plastics chemical BPA). Or consider at the risk to companies that do not meet the new sustainability-themed supply-chain demands from business customers. Or look at a company's ability to attract and retain talent based on how well the company manages its environmental and social performance. Ironically, BP leaders have told me in the past that their reputation as a green leader was making recruiting the best engineers far easier. But that reputation is shattered.

5. Companies can lose the reputation as a sustainability leader very fast. Warren Buffett famously said, "It takes 20 years to build a reputation and five minutes to ruin it." Having a reputation as a sustainability leader is valuable, but it's a tenuous thing, and it can be lost very fast. In the book I coauthored, Green to Gold, we open with two stories: one about Sony and environmental risk and the other about the money BP saved through carbon reductions. For years, the sustainability community has praised BP as best-in-class. In the 1990s, the CEO at the time, Lord John Browne, set BP on a path to go "beyond petroleum."

But over the last few years, BP has quietly reduced its investment in renewable energy to a negligible percentage of sales and profits. Under Hayward the focus has been on cutting costs, and the company has explicitly avoided talking about "green" initiatives in the media (give them credit at least for trying to reduce greenwash). Given the explosion of 2005 and this spill, it doesn't seem like much of a stretch to guess that the company has under-spent on safety.

BP nets about $20 billion a year. How much do you think BP should have spent on extra precautions and new clean-up technologies? Imagine if every well had a second, relief well nearly dug at all times. Expensive, yes, but so is the destruction of your reputation and business, not to mention an entire ecosystem.

The answer to how much BP, or any company, should spend to avoid these problems is somewhere between zero and how much the company is worth. Unfortunately for BP, that latter number is far smaller than it used to be.

[This post first appeared at Harvard Business Review Online]

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September 16, 2010

The Competing Black Swans of Climate Change

According the metaphorical story that opens Nassim Nicholas Taleb's The Black Swan, until the discovery of Australia, everyone in the Old World knew that all swans were white. Years of empirical evidence proved it — nobody had ever seen anything but a white swan.

It came as a shock then when the sighting of a single black swan destroyed such a simple theory. All it took was one example to overthrow the status quo.

The world faces some big shocks in the realms of sustainability and climate change, and the ways of thinking about the future described in Taleb's book will come in handy. In Taleb's view, a Black Swan event...

  • Lies way outside the realm of regular expectations — it's an outlier
  • Carries extreme impact
  • Seems explainable after the fact

The event that perfectly fits this bill, and the reason Taleb's book is so vital today, is the financial meltdown of 2008. It fits all three definitions.

The subprime mortgage market was predicated on the idea that housing prices nationally would continue to go up; after all, they always had. This conclusion represents one of the logical fallacies Taleb shows we all fall into where we "preselect segments of the seen and generalize from it to the unseen: the error of confirmation." Falling housing prices and subprime mortgage defaults certainly lived up to the "extreme impact" test, since they brought down the world economy. In retrospect, many pundits and analysts provide some explanations for the mass delusion that swept the financial world, the government, and homebuyers (see Michael Lewis' amazing The Big Short for a look at the few people who saw the collapse coming).

When I think about the challenges of sustainability, I see Taleb's principles and dynamics all over the place. From this point forward, two Black Swans will shape our world. First, we face an extreme outlier with unimaginable impact in the reality of climate change — it's the ultimate Black Swan. But we will require the appearance of another Black Swan to get us out of the hole we've dug.

Black Swan 1: Climate change itself. What really makes for a Black Swan is the fact that massive numbers of people are sure it can't be true. Even in the face of overwhelming evidence of climate change and resource constraints — the two heavy-hitter forces driving sustainability — many people struggle with believing any of it.

And it's not a big surprise that it's hard to believe. In our entire human history since the last Ice Age, our climate has not changed enough to threaten the viability of the species. So we make the error of confirmation and assume that it won't change that much going forward. We also make another of the logical errors that create problems: the narrative fallacy. We look for a story that makes sense of the facts in front of us. Look at this from a skeptic's point of view. The resource-constraint doomsayers throughout history, such as Thomas Malthus in the late 1700s and many in the modern environmental movement, have, it seems, been wrong. So the predictions of devastation will be wrong again, right?

Unfortunately, we're feeling the effects of the climate change Black Swan today. Russia burns, Pakistan and Nashville flood, and 2010 is the hottest year in recorded history. (Every climate scientist would, at this point, give the caveat that no single weather event can be ascribed to climate change, but the pattern is bad. Personally, I'm getting tired of the caveat, since it's useless — of course long-range climate models don't predict the weather, but the climate is changing before our eyes.)

So what will get us out of this mess?

Black Swan 2: Worldwide action. We'll need to change so much about the way the world works as to make it nearly unrecognizable. Imagine companies creating radically new energy supplies, entirely electric transportation systems, and non-toxic and completely recyclable products. Picture massive increases in resource efficiency, waterless manufacturing and agriculture, and everyone engaging in tough, heretical conversations about our consumption and what it means to live a good quality life.

The kind of collective will and action we'll need to create not only new markets and products, but also new lifestyles, is unprecedented. In human history, when has any group faced limits and made the changes necessary to survive and thrive? I'd be happy to hear an example, but if you follow to the work of Jared Diamond of Guns, Germs, and Steel and Collapse fame, the answer is basically never (think Easter Island).

Taleb addresses climate change in the second edition of his book and answers those who want to use his theories to do nothing: "The skepticism about models I propose does not lead to the conclusion endorsed by anti-environmentalists and pro-market fundamentalists. Quite the contrary: we need to be hyper-conservationists ecologically, since we do not know what we are harming with now. That's the sound policy under conditions of ignorance and epistemic opacity." That's his fancy way of saying that the Black Swan of climate change has so much downside, we need to be very careful. But to handle this challenge, we'll need to do something we've never done and it thus seems impossible as well. That's the second Black Swan here.

In that sense, though, Taleb's work gives me hope — the unexpected not only can happen, he says, it's really the only thing that ever changes history. Which Black Swan will hit first? Will it be climate devastation and resource shortages ... or collective action to create more profitable, healthy, and sustainable companies, communities, and countries?

The first Swan has left the gate and we have some catching up to do, but I'm betting on the second.

(This post first appeared at Harvard Business Online.)

January 6, 2011

Is Water the Next Carbon?

Note: This post is co-authored by Will Sarni (see bio below)

We all take water for granted. Even though water is critical for human life, ecosystems and as a major process or product input for industry, it's a resource that very few of us think actively about managing. And of all environmental issues, it's the least debatable; when there's no more water in a region, you don't need scientists to tell you.


Companies need to develop strategies for managing this important resource as water stress becomes the norm in many regions of the world. As a starting point, some organizations are now conducting "water footprints" to figure out where in the value chain their businesses are vulnerable.

Doesn't this sound familiar? Haven't we been down this road before with energy and carbon emissions? It's very easy to describe water as 'the next carbon', and many have, but it's not really the same. Before we lay out some reasons why, let's look at a few recently released reports that highlight how businesses are beginning to approach this challenge.

The Carbon Disclosure Project (CDP) has been extremely successful in compelling companies to assess their carbon footprint, develop carbon strategies, set reduction targets, and reduce their emissions. Now the CDP has turned its attention to water as well and recently released the results of its first Water Disclosure (WD) questionnaire (pdf).

Here are a few highlights from the 2010 CDP WD report, which went out to 302 of the world's largest companies. Of the respondents (and 25 unsolicited submissions)...

  • 50 percent of the companies foresee near-term risks (1 to 5 years), with 39 percent currently experiencing impacts such as disruption to operations from drought or flooding, declining water quality, and increases in water prices.
  • 67 percent already report on water related issues to the board or executive committee level.
  • 89 percent have developed specific water policies, strategies and plans
  • 60 percent have set water-related performance targets.

And the CDP WD is not alone — several key reports on water risk and opportunity have recently been released.

The bottom-line conclusions from all of these reports are in general these:

  1. Water demand is increasing
  2. Climate change will impact water availability
  3. Water quality is decreasing
  4. Price does not reflect the real value of water (which causes massive underinvestment in infrastructure, which we'll show in the next post)
  5. The public and private sectors need to collectively develop new ways to manage water.

Ok, so back to water and carbon. In the sense that businesses need to consider the risks and opportunities inherent in managing natural resource pressures, they represent similar challenges. But we see a few additional, fundamental differences between the two:

  • Carbon is fungible but water is not. The environmental issues stemming from emitting of a ton of carbon are fundamentally the same everywhere on the planet.
  • In contrast, geography and time are critical aspects of water availability and management. All water issues are local — any global water strategy is actually implemented within each and every watershed.
  • Water has a strong social and cultural dimension. Many people believe in a "human right to water" which makes pricing this resource even harder than putting a price on carbon.
  • Water is the ultimate renewable resource — we just need to price water according to value and ensure we do not continue to manage it as a throw away commodity.
  • Finally, to be overly obvious, water is desired, beneficial, necessary.

Given these significant differences, it would be tempting to say that companies need to develop a stand-alone strategy for water. But instead we recommend integrating water strategy into energy, carbon, and other resource strategies, all while navigating the differences between them.

The investors behind CDP understand the business imperative to managing water well, as do some of the companies with the most to gain in solving the problem. (Note: In part 2 of this post next week, we'll look at some companies both reducing water risk and also generating new business opportunities by helping others manage this precious resource.)

How aware is your organization of its own risks and opportunities? Now is the perfect time to answer this question. It's not too late.

Guest co-blogger Will Sarni is a director with Deloitte Consulting LLP and leads Enterprise Water Strategy for Deloitte's Sustainability Services. He is an internationally recognized thought leader on sustainability and is the author of the upcoming book, Corporate Water Strategies (Earthscan).

(This post first appeared at Harvard Business Online.)

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November 28, 2011

Water's Economics as Muddy as Ever

(Note: This blog is co-authored with Andy Wales, Global Head of Sustainable Development for SABMiller plc, one of the world's largest brewers)

It's hard to put into words how dry and hot Texas was this past summer. "Off the charts" is both figuratively and literally accurate: the data for the last 100 years shows a tight regression of temperature and water availability in Texas...except for the 2011 drought, which is far off the line (three degrees hotter with an inch less rainfall than any previous year).


The economic cost of the drought has been incredible; Texas lost $5.2 billion in agricultural production alone. With agriculture making up 9 percent of the state's economy, and water shortages already threatening growth in the state's energy industry, it's not a reach to suggest that the future of the Texas economy will be tied closely to water availability. And it's not a short-term problem, either. As Columbia University's Richard Seager told the New York Times this summer, "You can't really call it a drought because that implies a temporary change...You don't say, 'The Sahara is in drought.' It's a desert. If the models are right, then the Southwest will face a permanent drying out."

The trend is clear globally as well. Due to rising population, coupled with increasing demands by the agriculture and energy industries (often referred to as the water-food-energy nexus), global demand for clean water will outstrip supply by an average of 40 percent by 2030. While this reality poses grave risks to thousands of communities, it is also the driver of a daunting, and often confusing, economic dilemma which businesses must prepare for. It's time for companies operating in the many dry regions around the world to equip themselves with the tools and mindset they need to navigate this new normal.

