[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.

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.

[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]

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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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]

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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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.)

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.

• Murky Waters: Corporate Reporting on Water Risk (Ceres)
• The Ripple Effect: Water Risk in the Municipal Bond Market (Ceres)
• Water Futures (SAB Miller)
• Charting our Water Future (2030 Water Resources Group)

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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(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

(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)