While access to water has been recognized as a basic human right, it is also increasingly clear to see that it is a commodity — a resource in high demand that should be valued according to its supply.

But for such a transparent substance, water's economics are anything but clear. Water is one of the world's most glaring commercial anomalies, with a price reflecting nothing more than the costs to extract and distribute it. The value is exempt from the ebb and flow of the market. Even as demand vastly outpaces supply, the market price is as static as a boulder in stream.

With such imprecision in the marketplace, companies must take it upon themselves to identify long term risks, quantifying the true value of water in order to steer clear of long-term hazards. Much of the leading work in understanding water risk has come from Coca-Cola. The beverage giant is now working with the World Resources Institute's Aqueduct Initiative and sharing its extensive global database of previously proprietary data on water availability and risk. By identifying these risks, Coca-Cola is providing a strategic resource for broader communities facing water shortages.

Many companies are now calculating their "water footprint," which adds up the water they use throughout the value chain. The first corporate water footprint was jointly published by SABMiller and WWF in 2009, and since then Coca-Cola, Nestle, and UPM-Kymmene, and others have published footprints for key product lines. However, while the problem affects people globally, water is inherently local, so a global corporate footprint is only so useful. What the calculation does do, however, is help companies highlight those specific, local dangers where a low water supply could disrupt both business operations and the surrounding community.

But managing the risk, and preparing for the 40 percent global supply gap, will require a tough balance of local and large-scale, collective action in cities and watersheds around the world. Andy Wales' company, SABMiller, recently invited businesses, NGOs and other organizations to join a global water initiative, the Water Futures Partnership, in conjunction with the World Wildlife Fund (WWF) and the German development agency (GIZ). This article is part of an ongoing invitation to companies and NGOs worldwide to join the partnership.

From SABMiller's experience — and the work of others across many business sectors — we have learned that once a company understands water's real economic value, both innovation and efficiency weave their way into long term water plans. MillerCoors, for example, has partnered with The Nature Conservancy to help farmers develop a tool to save potentially more than 400,000 gallons of water in every crop rotation - a saving of nearly 20 percent. This kind of deep supply chain work fits the model of "shared value" creation that strategy guru Michael Porter laid out in HBR earlier this year.

While some voices in Texas have called for more action from the government, the real opportunity for leadership will be in the private sector. The leading water-aware companies may be better attuned to slowly emerging water disasters and best equipped to help reduce the gap between supply and demand. They will avoid business disruptions and build more resilient enterprises. They will also, by recognizing the true value of water, help protect everyone's access to clean water.

(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 (with Will Sarni)
Is Water the Next Carbon?
Innovation in Managing Water

January 30, 2012

Ecosystem Economics: Navigating the Water-Food-Energy Nexus

(Note: This blog is co-authored with Andy Wales, Global Head of Sustainable Development for SABMiller plc, one of the world's largest brewers)

When we talk about natural resource constraints on business — such as shortages in water or increases in the cost of energy or agricultural products — we tend to forget how deeply intertwined these commodities are. In the business community, just as in a natural ecosystem, an individual organism (in this case a company) is vulnerable to changes in the availability of these systemic inputs.


The risks are greater than we realize because the availability of any of these key resources deeply affects the availability of the others. For example, it takes 95 liters of water to produce one kilowatt-hour (kWh) of electricity; and each year, the US uses 520 billion kilowatt hours — or roughly 13 percent of all electricity consumed — to move, treat, and heat water. With agriculture accounting for roughly 70 percent of water use, you can imagine how complicated it can become to maintain a steady supply of all three to industry, citizens, and municipalities.

This interdependent nexus is now evolving in a way that will threaten the wellbeing of billions. In 2050, to meet demand from a rising and increasingly carnivorous population, we will need to grow and process 70 percent more food. This technological and logistical challenge is made all the harder by the fact that by 2030, we'll be confronting a water supply shortage of approximately 40 percent due to a toxic combination of rising demand and climate-change-driven shifts in water supply. Facing these clear resource constraints, businesses will need to adapt, and soon.

At the World Economic Forum in Davos this week, a new brand of resource realism will begin to take hold in the business community with the launch of the Water Resources Group, which recognizes these constraints and the need for adaptation. This public-private collaboration includes the International Finance Corporation and food and beverage giants such as Coca-Cola, Nestle, and SABMiller. Together, these diverse players will help governments, companies and communities work together to manage the nexus. Rather than well-meaning but one-sided solutions, these business leaders hope to harness the private sector's comprehensive, value-chain viewpoint to solve these multifaceted problems.

That comprehensive viewpoint is critical, as a supply shock in any of these resources can cause ripple effects elsewhere. The energy industry has witnessed its resource co-dependencies first hand in Texas, where the state's worst ever single year drought has threatened to stall plans for new power production and distribution projects.

Companies will need to measure and prepare for potential resource shortages and price increases, which will deeply affect their business operations, supply chains, and customers. These issues create collective risks that cannot be managed in silos. Companies will need to look along and beyond their own value chains to become agents of change. They'll bring together communities, governments and NGOs to address the challenge holistically.

All sectors — not just agriculture — must recognize how their actions are interlinked with all the people who use and depend on these resources. Consider, for example, how any facility needing water must work to ensure that all agricultural players in the community are adopting clean, non-polluting practices in local watersheds. If a community runs out of water, it affects everyone in the area, even companies that were good stewards of the resource. The collective nature of these resources means that everyone shares both the responsibilities for their protection and the risks of their scarcity.

For businesses, understanding the implications of this nexus begins with assessing how a lack of water can impact the bottom line. For example, a business dependent on food can only fully understand its vulnerability if it assesses the availability of water to feed the crops it needs upstream.

In recent years, multi-national food and beverage companies with a clear stake in how the nexus plays out have begun to assess their "water footprint." This exercise allows them to identify risks and opportunities in their own supply chains, and discover how they can create more value while consuming less.

Forward-looking companies must assess the risks of mismanaging this resource nexus, learn to partner outside their comfort zone, and integrate resource-saving initiatives into their long-term business plans. It's the only way we can ensure the long-term security and supply of the resources that our economy and society depend on.

(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)

November 5, 2012

Should Companies Care If Hurricane Sandy Was "Caused" By Climate Change?

(Catching up on re-posting pre-storm and storm week posts...happy voting day)

Hurricane Sandy has killed more than 100 people in the U.S. and the Caribbean, and caused billions of dollars in damage. The scene around my Connecticut home is not pretty, with downed trees and power lines everywhere. It's a serious time, and a time for some serious questions. Why did this happen? And from a business (or any) perspective, does it matter whether this megastorm was caused by climate change? I'd say no... and yes.


First, the "no" part...

Regardless of the cause, the cost to society of extreme weather has been rising for decades. The insurance giant Munich Re recently released a new report on the rapid increase in weather-related losses. In North America, the number of severe events has quintupled over the last 30 years. And while the report does indeed make the climate change connection directly, on some level it doesn't really matter for business. The problems and costs of extreme weather are the same either way.

Take the example of one of my clients, a Fortune 200 consumer products company. As the VP of global risk management told me, the most expensive events in company history in every weather category (flood, earthquake, hail, wind, etc.) occurred in the last few years. After making $50 million in insurance claims in 2011 alone, the company's insurance rates will certainly rise. But that's a side issue; the real problem is the constant threat to business continuity. At one of its large manufacturing plants in Asia, a drought stopped production for 3 weeks.

This kind of disruption is only going to grow. In the Thailand floods of November 2011, both the hard-drive industry and the automotive sector experienced serious supply chain problems. As Edmunds reported, car production dropped by 600,000 units and, in particular, "only a few critical Thai-built parts laid Honda low."

In a deeply unpredictable world, the challenge for multinational businesses is how to build resilient, flexible enterprises that rely on natural resources a great deal less than today (meaning fewer fossil fuels, less water, reduced waste, closed loops on key resources, and so on).

Smart companies will be examining supply chains and operations very closely for risks associated with water shortages, floods, storms, and resource constraints. Risk assessment is going to get much sexier and much more important to global organizations. Their leaders will also seize the opportunity to offer products and services that help other companies and society deal with a world of weird weather. Think drought-resistant crops, new insurance products, distributed energy systems (so homeowners won't care if the power goes out), and perhaps boats for getting around Wall Street.

OK, now on to the "yes" part of the discussion.

First, the necessary disclaimer: Scientists say that no single storm can be tied to something as large-scale and long-term as climate change (see the active debate going on here). But in the words of NASA scientist James Hansen, we're "loading the dice" and increasing the odds of extreme events by heating the oceans and putting more moisture into the atmosphere. The devastation around New York City is exactly what was predicted to happen more frequently.

But let's get real about business impacts. If you're going to really assess risk to your operations now and in the future, you have to understand how climate change will increase the likelihood of severe events and what it will mean for your value chain. Not doing so would be costly, stupid, and irresponsible to your shareholders.

Companies are waking up to the immediate impacts. The most recent report from the Carbon Disclosure Project (CDP), compiled with the help of PwC (full disclosure: my consulting firm has a partnership with the U.S. arm of PwC), shows that most global companies acknolwedge climate-driven risks. Fully 37% of those reporting to the CDP — most of the world's largest companies — say that climate change is already creating business risk (up from 10% in just two years). Another 43% see risk to the business within the next 10 years.

So as companies wake up to this challenge, they are starting to talk about adaptation and the expense of getting ready for a hotter, dryer or wetter (depending on the location), more resource-constrained world. But adapting is just not good enough.

We really have to stop kidding ourselves that we can ride this out. We have to adapt, of course, but we also need to get going on a low-carbon agenda very quickly to mitigate the risk as much as possible. If you really listen to the scientists, the "business as usual" emissions path were facing over the coming decades could seriously destabilize the planet, which, I hate to state the obvious, supports our economy and way of life. The normal curve of expected possible outcomes is starting to include real risk to our species.

If you bring this level of threat down to the industry or company level, it causes you to rethink your business. As one tech executive said to me recently, "nobody's really going to care what operating system they have if they don't have food." Meaning, we better reduce the odds of disaster or our businesses won't matter much.

To those of you who fear that the cost of going low carbon will be too high, I have to ask: how expensive are storms like Sandy to business and society? In reality, tackling climate change is not an expense, but a very smart investment. It's a multitrillion-dollar business opportunity, or what Richard Branson calls "the greatest wealth-generating opportunity of our generation."

In short, this debate is about direction and speed. In terms of what direction your company should head to prepare for a riskier future of extreme weather, it doesn't really matter whether Sandy was caused by climate change or not. But how do we determine how fast we need to move in that direction? To answer that question, climate change does truly matter. It matters a lot.

(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)

December 22, 2012

Top 10 Sustainable Business Stories of 2012


It's time once again to try and summarize the last 12 months in a handy list. But before I dive in, some quick thoughts.

It was an odd year for green business, and it began with some mixed signals about how far companies were coming on sustainability. A GreenBiz report indicated that progress had slowed or even regressed, but MIT and BCG also declared that sustainability had reached a "tipping point" with more companies putting sustainability "on the management agenda."

In reality, both views were right. Corporate sustainability lost some of its sexiness from previous years, as it grew more entrenched in day-to-day business. Some parts of the agenda — eco-efficiency and resource conservation for example — are widely accepted now, and it's rare to find a big-company CEO who doesn't have sustainability on his or her radar.

The mega forces driving sustainability deep into business — such as climate change, resource constraints, and transparency — are getting stronger. We may not be keeping pace with these pressures, but leading companies continue to evolve more sustainable strategies and tactics. Let's look at some top macro- and company-level stories.

Macro Trends

1. Historic drought and Hurricane Sandy sweep away (some) climate denial
For many people this year, climate change moved from theoretical to painfully real. Mega weather took many lives and cost over $120 billion in the U.S. alone ($50 billion for the drought, $71 billion for Sandy). After Sandy raged across the eastern coast, Businessweek blared on its cover "It's Global Warming, Stupid." New York Mayor Bloomberg, a Republican, endorsed President Obama in the election, titling his open letter, "A Vote for a President to Lead on Climate Change."

As bad as Sandy was, the relentless drought across the middle of the country may prove more convincing in the long run. Corn yields per acre fell 19%, food prices rose, and water disappeared —the Mississippi River may soon struggle to support commerce. Individual companies are feeling the bite: analysts at Morningstar estimate that input costs at Tyson Foods will rise by $700 million — more than its 2012 net income.

Over one-third of the world's largest companies surveyed by the Carbon Disclosure Project arealready seeing the impacts of climate change on their business. So with life-and-death consequences and vast costs, we must have moved quickly to tackle climate change, right? Sort of...

The year ended with the failure, yet again, of the international community to come to some agreement on climate change. But country-level and regional policy moved forward: Australia passed a carbon tax, South Korea approved carbon trading, and California just began its own trading experiment.

Many countries also committed serious funds to build a clean economy: Saudi Arabia pledged $109 billion for solar, Japan declared that a $628 billion green energy industry would be central to its 2020 strategy, and China targeted $372 billion to cut energy use and pollution.

In the U.S., a backdoor approach to climate policy took over. The Obama administration issued new standards to double the fuel economy of cars and trucks, and the National Resources Defense Council (an NGO) proposed using the Clean Air Act to reduce emissions from power plants by 25%.

2. The math and physics of a planetary constraints get clearer
Arithmetic had a big year: Nate Silver's nearly perfect predictions of the election gave him the oxymoronic status of rock-star statistician. The math and physics of sustainability got some serious attention as well.

Writer and activist Bill McKibben wrote a widely-read piece in Rolling Stone about climate math — how much more carbon emissions the planet can take — and followed it up with a national awareness-building tour. Based on similar numbers, both McKinsey and PwC UK calculated how fast we must reduce the carbon intensity of the global economy (PwC's number is 5% per year until 2050).

And on the resource constraint front, Jeremy Grantham, co-founder of the asset management firm GMO ($100 billion invested), continued his relentless numbers-based assault on the fallacy of infinite resources. In his November newsletter, he demonstrated exactly how much of a drag on the U.S. economy commodity prices have become.

Nobody can really deny that, in principle, exponential growth must stop someday. Grantham, McKibben, and many others are making the case that someday has arrived.

3. The clean economy continues to explode
The rapid growth of natural gas production (the biggest energy story of the year) and the high-profile failure of one solar manufacturer (Solyndra) have confused people about the prospects for clean tech. In reality, the clean economy is winning. The share of U.S. electricity coming from non-hydro renewables doubled to 6% in the last 4 years. On May 26, Germany set a world record when it produced 50% of its electricity needs from solar power alone. In a mini political tipping point, six Republican senators publicly supported an extension to the wind production tax credit in the U.S. (which will expire in days), and got an earful from a Wall Street Journal editorial.

It wasn't just energy. One auto analyst declared 2012 the "Year of the Green Car," with more high-MPG models, 500,000 hybrid sales in the U.S., and plug-in sales up 228%. To cap the year, the pure electric Tesla Model S was selected as the Motor Trend Car of the Year.

Company Stories

This year, there were countless eco-efficiency stories about companies saving millions of dollarsand developing new tools to make buildings, fleets (Staples and UPS, for example), and manufacturing much leaner. Aside from that overall theme, the following stories grabbed me because of their connection to larger trends.

4. The green supply chain gets some teeth: Walmart changes incentives for buyers
This year, Walmart finally added a key element to its impressive green supply chain efforts. The retail giant's powerful buyers, or merchants, now have a sustainability goal in their performance targets and reviews. For example, the laptop PC buyer set a goal that, by Christmas, all of the laptops Walmart sells would come pre-installed with advanced energy-saving settings. It was by no means a hiccup-free year on sustainability issues for Walmart, with deep concerns about corruption in its Mexican operations. But the subtle change in buyer incentives is a big deal.

5. Transparency and tragedy raise awareness about worker conditions
Early in 2012, Apple took some serious heat for the working conditions at Foxconn, the giant company that assembles a huge percentage of our electronics. Later in the year, tragedy struck Dhaka, Bangladesh when a fire at the Tazreen Fashion factory killed or injured hundreds of people. The company that owns the factory serves Walmart, Carrefour, IKEA, and many others (but in fact,some companies didn't even know that Tazreen was a supplier). It's unclear if any of these human and PR disasters will affect the companies downstream, but transparency and knowledge about the lives of the people who make our products will continue to rise.

6. Data gets bigger and faster: PepsiCo and Columbia speed up lifecycle assessments
The rise of Big Data was an important theme in business in general this year, but especially in sustainability. And nowhere is good data needed more than in the onerous and expensive task of calculating a product's lifecycle footprint. PepsiCo has had great success with the method, finding ways to reduce cost and risk for key brands, but execs wanted to apply the tool across thousands of products. To make the exercise feasible and affordable, they turned to Columbia University, which developed a new algorithm for fast carbon footprinting. This isn't just a wonky exercise: As PepsiCo exec Al Halvorsen told me, "the real reason you do an LCA is improve the business, to put more efficient processes in place, and innovate in the supply chain."

7. Sustainability innovation opens up: Unilever, Heineken, and EMC ask the world for help
This new world of social media, where everyone has a voice, can be tough on companies. Consumers can gather around a green issue and pressure companies to change their behavior. Some notable change.org campaigns this year challenged Universal Pictures (about its green messaging around The Lorax), Crayola (recycling markers), and Dunkin' Donuts (Styrofoam cups). But companies can also use "open" innovation tools to generate new ideas and invite the world to solve problems together.

Unilever, which has my vote for leader in corporate sustainability right now, held an online discussion or "jam." Then the company posted a list of "Challenges and wants" and asked for ideas on solving big issues such as how to bring safe drinking water to the world's poorest regions.Unilever has received over 1,000 ideas and is "pursuing 6 to 7 percent of these with internal teams." Other notable open innovation models this year included Heineken's $10,000 sustainable packaging contest (which yielded some very fun ideas like a roving tap truck) and EMC's eco-challenge with InnoCentive on e-waste.

8. The economy gets a bit more circular: M&S, H&M, and Puma experiment with closing loops
On the heels of Patagonia's "Don't Buy This Jacket" campaign (one of my top 10 stories from last year), British retailer M&S began a program called "Schwop" that asked customers to bring back old clothes every time they bought new ones. This month, H&M also rolled out a global clothing collection and recycling effort.

Puma, after making last year's list with it's Environmental P&L, kept the momentum going andannounced a new "InCycle" collection with biodegradable sneakers and shirts, and recyclable jackets and backpacks. Remanufacturing has been around a long time, but closing loops is getting more popular every year.

9. Dematerialization gets sexier: Nike's knitted shoe shows off sustainable style
Keeping the apparel theme, um, running, check out Nike's new shoe with FlyKnit technology. The upper part of the shoe is constructed from a single strand, which greatly reduces waste and lightens the shoe dramatically. It's a great thing when a more sustainable design also coincides perfectly with customer needs. Enough said.

10. Zero becomes more the norm: DuPont, GM, and John Elkington show the way
The idea that organizations should send zero waste to landfill was once a niche idea, but it's quickly becoming the ante to enter the waste management game. Announcements on waste may not be exciting, but they demonstrate how companies can turn a cost center into a source of profit. DuPont's Building Innovation Products business reduced its landfill waste from 81 million pounds to zero in three years. GM announced that it would ramp up its already extensive waste reuse and recycling efforts, which are now generating $1 billion a year. And a plug for a fellow writer: In a new book, sustainability thought leader John Elkington made the case that the future would belong to the "Zeronauts," the "new breed of innovators determined to drive problems such as carbon, waste, toxics, and poverty to zero."

Five Questions For 2013

Some other promising stories are in the "too early to tell" stage, but bring up some key questions:

1. Can we standardize sustainability, which some smart folks began to do around rankings (GISR) and accounting (Sustainability Accounting Standards Board)?

2. Will we find a way to value externalities like ecosystem services and internalized, intangible benefits? (A focus of some of my work as an advisor to PwC US). For example, Microsoft launched an internal carbon tax and some major companies (Coca-Cola, Nike, Kimberly-Clark, etc.) pledged to value natural capital at Rio+20.

3. Will government get in the way or help, like when the U.S. Senate allowed the military to keep investing in biofuels?

4. Hertz and B&Q (Kingfisher) have delved into collaborative consumption (see WWF's Green Game-Changers report), but will the sharing economy make a dent on sustainability issues?

5. Finally, how much will we challenge the nature of capitalism, and what will that mean for how companies operate? (This is the focus of my next project.)

So many stories, so little time... on to 2013. Happy holidays and have a safe and wonderful New Year!

(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)

January 9, 2014

Business Resilience Comes from Working with Nature

[Note: This post is co-authored with Michelle Lapinski, a senior advisor on valuing nature at The Nature Conservancy]

Hurricane Sandy, the superstorm that pummeled the U.S. northeast in October 2012, ranks as the second-costliest hurricane in American history, causing an estimated $68 billion in damages. One year later, the most powerful storm ever recorded to hit land devastated the Philippines.

With these once extraordinary events becoming more ordinary, it’s becoming clearer that businesses in vulnerable regions need to prepare. But how should companies go about building resilient enterprises that are ready to face extreme weather and other effects of climate change? One powerful, underleveraged option is to use nature to protect our coasts and physical assets — that is, to invest in so-called “green infrastructure” a term meant to differentiate projects from more typical “gray” or man-made infrastructure solutions (such as dams, levees, and water treatment systems) that we build to cool and purify water or defend our buildings and assets against the elements.


Our natural world already provides immensely valuable services to make our economy and society possible. Most obviously, we get all our food, minerals, and metals from the ground, and forests provide wood and oxygen. But there are more subtle benefits: forests also clean our water and coastal wetlands and reefs provide natural defense from storms and floods. They can help us manage rainwater and wastewater. These services, which are not currently valued in the marketplace, protect both people and commercial and residential assets.

So a city or company looking to safeguard its water supply, for example, could invest in protecting or restoring lands instead of building a new water treatment plant (which is exactly what the New York City did when it bought land in the Catskill Mountains in 1997 — this initiative avoided up to $8 billion in costs for a new filtration facility and saved $200-$300 million in ongoing operation and maintenance costs).

But is this kind of green infrastructure approach generally as effective? Is it cost competitive? A recent paper by Shell, Dow, Swiss Re, Unilever and The Nature Conservancy concludes that frequently, it is.

Using standard cost-benefit analysis, the study compared some natural solutions to more traditional infrastructure investments. In all of the completed corporate projects, the green option won out toe-to-toe on capital expenditures and operational expenditures

Here’s one of the more compelling examples highlighted in the paper:

One of Shell’s joint ventures, Petroleum Development Oman LLC (PDO), uses constructed wetlands to treat produced water from oilfields. PDO’s extraction activities produce a lot of oily water as a by-product. After investigating alternative, low cost solutions to treat and dispose of the water, PDO built a natural wetland system that uses sunlight, reeds, and gravity (to flow water down in steps) in place of extensive water treatment and injection operations. The latter, gray option would have required significant electric power and produced high greenhouse gas emissions… and it would’ve cost a lot more.

On every important measure — capital expenditure, operational expenditure, and performance — the constructed wetland outperformed the traditional approach. Power consumption and CO2 emissions were reduced by 98%, which lowered operating expenses dramatically. And as a bonus, the wetland provides habitat for fish and hundreds of species of migratory birds.

In this particular case, PDO only needed the natural option, but the study concluded that hybrid solutions – combinations of green and gray infrastructure — may often provide the best mix of benefits. Together, green and gray solutions combine some of the resilience inherent in natural systems with the way an engineered solution can solve a specific challenge.

Shell isn’t the only company that discovered the savings from green infrastructure. The report includes case studies for Dow, which also utilized a constructed wetland at one of its facilities, reducing capex expense by a factor of 10. Today, Dow is exploring additional applications of green infrastructure and is engaged in a multi-year collaboration with The Nature Conservancy on valuing ecosystem services, which includes evaluating the viability of natural infrastructure at its largest production site.

Companies with common challenges can identify savvy, shared investments in green solutions for wastewater treatment, desalination, or coastal defense (using, say, wetland and reef restoration) and potentially collaborate on new green infrastructure opportunities at co-located assets.

Collectively, the companies in the report concluded that green infrastructure solutions should become a major part of the modern engineer’s standard toolkit: “Incorporating nature into man-made infrastructure can improve business resilience —and bring additional economic, environmental and socio-political benefits.” The report also provides an emerging set of performance metrics that managers can use to assess and compare green and grey infrastructure options.

As the damages from (and costs of) extreme weather and other disruptions soar, investing in resilience becomes a better deal. And nature can provide many of the solutions we need to both save money and protect our assets. So run the numbers on green infrastructure solutions. The calculations are likely to show that green options are the best investments.

(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 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.


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.)

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February 27, 2014

It Just Got Easier for Companies to Invest in Nature

Nature is valuable. But figuring out how valuable has been challenging. By some measures, the services that nature provides business and society — clean water, food and metals, natural defense from storms and floods, and much more — are worth many trillions of dollars. But that number is not helpful to companies trying to assess how dependent they are on natural resources, or how to value them as business inputs.


In recent years, many large companies have realized that they need to get a handle on these issues, and that doing it well creates business resilience. But figuring out what steps to take has been challenging. Into that void steps a new, very helpful tool, the Natural Capital Business Hub. The Hub is a project run by the Corporate EcoForum, The Nature Conservancy, and The Natural Capital Coalition (and built by Tata Consultancy Services). It builds off a partnership launched at the Rio+20 summit in 2012 with companies such as Alcoa, Coca-Cola, Disney, Dow, GM, Kimberly-Clark, Nike, Unilever, and Xerox. At the time, they produced a report with case studies showing how companies have managed natural capital issues. The Hub expands that effort, making much more information available and searchable.

The Hub basically does four things:

  • Provides case studies of corporate action for benchmarking and learning, which you can search by industry, region, ecosystem, or value-creation focus (cost reduction, brand building, etc.).
  • Offers perspective on how to make the business case internally by laying out how valuing natural capital helps business.
  • Gives us a framework for implementation and a thorough description of (or links to) the best tools for valuing and managing natural capital.
  • Opens up collaboration opportunities by listing programs that need more partners and builds a network of professionals (with 2Degrees Network) who are working on these issues.

The case studies are ostensibly the core of the site. Project managers, facility heads, executives who make capital decisions, sustainability managers, and many others can learn from the work that leading companies have done already. Managing natural capital is a young field, but Dow, for example, is now three years into its six-year partnership with The Nature Conservancy to “recognize, value, and incorporate the value of nature into business decisions, strategies and goals.” (The company just released the latest update on the partnership.) The Hub is a place to start your research and learn from Dow and many others.

On the site, you can find stories of completed projects or prospective collaborations that need more partners to get off the ground. In the first category, you’ll find stories like the one about Grupo Bimbo, the Mexican food company that owns Sara Lee, Hostess, and Pepperidge Farms. Bimbo needed to manage stormwater around a site in Pennsylvania. Using natural or “green” infrastructure such as rain gardens and forest buffers — versus “gray”, manmade systems like retention ponds and pipes — the company reduced ongoing operating costs and avoided the complications of burying pipes in sensitive ecosystems.

On a somewhat larger scale, consider Darden restaurants (owner of Olive Garden, Red Lobster, and many more) and its efforts to save fisheries. As companies like Unilever and McDonald’s have long recognized, ensuring healthy fish stocks isn’t a philanthropic nice-to-have, but core to business survival: no fish, no fish sticks, lobster plates, or Filet-O-Fish sandwiches. Darden is working with the National Fish & Wildlife Foundation and others to target valuable fisheries and manage them closely.

What’s interesting about the Darden case study, and the Hub in general, is that this project is just getting started — essentially, it’s an open call for collaboration. The Hub is innovative and helpful because of the partnership tools. Natural capital issues are not easy and cross many lines – every company, city, and home in a region, for example, depends on water and flood protection. No organization or region can act alone, and it shouldn’t. By listing the major collaborations that are actively searching for new partners, the Hub has done a great service.

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

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March 7, 2014

CVS Gave Up Tobacco -- Could Fossil Fuels Be the Next to Go?

The recent decision by drugstore giant CVS to stop selling tobaccoreceived a great deal of attention, as it should. It's a big deal when a US-based, public company chooses to stop selling something.


Some have downplayed the move, calling the $2bn in lost sales "a mere dent" in the company's $123bn in revenues. But I challenge anyone to walk into their bosses' office at a big, publicly held company and say, "Hey, let's cut a couple billion from our revenue on purpose." The choice that CVS made, in a culture of relentless pressure on short-term earnings, was brave – full stop.

As others have pointed out, it was also a logical decision that was likely good for the business.

The free publicity alone was worth a great deal. And the goodwill from many customers should pay off. I realize my family makes an unscientific focus group, but when the decision was announced, my wife said: "We really should go to CVS more and give them some business." I went to a CVS that day.

More strategically, a couple of key questions come to mind. First, why did CVS do this? Perhaps they'll just save money. After all, Target stopped selling tobacco in 1996 to cut costs (from reduced shoplifting and anti-theft measures).

But I'm inclined to take CVS at face value. Here's what Larry Merlo, CVS' CEO, said about the company's core mission to provide health services: "Cigarettes and providing healthcare just don't go together."

That indicates this was a strategic decision about the future of the company. Still brave, but logical. It's a great example of what I call a big pivot – a fundamental shift in strategy and tactics to deal with some big shifts in how the world works. I usually focus more on climate changeand resource constraints as drivers of change, but health and wellness issues are extremely large forces to reorganize a company around as well.

The second big question is, what's next? What other items on CVS shelves don't fit the health care focus? Several columns in the Guardian – as well as The Boston Globe – call out the candy, soda and other fatty or sugary snacks still on offer.

It's worth considering, in a larger sense, the things many companies are doing today that don't fit with their missions. Does it make sense, for example, for companies that rely heavily on a robust middle class to fight a raise in minimum wages? A century ago, Henry Ford raised wages so more people could afford cars. And on Wednesday, apparel retailer Gap announced it would pay its employees more, raising its minimum hourly rate.

How about the use of fossil fuels in business? It may seem like a leap, but for many companies and organizations, using, supporting, and investing in climate-changing fuels goes against their missions. For CVS, we could ask, what's "healthy" about fuels that generate air pollution, which increases asthma and heart attacks, or that destabilize the climate and drive extreme weather that threatens public well being?

We can look at many stated visions for organizations and ask whether fossil fuels fit. Take Walmart's "Save money, live better" slogan. We're clearly not going to be living better with extreme weather, droughts and floods.

To Walmart's credit, the company is buying significant quantities of renewable energy (not as high a percentage of its energy use a few other retailers, such as Ikea, but still a quickly growing one). At the company's quarterly milestone meeting this week, it announced that 1,300 of its stores use renewables and Walmart de Mexico is now getting 60% of its energy from clean sources.

The company makes the case in mainly financial terms, saying it's paying less for energy, or by citing the resilience benefits. Those are great reasons, but a mission check might drive even faster adoption of new technologies.

Or consider the universities under pressure to divest from fossil fuels. Most recently, Harvard and Brown resisted calls to divest. They made seemingly well reasoned arguments: they have other means to effect change, their investment portfolios aren't so large as to influence the markets, and there may be hypocrisy in relying on fossil fuels to operate while de-investing.

A recent piece in The Nation makes a number of strong counter arguments, including the basic fact that climate change already disrupts university operations. For example, Tulane in New Orleans had to shut down for months after Hurricane Katrina.

But perhaps the most powerful argument is that climate change threatens a core mission of a university, preparing students for the world, by changing the world irrevocably. This means the universities may be training a generation for the wrong reality.

I recently wrote about three possible paths to getting us off of fossil fuels– government regulation, economics (as renewables get cheaper) and moral pressure. But there may be an important additional pathway that we can see at play in the tobacco example: changing cultural norms. Perhaps CVS has decided, about 50 years after the Mad Men era when everyone smoked, that it's just not cool anymore.

So who's going to be brave enough to say no to fossil fuels, without couching it in economic or business-case terms? Who will state clearly that this kind of energy no longer fits with what we want to be?

(This post first appeared on the Guardian Sustainable Business hub.)

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June 25, 2014

The EPA's Carbon Plan Won’t Hurt Corporate America

[This was an op-ed I recently posted at Fortune.com.]

President Obama has said that fighting climate change is one of his top priorities. He finally made good on that promise when he announced federal regulations that will force states and power plants to reduce carbon emissions by 30% by 2030 (from a baseline of 2005 emissions). As widely reported, the regulatory mechanism is meant to be flexible, with four main options now open to the states – states can choose from energy efficiency, shifting from coal to natural gas, investing in renewable energy and discounts to encouraging consumers to move to off-peak hours.


It all sounds wonky and focused only on the power sector, but these new rules could bring deep change for all businesses and all citizens. Those fighting progress are of course crying foul and shouting about economic devastation from burdensome regulations – the U.S. Chamber of Commerce put out an absurd “analysis” of the regulations before they were released. There will obviously be a cost for utilities to comply, but industry generally overestimates – often by an order of magnitude – the expense to meet tougher standards.

And to say, as the Chamber does, that these regulations are the prime source of uncertainty for utilities, is an exaggeration at best. The utilities were already at a point of no return even without regulations, and investors have begun to figure it out. Barclays bank recently downgraded the corporate debt of the entire U.S. utility sector to an “underweight” rating in its portfolio. The bank declared that an industry that was once “seen by many investors as a sturdy and defensive subset of the investment grade universe” was now risky because of the threat of cheap solar power. Clean tech innovation is already well under way and deeply impacting older industries. The new regulations will only accelerate the move.

Regulating power plants and utilities is going to propel innovation across many sectors – not just power technology, but anything that improves energy efficiency, including new technologies for buildings, agriculture, electronics, and even water (we use 13% of our electricity to move, heat, and treat water). So, yes, dirtier power will get more expensive – and that’s part of the point – but we will innovate. We will drive total energy use down and use of clean energy up.

There will be other ripple effects making the carbon reductions from these regulations greater than they seem. Electricity, as some critics point out, is “only” 32% of U.S. emissions, but that’s only part of the story. Transportation makes up another 28% of our carbon pollution. As we make power generation cleaner, plugging a Tesla into the grid will kill two very big birds with one electric stone.

So all of that said, what should a company that isn’t in the business of generating power do to prepare for what’s coming? I’d suggest moving to renewable energy as fast as possible, if only to avoid uncertainty. Will utilities be able to pass along whatever costs they incur? That is, will our energy costs rise? Who knows, but it does seem likely that traditional, dirty energy will be getting more expensive. It’s very simple in theory – the less energy you use in total, and the more clean energy you use, the less vulnerable your business (or home) is.

Consider the organizations – mainly retailers and big tech companies – that have been moving aggressively to renewable energy already. IKEA will make 70% of its own power by 2015 (and over 100% of its needs in the U.S.). Wal-Mart gets 24% of its electricity from renewables (granted, two-thirds of that comes from the green power their utilities are already generating, but it’s still a lot of clean power onsite or near to stores). Apple gets about 100% of its power for its data centers from the wind, sun, and fuel cells.

I could go on, but the key question is this: How much do these companies care about these new rules and the cost of dirty power? Well, I’m guessing IKEA cares about 70% to 100% less than some of its lagging peers. As a homeowner making over 50% of my own power from the sun, I know I’ve got less directly at stake in this debate.

Regulations and laws aren’t fun. They’re not sexy. The battles over these laws will be bloody, so why not avoid the war? It’s time for companies to actively seek ways to dramatically reduce their energy use and shift their supply.

For utilities – and all companies really – the writing is not just on the wall, it’s now on the books.

(Andrew's new book, The Big Pivot, is out! Get your copy here. Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

July 7, 2014

What Momentum on Climate Change Means for Business

Climate change is real — as in actual, factual, and tangible. And it’s really expensive. This is the clear message from “Risky Business,” a new report issued by former U.S. treasury Secretaries such as Robert Rubin and Hank Paulson and other bigwigs like Michael Bloomberg.


Their report is just one of many drumbeats for action on climate — drumbeats that have gotten much louder in recent weeks. Four former EPA chiefs, all Republicans, went to Congress to ask their party peers to take action, for example. And Hank Paulson, George W. Bush’s Treasury Secretary, recently wrote an op-ed called “The Coming Climate Crash” as a prelude to the Risky Business report. He likened the growing climate crisis to the fiscal crisis of 2008, a mess he had to deal with firsthand. This Republican and former Goldman Sachs exec actually called for a tax on carbon. Let that sink in for a moment.

The story coming from these unusual messengers is not subtle about how expensive climate change is and will continue to be. We’re taking out an “interest-only loan,” the report says, with cumulative interest that will burden future generations. In a neat metaphor, “Risky Business” calculates that there’s a 1 in 20 chance — equal to the chances of “an American developing colon cancer” — that more than $730 billion of coastal assets will be at high risk in the coming years. And whole swaths of the country will face extreme heat — months of days above 95 degrees, which could seriously impact agricultural and labor productivity (imagine construction and other outdoor work in dangerous heat).

These long-term numbers are just for scale and to, well, scare us into action. But the real message of the report is that there are serious economic impacts today. Extreme weather from climate change is, they say, “already costing local economies billions of dollars.”

So finally, real bipartisan pressure and consensus are building. What does that mean for business?

First, questioning whether climate change is even happening is moving fast to the far fringe. The discussion is shifting, thankfully, from if we should tackle it to how — as one CEO I work with said recently, “I know this is a problem… I just don’t know what to do about it.” Over the coming months and years, it will become even less acceptable — to employees, customers, and investors — for business people to stick their heads in the increasingly hot sand on this issue. Investors in particular are starting to notice the massive risk to business and acting accordingly — see Barclays’ downgrading the bonds of U.S. utilities because of growing competition from solar and distributed energy generation. Business leaders who want to take action and show their investors and customers that they “get it” should step forward now.

Second, there will be more regulation on carbon around the world. The recent coal rules the Obama administration issued are just the beginning. (The 30% reduction from utilities demanded by 2030 is not even particularly aggressive. Ten states have already hit the goal.) It’s not just the U.S. — the day after Obama’s announcement, China said it would cap CO2 emissions starting in 2016.

Third, and most important, business needs to change how it operates fundamentally. When you dig past all the political wrangling and theater around climate change, you reach a very serious challenge. Asking government to act, as many new voices are doing, is a great start. But we need business to lead in the areas it excels at — driving deep, heretical innovation in products, services, and business models; connecting with and inspiring customers to change their behavior; allocating capital to the best ideas, and much more.

But we’re going to have to redefine “business as usual,” a shift I’ve called the big pivot. Companies will need to think about the longer term — at least more than a quarter at a time — if they want to plan for multi-year and multi-decade risks and opportunities. They’ll need to set goals based on science and make investment decisions with a broader sense of return on investment than they normally use, to include benefits like risk reduction, business resilience, relevance in society, and attracting and retaining the best talent. And we’re going to see new, unusual partnerships across normal party and competitive lines. All of these pivots are underway, but they need to move much faster.

Luckily, we have most of the solutions we need now. Renewable energy is reaching scale quickly and companies are coming together along value chains to work on big challenges — for example, Coca-Cola, Pepsi, Unilever, and others have been working for years on changing technologies for refrigerating drinks, something that relies on high global warming HFC gases today.

But even if the options for building low-carbon lifestyles and businesses are growing, transformation can be hard. Who knows what gets people over a hump to see the need for real change. Hearing from unlikely sources, like Treasury Secretaries, might do the trick. Certainly the growing economic costs are getting clearer. It’s time for business leaders to make climate action a — if not the — core priority for business.

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

(Andrew's new book, The Big Pivot, is out! Get your copy here. Sign up for Andrew Winston's blog, via RSS feed, or by email. Follow Andrew on Twitter @AndrewWinston)

July 30, 2015

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

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

(Photo: Flickr by h080)

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

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

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

  • Eco-efficiency in all its forms: slashing energy and material use in production, packaging, distribution and business operations, as well as redesigning products and encouraging customers to reduce their energy draw
  • Using renewable energy: either investing in energy-generating assets or signing long-term power purchasing agreements for renewable electricity
  • Ensuring the supply chain is working on eco-efficiency and renewable energy
  • Lobbying for a tax on carbon or encouraging other policies that would help drive all of the above

No regrets

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

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

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

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

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

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

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

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

The big picture

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

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

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

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

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

(This post first appeared on The Guardian online.)

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

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.]


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.

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June 8, 2016

A New Report on How General Mills and Kellogg are Tackling Climate Change

In the global effort to limit climate change and reduce greenhouse gas emissions (GHGs), the energy and transportation sectors are the most obvious targets, but perhaps not the biggest. Consider the food business. Agriculture alone – not including the sizable food processing industry — produces up to 35% of the world’s greenhouse gas emissions (and uses70% of the water).

By some estimates, humanity may need to produce as much food in the next 40 years as it did in the last 8,000. And that can’t happen if we don’t get the carbon and water footprint of agriculture under control. With the stakes so high, it’s welcome news that food giants are getting serious about emissions.

Two big companies in particular, General Mills and Kellogg, have set new, aggressive goals. Their targets are important and different than what came before in two key ways: 1) they’re explicitly based on science; and 2) they cover emissions from agricultural suppliers. This latter point is a big deal — General Mills estimates that agriculture is responsible for more than 40% of its lifecycle GHG emissions (and uses 82% of the water).

The companies’ goals as stated, are fairly straightforward:

  • General Mills will cut absolute GHGs by 28% by 2025 “across the entire value chain.” By 2050 it will slash emissions up to 72%, with the exact number TBD, but at a pace that will keep them “in line with scientific consensus.”
  • Kellogg’s 2050 target is to cut its own and supplier emissions by 65% and 50% respectively.

But the reality of reaching targets like these is much less simple.

First, emissions from food and agriculture stem from a diverse and complicated mixed bag of sources, including clearing land for grazing or crops (often burning trees and releasing the CO2), direct energy use on farms, fertilizer production, and methane from rice fields and from animals (mostly burps).

Second, even if you get the sources right, the state of data collection on farms is mostly nascent. The industry and partner NGOs are building tools and programs to get farms measuring emissions, but the current state of the art is surprisingly simplistic: take your total yield of a crop and multiply it by an estimate of emissions for that crop (taken, most likely, from an academic study of some plot of land or in a lab). It’s a blunt tool since clearly that kind of estimate does not reflect differences in growing region or farming methods.

So given the inherent difficulty of this whole endeavor, it’s important to ask how prepared General Mills and Kellogg are to navigate this tricky terrain. Answering that question was a core reason my firm, at the request of Oxfam International, authored a new report, Evaluation of General Mills’ and Kellogg’s GHG Emissions Targets and Plans.

We were not trying to judge the companies and their goals on outcomes, but rather to assess how their goals line with credible science-based target methodologies, and whether their action plans are robust enough to make achieving the goals likely.

I won’t rehash the whole report – you can check it out here – but in short, the outlook for both companies, for both areas of assessment, is positive. Their goals are clearly connected to science-based methods (leveraging work by NGOs like the World Resources Institute and CDP and working with advisors like BSR). And they both have multi-faceted plans to get there.

Written with my colleague Jeff Gowdy, sustainability consultant and adjunct professor at Vanderbilt’s Owen Graduate School of Business, the assessment suggests five areas to consider carefully in crafting an operational plan to reach science-based carbon reductions:

  • Build good governance around the process to ensure internal accountability
  • Develop robust plans to engage suppliers (and provide human and financial capital if necessary) to identify and spread best practices and technologies
  • Invest in the development of solid measurement and metrics
  • Establish interim goals and adjustments to the targets as climate science evolves
  • Be transparent and open about progress

In essence, we’re saying companies should ask themselves: who’s in charge, how will we spread best practices, how will we know if we’re making progress, how well will we adjust to changing science, and how open are we being with the world?

Given the built-in uncertainty surrounding agricultural emissions, locking down a plan with these elements is important. But it’s only good enough in the short-run. Some additional big gaps need to be closed for the food value chain to slash emissions dramatically. Companies will need much better data at the farm level, expanded industry-wide research and best practice collaborations, and some investment funds to spread technologies.

But thinking even more expansively, the leading companies need to start imagining goingbeyond science-based targets. Climate math is brutal — we only have so much carbon left to emit to keep the planet stable. Thus science-based targets are the minimum — like how much water you need to put out a fire. Leaders should consider setting goals that are even more aggressive to provide some buffer if some best practices fail to live up to their promise, and to help make up for the laggards in an industry. The goal, ultimately, is to prevent the fire in the first place.

Going big is also an opportunity to explore truly cutting edge techniques in what some call “regenerative agriculture”: techniques to use farms and ranches to actually capture more carbon from the air than they produce. The leaders in this exciting new space (often, ironically, using ancient practices) are employing a range of techniques, including grazing animals differently and managing soil smarter so both processes sequester carbon. It’s possible that agriculture could move from being a third of the carbon problem to being the ultimate solution.

For now, though, companies like General Mills and Kellogg are on the right path. Even without completely reimagining food production, these companies are taking a big leap of faith — they’re setting goals without knowing exactly how they’ll get there. But the science of climate change demands that we move quickly and these goals and plans are a very good start.

(This post first appeared at Harvard Business Review 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)

June 22, 2016

It's Time for Companies to be Strategic About Energy (A New Report)

Last year, networking giant Cisco Systems worked with one of its contract manufacturers in Malaysia to deploy 1,500 energy and temperature sensors on its manufacturing equipment. These more “intelligent assets” read performance data, giving Cisco a detailed view of energy consumption — one that had not been available before.

Last week, at an internal Cisco meeting, the company’s VP of Supply Chain, John Kern, proudly reported that the project had identified ways to cut energy use by approximately 30%, which will likely save $1 million per year. (Disclosure: I was at the meeting as a paid speaker on sustainability strategy.)

When Cisco rolls out the sensors globally, these savings will add up. But to me, the most fascinating thing about the whole initiative is the organizational mindset shift it’s creating: a realization about the value of getting smarter about how — and where — operations use energy. As Kern put it, “We always manage costs so closely, but we weren’t really measuring energy — we didn’t know how much we spent! Through digitization initiatives such as this, we now have a way to measure, monitor, and manage energy…this is huge since energy is typically a factory’s largest variable cost.”


In many of the most sophisticated companies with top tier operational practices, energy has mostly been treated as a cost line item, watched only by mid-level managers or execs, if at all. This black box approach can’t last. It’s time to move energy into the C-suite so executives can manage this critical component of operational performance in a more strategic way.

In addition, with the global climate accords signed now by 175 countries, the world is clearly turning attention to carbon emissions. How a company manages its carbon footprint and approach to energy in general is becoming a top-tier operational issue — and a big deal to regulators, customers, employees, and investors.

Some sectors have woken up already. In the tech world, for example, energy is now the largest component of variable costs for running a datacenter. Logically then, many of the companies investing most heavily in renewables are tech giants like Google, Apple, Microsoft, and Facebook. Heavy industry is also diving in, and companies like 3M, Dow, and Owens-Corning have bought many megawatts of renewable energy and found billions of dollars in energy savings. In agriculture, carbon emissions and energy use throughout the value chain are increasingly a core operational issue as well.

Every sector should be taking energy this seriously. Even if it’s not a large cost or risk issue in direct operations, it certainly is somewhere else in the value chain. The importance of energy to the global economy, to geopolitics, and to corporate bottom lines — plus the pressing need to tackle carbon emissions to ensure a stable planet and global wellbeing — all combine to make a powerful case for managing energy much more strategically at all levels, from facilities to total operations to strategy.

This basic argument, and its repercussions, are laid out in a new strategy guide that I co-authored with PwC’s George Favaloro and Tim Healy, the CEO of EnerNOC, a leader in energy intelligence software. For our paper, Energy Strategy for the C-Suite, we analyzed research and data on energy use at hundreds of companies, and included perspectives from an advisory council that included corporate energy executives and government and academic thought leaders (I also sit on that advisory group).

Aside from describing the mega-trends coming to bear on companies — such as climate change; new expectations of increased transparency about business operations; tech breakthroughs like big data and the internet of things; and dramatic shifts in how energy markets work and how to source energy — we identified 15 emerging best practices that can help companies create more value.

Here are a few examples of what we recommend in this new framework:

  • Develop a global energy strategy with C-suite and cross-functional accountability. We believe energy could be viewed in many organizations as a “keystone metric” — i.e., a primary indicator that aligns the whole organization around the pursuit of operational excellence. Optimizing energy and slashing carbon can drive overall operational improvements.
  • Set ambitious, science-based goals for energy and carbon. Dozens of leaders, from many sectors have set goals to cut carbon 40 to 100% in line with climate science (Cisco, Disney, Alcoa, Sony, J&J, EMC, and many more).
  • Track energy data at all levels, from the enterprise down to the product, using new tools to understand better how energy connects to overall business performance and metrics (like cost of goods sold). For example, Saint Gobain’s Ohio factory produces 30,000 different products, each with its own energy demands. Much finer energy intelligence data has helped the company understand its true cost per product line. It has adjusted its product prices accordingly, improving margins or just finding a more competitive price point in the marketplace
  • Use advanced financing mechanisms to expand energy project options. In addition to power purchasing agreements (PPAs) for corporate renewables, companies are increasingly able to buy energy as a service, not a product. Consider McCormick & Co, a Fortune 1000 spice manufacturer. When the company needed to replace old air conditioning units, it contracted with Constellation Energy Group to build a brand new chiller plant. Constellation owns the chiller and charges McCormick for cold air, freeing up McCormick’s capital to invest in other operational improvements and the business itself, not in energy infrastructure.

In total, energy is one of the largest components of company cost structure, and it’s a complicated operational issue. But it’s rarely seen as something that can provide deeper strategic insight. With new tools in a much more connected world, executive can better manage this most basic of inputs into the economy. Energy is just too important to be managed as a line item.

(This post first appeared at Harvard Business Review 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)

November 2, 2016

General Mills' CEO is Serious about Climate

Climate change has been nearly absent in the presidential election. But it's front and center in business. We’ve left the era of climate denial and CEOs are talking more openly about what a changing climate means for business. Exhibit A is General Mills, which is, like its competitor Kellogg, sounding alarms about the climate...and for good reason.


Ken Powell, General Mills’ Chairman and CEO, opened the Business for Social Responsibility conference yesterday in New York and laid out some compelling reasons why climate and sustainability were core issues for the company. One reason he gave was something I don't hear often. As CEO, he said, he is directly "accountable for enterprise risk management"

Powell said that he is expected – by investors, I presume – to have plans in place to avoid disruptions to the business. Issues range from facility safety (making sure a factory isn't wiped out by an earthquake or storm) to fraud and cybersecurity. He used these risks as examples to make an important point: climate change is now firmly on the list of issues he has to manage. And putting any uncertainty to rest, he said, “clearly, there’s a strong scientific consensus that climate is a risk.”

Powell provided another big reason that General Mills is pursuing sustainability aggressively: pressure from key stakeholders, particularly employees, consumers, and retailers.

Employees, he said, care deeply about two things: food security (helping those who don’t have enough) and sustainability. And they let him know it. Consumer expectations "have never been higher,” with rising demand for simpler, less processed, less artificial food. Many executives, Powell included, say that this “clean label” movement is the most dramatic change in the food industry that they’ve ever seen. It’s part of larger shift in expectations. All of us, he said, “want to know that the company that makes your food shares your values.” Finally, Powell talked about pressure to improve environmental and social performance coming from big retailers like Walmart.

But in the end, Powell’s interest in sustainability and climate change is even more fundamental than stakeholder pressures. As he put it, “Sustainability is an important business imperative for us. To feed a growing population, we need clean water, healthy soil, strong ecosystems, a stable climate, and thriving farm communities.” In short, you can't grow food without healthy farms operating in a good climate.

Clearly Powell understands that tackling climate change, as well as ensuring the basic health of the planet, is core to the success of his business. To make that connection clear, last year he set aggressive carbon goals for the company’s own operations and its agricultural suppliers (my firm wrote a report for Oxfam that assessed General Mills’ and Kellogg’s value chain GHG goals).

Watching the CEO of a traditional, old-school company – nearly 150 years old – talking fluently about megatrends and climate change was wonderful to see. It's a great sign that companies are getting focused on climate, even as the country debates everything else.

PS, On a lighter note, Powell did provide one fun factoid. Apparently, Lucky Charms, which most would guess is targeted at kids is mostly consumed by adults. It’s the #1 cereal on college campuses.

(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)

January 31, 2017

An Inside View of How LVMH Makes Luxury More Sustainable

(Note: It can feel odd right now to talk about nearly anything except what's going on in the U.S. An increasing percentage of my time is spent on activism. But the realm of my core work -- sustainable business -- is perhaps more critical than ever.

A few months before the election I did some research and interviews with executives at the large luxury company LVMH. I was doing something I hadn't done in a while -- focusing on what a single company was doing to improve its environmental and social impacts. It took me months to carve out time to write it up. I posted this at HBR.org a few weeks ago.

I received some pushback and commentary from a few people who felt the company is not doing enough. That's always true. I may be a touch rosy in this piece, but I've never felt that highlighting what a company is doing right confers a blanket endorsement...or indicates that the organization has conquered sustainability. If I only wrote about fully sustainable companies, I wouldn't have much to write about. That said, I'm more interested in the macro question for a company like LVMH -- can it ever be "sustainable"? See what you think...)

The LVMH Sustainability Story

The companies that are most vocal about environmental and social issues tend to be big, mass-market brands — well-known retailers, consumer products giants, and tech firms that are telling a new story to consumers who increasingly care about sustainability. It might seem that luxury goods companies would not feel the same pressure, but the high-end brands face important questions about the way their businesses impact the world. These companies can’t ignore sustainability.


One luxury leader, LVMH, provides a great example of how to build a robust sustainability program. The company is a €36 billion decentralized collection of valuable brands — which they call houses (or maisons) — covering fashion, wine and spirits, cosmetics, and jewelry. To understand its sustainability journey better, I spoke with the company’s head of environment, Sylvie Benard, and the CEOs of two of its wine and spirits brands.

The center of the corporate program is a framework it calls LIFE (LVMH Initiatives for the Environment), a “strategic backbone” for programs that address nine environmental challenges. LIFE focuses attention on the full life cycle of products, from supply chain to production excellence to designing longer-lasting and repairable products. Each brand’s strategic business plans now include a LIFE plan, with actions and targets laid out for the next five years.

Looking at LVMH’s efforts, I’ll highlight three areas where I see great impact and innovation: managing carbon and energy, building a connection with customers around brand purpose, and working closely with suppliers. I’ll then discuss some of LVMH’s challenges.

Managing Carbon and Energy

Since 2001 LVMH has studied its life cycle carbon footprint, focusing on both the obvious energy hogs — its stores and distribution — and brand-specific issues, such as packaging in spirits and personal care. The company has aggressively reduced its own energy demand and ramped up the use of clean energy. By the end of this year, 100% of the electricity for LVMH facilities in France will be renewable.

Belvedere Vodka, a brand with sales in 120 countries, has pursued many large-scale projects to reduce its CO2 footprint. Belvedere’s distillery in Poland shifted from oil to gas for energy generation and added heat recovery systems to capture wasted energy. Charles Gibb, Belvedere’s CEO, says it made a strategic choice to invest in this project, even though it had a longer payback period than normal. It was part of a larger overhaul that included automating some distillery operations, which gave it better data and helped slash energy and water use. As a result, Belvedere’s greenhouse gas emissions have dropped by 40%.

The most innovative part of LVMH’s carbon strategy is the use of an internal carbon fund. Dozens of the world’s largest companies use “shadow prices” to model how a carbon tax would affect their investment decisions. But only a few big companies actually collect real money from their divisions or brands (Disney and Microsoft were early leaders). LVMH’s approach is somewhat unique. Where others have collected funds internally to create a central pool of money for carbon-reducing projects, LVMH instead requires every maison to spend €15 for every ton of carbon emissions (either on-site or from grid-based electricity) on efficiency and energy reduction, clean energy, or research to understand that brand’s greenhouse gas emissions better. Like its carbon-taxing peers, LVMH has created a powerful virtuous circle of emissions reductions. In total, LVMH has invested about €6 million in the first year of the program.

Brand-Building and Customer Connection

The LVMH leaders I spoke with believe strongly that Millennials, more so than previous generations, care about sustainability. As Gibb puts it, “Until recently, marketing would focus mainly on product and brand image. But now people look for whether you’re both socially and environmentally responsible. People look at brands and ask what they do for the world. If you don’t do this stuff, you’re not a modern brand.”

One of the ways the company is telling a more sustainable story to customers is through the use of the “Butterfly Mark,” a symbol — a first in the luxury industry — that “at a glance helps people identify brands committed to social and environmental sustainability.” (Disclosure: I’m an unpaid advisor to Positive Luxury, the company behind the mark.) The Butterfly Mark will soon appear on Krug’s Champagne. Krug also uses a fun, innovative tracking system to share information with consumers. Every bottle has a unique six-digit number, which you can input on its website to get that bottle’s story.

Supply Chain Partnerships

Maggie Henriquez, CEO of Krug Champagne, says that its focus on environmental and social impacts, and the story the company tells about it, stems from looking inward at its own history. Like many luxury brands, Krug was struggling after the 2008 financial crisis. Henriquez says there was a deeper problem than just economic conditions: It had lost its connection to the founder’s 19th-century ideals about craftsmanship, humility, and quality.

A critical part of going back to its roots, Henriquez says, required connecting in a deeper way to growers. The quality of the crops, and the care of the growers, are key to the success of the business. Henriquez started a program to work with growers on sustainability and quality, going plot by plot to review harvest times and implement modern best practices. Together they reduce waste and agricultural inputs (such as fertilizer and water) to get better yields, which reduces the overall footprint. Some of LVMH’s other businesses, such as jewelry brand Bulgari, have also implemented supply chain tracing programs for critical inputs with potentially troubled histories (like some metals and diamonds).

In one sense, none of this is surprising or cutting edge. Most large companies with agricultural supply chains, like Kellogg and General Mills, have developed elaborate, robust supplier programs to improve yields and cut water use and greenhouse gas emissions. And on the jewelry side, companies like Tiffany employ extensive tracking programs to avoid conflict minerals and blood diamonds.

But LVMH does some unusual things. Henriquez decided that growers were so important to the Krug story that she wanted them engaged in a deeper way. Henriquez, growers, and the winemaking team enjoy product tastings together, allowing growers to enjoy the end results of their work and their crops. It sounds so simple, but Henriquez says, “It’s not normal in our business, and it’s such a moment of connection.”

The Challenges

The sustainability and operating execs at LVMH talk openly about some of the challenges they face. As usual, short-term pressures on financial performance are a concern, and change takes time. Environmental exec Sylvie Benard comments that changing behavior can take a few years, and you have to keep hammering home the message and “find the right moment” to act.

However, it’s a bit easier for the brand CEOs to stay focused on the long term when some of the maisons are three centuries old. They have to plant trees today, for example, to have the right wood for casks 150 years from now. As Gibb puts it, “If you’re not thinking about the brand over a 10-year period, you’re not doing your job.”

Perhaps the biggest hurdle is more existential: Can luxury goods ever be sustainable? On one level, probably not, since these products almost by definition are not an inherent human need. But while it would be easy for sustainability people to assert that “none of these products should exist,” that’s more than just unrealistic — it’s probably counterproductive. Everyone has different definitions of what makes for a thriving life; for many, it can easily include some wants, or things that provide fun and beauty.

The challenge, then, is to make sure sustainability and beauty are inseparable. LVMH is on the right track, talking about sustainability as core to excellence, quality, and brand image — and central to how the company operates. As Sylvie Benard says, when “the marketing director, financial director, logistics director, and so on take the environment into account when making a decision, then life will be beautiful.”

(This post first appeared at Harvard Business Review online.)

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

(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.

April 17, 2017

Pepsi, United, and the Speed of Corporate Shame

(The last few weeks have been eventful in the realm of public corporate debacles and foot-in-mouth disease. This article from last week got some good commentary on the HBR site, much of it about whether business schools are teaching people to be ethical and humane. In this piece I look at Pepsi and United, but to be clear, these situations are very different in intention and speed of response to a public problem. What connects them in my mind is primarily about the three themes in this article -- speed of transparency, expectations of customers and the world, and internal culture.)

United Airlines has leapt into a brand disaster of mythic proportions. In a scandal that’s still evolving quickly, the company’s employees had Chicago Department of Aviation officers forcefully remove a passenger — a paying customer sitting in his seat — from an overbooked flight. Around the world, people watched a video of the bloodied man being dragged down the aisle. The company’s stock lost hundreds of millions of market cap , but the damage to the brand (and future sales) may be far higher.

The incident, along with some other recent brand missteps, highlight some basic realities about the world companies operate in today. Three themes seem critical.


1. The speed of shame is as fast (and as ruthless) as the internet. When will companies realize that everyone now has a video camera on them, and that they can broadcast live on Facebook within minutes? People can now destroy brand trust at the speed of light, with consequences that are far-reaching. For example, in China, a critical growth market for the airlines, the disturbing passenger-shot video story has gone super-viral (likely in part because the passenger manhandled by United was Asian). It was the number one topic on Weibo , China’s version of Twitter, with 100 million views. And while it’s way too early to predict the financial damage in that country or more broadly, the brand will likely keep taking hits for a while — other stories about being mistreated by United are getting airtime and countless people are pledging to stop flying United.

Yet United is far from the only company to experience instantaneous negative reactions recently. Last week, PepsiCo ran — and then quickly pulled — an advertisement showing the model Kendall Jenner breaking through a line of protesters (who looked more like they were at a dance party) to hand a Pepsi to a police officer. Jenner’s offering of 12-ounces of peace and love seemingly solves all of society’s tensions. The backlash, especially from those who saw a jarringly off-note take on Black Lives Matter protests, was justified — and unbelievably fast. Has there ever been a major ad that debuted and was pulled in less than 24 hours?

In both cases, word spread partly though dark humor, which raced around Twitter, Facebook, and newscasts, including a map of a United plane with a section labeled “Fight Club.” And Saturday Night Live’s brilliant take on Pepsi captured the essence of what was likely a well-intentioned effort. SNL gave us an imagined conversation between the ad’s creator and his family (unseen on the other end of a phone call, like an old-school Bob Newhart routine). His dawning realization that he’s made a big mistake is comedy gold. Humor plays a big role in stories going viral and, in cases like these, it may help people cope with upsetting images. But it doesn’t do the brands any favors.

2. Everyone expects an apology — and a real one. Pepsi got this right. The company acted quickly and owned the error . As a spokesperson said, “Pepsi was trying to project a global message of unity, peace, and understanding. Clearly, we missed the mark, and we apologize.”

United, on the other hand, has had a rough couple of days. The first statement from Oscar Munoz, the United CEO, was just bizarre, focusing on his employees while also using an awful euphemism for violently pulling someone off a plane: “This is an upsetting event to all of us here at United. I apologize for having to re-accommodate these customers.”

What’s different today is that everyone can feel personally engaged in what your company does to anyone. In Munoz’ first statement, he went on to say, “we are reaching out to this passenger to talk directly to him and resolve this situation.” That’s fine, but CEOs today need to “reach out” to the public, too. At the very least every passenger on that plane deserves some direct contact, but now millions of others want an explanation as well. In our social media dominated world, everybody has an opinion and feels like they’re owed something.

Munoz tried to make up for his first statement with numerous public apologies since — and they’re much better – but the reality is that the first one sticks and is a very public window into your company’s priorities and soul.

3. Employees must feel safe and empowered to speak up. The biggest question I (and many others) have about these recent brand disasters is this: Why didn’t anyone in these companies say something before things got out of hand? At Pepsi, there must have been employees – in the marketing meetings, on the set, or even in the ad agency – who felt like the unseen family members in the SNL skit. Many knew the ad was tone-deaf. If they believed they were expected to go beyond following rules and maximizing performance, United employees would have stepped in to de-escalate the situation once they realized something was going horribly wrong on that flight.

Of course, intentions do matter. In Pepsi’s case, the ad was likely well-meaning, so chastised execs and the brand will probably recover. United is in a radically different situation. As with the Wells Fargo and VW scandals before it, the problem here is a systematic set of expectations and rules, set from the top, that lead to very bad (and now public) behavior.

Companies need to think carefully about their policies and their crisis communications, so they can quickly move from a defensive crouch to honest, heart-felt apologies — and to real changes in how they operate. But most importantly, they need to assess whether their cultures allow their own employees the power and safety to stand in front of the train of fast-moving stupidity and say, “You shall not pass!” And they need to have executives who will listen to them.

The big takeaway here is that expectations about how companies operate — and their very role in society — are rising fast. Pepsi clearly had some inkling of this; just think about why the company wanted to say something about justice and understanding, even if it did it poorly. United (and its airline peers) had better wake up fast to this new reality as well.

All companies now operate in a world that’s closely watching their policies, actions, and how they handle themselves when things go wrong. When literally anyone can simultaneously act as a customer, a protester, a critic, and a muckraking reporter with a video camera, executives have zero room for error.

(This post first appeared in Harvard Business Review.

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

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.

April 28, 2017

The Straw Man Arguments of Climate Deniers

(I published this on Medium yesterday.)

For some unknown reason, the New York Times decided that in 2017, it needed to hire a known climate denier away from the Wall Street Journal. The new op-ed writer, Bret Stephens, wasted no time diving into the fray, decrying the certainty of people who want action on climate change. His article is fantastic example of how to make straw man arguments.


Here’s the critical passage from his climate hit piece:

Claiming total certainty about the science traduces the spirit of science and creates openings for doubt whenever a climate claim proves wrong. Demanding abrupt and expensive changes in public policy raises fair questions about ideological intentions.

He makes two fundamental claims:

(1) Everyone who is seriously concerned about climate change (which, I would note, includes basically every major scientific association in the world) is TOO certain about the science.

(2) Solving the problem will be “abrupt and expensive.”

On the first one, the only thing to say is that’s bullshit. It’s not that the climate-concerned know with 100% certainty how it will all play out — of course we don’t, and nobody serious is really claiming that we do. The science is filled with probability assessments.

No, the certainty is around the case for action, which is different than the science itself. In that, I’m 100% sure, given both the probabilities of continued emissions changing our climate AND the dire consequences if the warming continues unabated. It’s basically an expected value calculation, and the risk-reward assessment is clear.

The second claim has been the go-to for deniers for many years. It’s nearly the official position of the entire GOP establishment in DC, especially the president. They talk about fighting climate change as if it’s some giant liberal boondoggle to spend money. There are two big problems with this argument. First, it’s quite logical feat to decry climate hawks for certainty, and then declare with utter confidence that doing anything about climate will be too expensive.

But second, and more importantly, the argument that reducing carbon is going to drag the economy down is wrong, increasingly absurd, and actually backwards.

If we do nothing, unabated climate change and weather extremes will cost the world tens of trillions of dollars (that’s analysis from Citi and other banks, not Greenpeace). Reducing carbon — through innovation in energy, buildings, transportation, and other sectors — is an enormous opportunity to improve health and generate wealth. As in many trillions of dollars. Thus rolling back action on climate, as Trump’s executive order did a month ago, will hurt the economy and our competitiveness.

I could point to endless evidence of both the science and the cost-benefit logic of action. But what’s the point really? Many people will not be convinced of the reality that action on climate is justified by the science and but also by every interpretation of risk management. They will keep their ears plugged and eyes covered forever.

By encouraging everyone to go slow, the deniers risk everything, but unfortunately not just for themselves — we’re all in this together, which is why Stephens and his ilk are so dangerous. On the alter of making a point and sounding smart, they're sacrificing our collective well-being.

Alas, we’ll never convince those like him, even as we build a healthier, better, cleaner economy. Onward.

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May 17, 2017

The Regulated Industry Protection Agency

(Last week was filled with fresh new offenses coming from the White House. But right before the president fired his FBI director -- and then gave away state secrets -- his EPA also dismissed scientists who advised the agency. This is bad news, and it got lost in the shuffle. The EPA has turned its back on its core mission. I posted this on Medium.)


The Environmental Protection Agency has a clear, one-sentence mandate: “The mission of EPA is to protect human health and the environment.” But EPA Administrator Scott Pruitt and his boss, President Trump, seem to think the EPA should mainly defend business from too much environmental protection. They’re confused and they’re missing a fundamental reality: there is no economy without the environment.

The purpose of the EPA has always been to defend the commons.

The latest attack on the EPA from within came last week. Pruitt dismissed members of a scientific review board to make room for industry representatives.

A spokesperson, according to the New York Times, indicated that Pruitt would “consider replacing the academic scientists with representatives from industries whose pollution the agency is supposed to regulate.” The hen-in-the-henhouse approach would make sense if business were somehow locked out of the process. But does anyone seriously believe that business and industry are underrepresented in government decision-making?

The Cabinet already includes the Small Business Administration and significant representation of business interests within the departments of transportation, agriculture, and energy. And, of course, the Commerce Department itself, which “serves as the voice of U.S. business within the Cabinet.” The private sector has massive, unprecedented influence as well, through thousands of government relations executives, countless lobbying firms, and uber-powerful trade groups like the U.S. Chamber of Commerce and the National Association of Manufacturers.

With that backdrop, the purpose of the EPA has always been to defend the commons -- that is, our air, water, climate, and much more. When President Richard Nixon established the agency, he was clear that he wanted to fill a gap: “Our national government today is not structured to make a coordinated attack on the pollutants which debase the air we breathe, the water we drink, and the land that grows our food. Indeed, the present governmental structure for dealing with environmental pollution often defies effective and concerted action.” He created the agency to organize environmental protection, not focus on economic growth and industry needs.

But besides misunderstanding the mission of the EPA, the Trump administration has fallen prey to a massive misperception. They clearly believe that regulatory protections always come at the cost of business and economic growth. This misplaced narrative has thoroughly infused our public discourse; the word “regulation” rarely appears without the modifiers “burdensome” or “job-killing.”

Of course, many regulations on air and water (and food, products, or workplace conditions) cost some companies money. Complying with regulations can be an ugly and expensive process. They can slow down some kinds of innovation. So, yes, regulations are hardly perfect. So stipulated.

But acting like they are only an impediment to business is a straw man. Regulations are, most of the time, based on a real need to protect us. Safe food and drugs, clean water and air, workplaces that don’t threaten lives, and even a stable climate — these are not nice-to-haves, but prerequisites for a thriving life and economy.

And the value to society (including business) of strong protections is high — protecting air quality alone has been worth many trillions of dollars in avoided health care costs and quality of life. Business does better when its employees and customers thrive. So slashing health, environmental, and societal protections is only “pro-business” in the narrowest of terms, and only in the short-run. Business does not operate in a vacuum, separate from the natural world. Far from it, as the economy depends entirely on the human and natural resources that power it.

Most government departments make these connections explicit. One of the five “strategic goals” of the Commerce Department is called, simply, “environment.” They gather “actionable environmental intelligence” to help business understand environmental change, prepare for it, and even profit by “developing environmental and climate informed business solutions.” At the USDA, “Natural Resources and Environment” is one of seven mission areas. The Pentagon has called climate change a “threat multiplier,” and Trump’s own Secretary of Defense, Jim Mattis, says it’s a national security issue.

Many branches of government, along with many private sector leaders, want to protect the environment and build a clean economy. But the one agency tasked with defending the environment (and human health) explicitly is sprinting away from its duty. Since the economy, our food system, and our security all depend on a strong environment, Pruitt and Trump’s misguided attempt to help a narrow group of business interests will fail miserably. Sadly, we’ll all pay the price.

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September 18, 2017

The Questions Business Leaders Should Ask Themselves After Harvey and Irma

Hurricane Katrina changed business forever. Will today's extreme weather do the same?


Twelve years ago, Hurricane Katrina ravaged New Orleans. Eleven years ago, Walmart launched its sustainability initiative, deeply affecting how business has been done since then. It wasn’t a coincidence.

During the hurricane and immediate recovery, the government at all levels was overwhelmed by the human and economic needs. It couldn’t deliver basic services like water. But large companies, with their extensive resources and logistics expertise, stepped up. Walmart discovered what it was capable of.

An important shift in how the retail giant approached its business began with then-CEO Lee Scott’s epiphany, penned in a manifesto titled “Twenty First Century Leadership.” Scott realized that the company had a much bigger role to play in society than just delivering everyday products at a low cost and providing jobs. Over the next decade Walmart saved billions of dollars by aggressively cutting its energy use, doubling the efficiency of its fleet, and becoming one of the world’s largest private-sector buyers of renewable energy. But most important, Walmart compelled suppliers to improve their environmental performance.

A climate-changed world is not a theoretical discussion anymore. It’s reality, and the impact on business is significant.

Many can debate how well Walmart has followed through, or whether its environmental gains are lessened by how it has handled other aspects of long-term business sustainability, such as labor and wages. But Walmart’s impacts on other companies, and on the general debate about the role of business in society, are undeniable. The giant created ripples of action.

The storms around the world right now — from Hurricanes Harvey and Irma to the devastating monsoons in Mumbai — are bigger, more devastating, and extreme than even Katrina. Climate chaos is upon us. Will it change the face of business again?

For smart companies it will, and immediately. They’ll be asking themselves several questions, loosely categorized below, or expanding on work they’ve already started.

  • Rising seas and extreme weather (assets and operations): Do we — or our major suppliers or customers — have important assets in low-lying areas around the world? How much operational and financial risk do we face, throughout our value chain, from rising seas and mega-storms, or from droughts and water-quality issues?
  • Rising expectations: What do our major stakeholders — employees, customers, communities, and even investors — expect from us in terms of action on climate change?
  • Rising sun: Are our goals for carbon reduction or renewable energy aggressive enough? Are these targets in line with the ever-tightening science on how much carbon the world can afford to emit?
  • Changing political realities: Are we taking a public position and influencing policy (in the U.S. and elsewhere) to keep the world moving on climate action? Sitting this one out is not an option anymore. For example, many of the world’s biggest brands lobbied President Trump to stay in the Paris climate accord, running a full-page ad in the Wall Street Journal. And then, after Trump pulled the U.S. out of the agreement, hundreds of companies made a public declaration that “We Are Still In.”
  • Helping out: What can our business do to help in these extreme situations? Do we have special expertise in logistics, or can we shift some production and operations temporarily? Witness how Anheuser-Busch sometimes shifts production at a Georgia facility to put drinking water in cans for emergencieslike Harvey. As Walmart discovered 12 years ago, companies have the scale to help in dire situations.
  • Rising revenues: How might our business benefit? It’s OK to ask this — it isn’t taking advantage of a horrible situation. We also need businesses to help prepare for extremes and to aid in recovery afterward. For example, in the immediate aftermath, clean-up is important, and there will be increased sales of replacement furniture, cars, and much more. In the longer run, the construction sector could do well, as will providers of emergency services like portable energy. There are also amazing opportunities to rebuild smarter, more resilient, more sustainable communities. Governments and companies can invest in so-called green infrastructure like natural wetlands to dampen storm surges (versus “gray,” traditional infrastructure like dams and levees) and many more porous roads and surfaces to control flooding.

The bottom line is that a climate-changed world is not a theoretical discussion anymore. It’s reality, and the impact on business is significant. This is blindingly obvious but needs to be said: Cities and regions under water, demolished, or with dispersed or evacuated populations don’t make for healthy economies.

If we don’t see a dramatic shift in how business operates and the kinds of products and services they provide — or how governments and civil society work at all levels — the world will become too unstable for any business, or anyone at all, to thrive. Things have gotten very real. It’s time for businesses to step up.

This post first appeared at Harvard Business Review online.

(Photo credit: Rick Wilson, Reuters)

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