Challenges, Issues, and Opportunities Revealed through AUDIO Analysis

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Part One Preparing for a New World

In the first few chapters, we lay out the context for this book, highlighting how environmental challenges have become an important part of the business landscape. In Chapter 1, we introduce the “Green Wave” sweeping the business world, and we present the logic for making environmental thinking a core part of strategy. We also spell out some of the “mega- forces,” like globalization, that give the new environmental imperative greater prominence. Finally, we provide an over- view of how we conducted our research and picked the com- panies that are the focus of this book.

Chapters 2 and 3 introduce the new pressures—both nat- ural and human—coming to bear on companies. These forces make attention to environmental strategy essential for busi- ness success. We start in Chapter 2 by highlighting the en- vironmental problems facing humanity and every company, ranging from global warming to water shortages. For each issue in our environmental primer, we offer a crisp summary of the problem, a review of the possible range of effects, and an analysis of how the problem might affect business.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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6 Preparing for a New World

In Chapter 3, we review the growing array of environment- oriented “players” on the field of business. We map 20 different cat- egories of stakeholders from traditional government regulators to powerful nongovernmental organizations (NGOs) to increasingly en- vironmentally focused banks. We highlight the questions these groups are asking about how companies operate.

In brief, this section explains how and why the environment has emerged as a critical strategic issue for companies of all sizes. It sets the stage for our tour of the critical elements of corporate environ- mental strategy. And it shows how careful thinking about the envi- ronment can provide a new basis for competitive advantage.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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7

Chapter 1 Eco-Advantage

Washington, D.C.: General Electric CEO Jeff Immelt an- nounces a new initiative, “ecomagination,” committing the mega-manufacturer to double its investment in environmen- tal products—everything from energy-saving lightbulbs to industrial-sized water purification systems and more efficient jet engines. Backed by a multi-million-dollar ad campaign, Immelt positions GE as the cure for many of the world’s environmental ills.

Bentonville, Arkansas: In a speech to shareholders, Wal- Mart CEO Lee Scott lays out his definition of “Twenty First Century Leadership.” At the core of his new manifesto are commitments to improve the company’s environmental per- formance. Wal-Mart will cut energy use by 30 percent, aim to use 100 percent renewable energy (from sources like wind farms and solar panels), and double the fuel efficiency of its massive shipping fleet. In total, the company will invest $500 million annually in these energy programs. Moreover, in a move with potentially seismic ripples, Wal-Mart will “ask”

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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8 Preparing for a New World

suppliers to create more environmentally friendly products: some of the fish Wal-Mart sells will have to come from sustainable fisheries, and the clothing suppliers will use materials like organic cotton. “We believe that these initiatives will make us a more competitive and innovative company,” Scott emphasizes.

By either market cap or sales, GE and Wal-Mart are two of the biggest companies in human history. Neither company springs read- ily to mind when you say the word “green.” But these are not isolated stories. Companies as diverse as Goldman Sachs and Tiffany have also announced environmental initiatives. As the Washington Post observed, GE’s move was “the most dramatic example yet of a green revolution that is quietly transforming global business.”

What’s going on? Why are the world’s biggest, toughest, most profit-seeking companies talking about the environment now? Simply put, because they have to. The forces coming to bear on companies are real and growing. Almost without exception, industry groups are facing an unavoidable new array of environmentally driven issues. Like any revolution, this new “Green Wave” presents an unprece- dented challenge to business as usual.

NEW PRESSURES

Behind the Green Wave lie two interlocking sources of pressure. First, the limits of the natural world could constrain business operations, realign markets, and perhaps even threaten the planet’s well-being. Second, companies face a growing spectrum of stakeholders who are concerned about the environment.

Global warming, water scarcity, extinction of species (or loss of “biodiversity”), growing signs of toxic chemicals in humans and an- imals—these issues and many others increasingly affect how com- panies and society function. Those who best meet and find solutions to these challenges will lead the competitive pack.

The science, we stress, is not black and white on all these issues. Some problems, like ozone layer depletion or water shortages, are fairly straightforward. The trends are plainly visible. On other is- sues—climate change most notably—uncertainties persist, but the ev- idence is clear enough and the scientific consensus strong enough to warrant action.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 9

THE EVOLVING CHALLENGE

Environmental worries used to center on “limits to growth” and the pros- pect of running out of key natural resources like oil and industrial metals. These concerns have often been overblown. A second line of concerns focused on pollution and has proven to be more enduring. We now know that humans can overwhelm the capacity of nature—from local waterways to the global atmosphere—to absorb pollutants or to provide the essential “ecosystem services” we need, such as fresh water, breath- able air, a stable climate, and productive land.

A broad-based set of players now insists on attention to these is- sues. Government, the traditional superpower of influence on cor- porate behavior, has not gone away. Far from it. Regulators world- wide no longer turn a blind eye to pollution. Citizens simply won’t allow it. Across all societies, we see serious efforts to control emis- sions and make polluters pay for the harm they cause.

Other actors, however, now play prominent environmental roles on the business stage. NGOs, customers, and employees increasingly ask pointed questions and call for action on a spectrum of issues. To give just one example, HP says that in 2004, $6 billion of new busi- ness depended in part on answers to customer questions about the company’s environmental and social performance—up 660 percent from 2002. These demands reshape markets, create new business risks, and generate opportunities for those prepared to respond.

The breaking news is the arrival of a new set of stakeholders on the environmental scene, including banks and insurance companies. When the financial services industry—which focuses like a laser on return on investment—starts worrying about the environment, you know something big is happening. Wall Street stalwart Goldman Sachs announced that it would “promote activities that protect for- ests and guard against climate change.” The company said it would “encourage” its clients to act greener and pledged $1 billion for in- vestment in alternative energy, having already bought a company that builds wind farms. Even for Goldman, a billion dollars is not a token gesture. JPMorgan, Citigroup, and other big names have made sim- ilar commitments—and they have signed on to the “Equator Princi- ples,” which require environmental assessments of major loans.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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10 Preparing for a New World

For a painful example of how this one-two punch of natural forces and new stakeholders can slam a company, just ask Coca-Cola’s two most recent ex-CEOs, Doug Ivestor and Doug Daft. Within the past five years alone, the world’s largest soft-drink manufacturer faced angry protests in India over its water consumption, came under pres- sure to stop using refrigerants that hurt the ozone layer, and with- drew its flagship bottled water Dasani from the British market after the supposedly purified drink failed European Union quality tests. Today, the company has a vice president dedicated to water and environment issues, Jeff Seabright, and a new CEO, Neville Isdell, who works closely with the company’s Environmental Advisory Board, on which one of us (Dan) serves.

Environmental missteps can create public relations

nightmares, destroy markets and careers, and knock

billions off the value of a company. Companies that do

not add environmental thinking to their strategy

arsenal risk missing upside opportunities in markets

that are increasingly shaped by environmental factors.

THE BUSINESS CASE FOR ENVIRONMENTAL THINKING

We see three basic reasons for adding the environmental lens to core strategy: the potential for upside benefits, the management of down- side risks, and a values-based concern for environmental stewardship.

The Upside Benefits

Nobody, not even market-savvy Toyota, could have predicted the success of its hybrid gas-electric Prius. Given the poor track record of electric vehicles, this leap of faith was anything but a clear path

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 11

to profit. Yet Toyota executives saw potential value down the road, and they could not have been more correct. After a decade-long re- search push, the Prius was named Motor Trend’s Car of the Year in 2004, by which time customers were waiting six months to get their hybrid cars. While Detroit was nearing bankruptcy, laying off tens of thousands of workers, and offering “employee discounts” to everybody, Toyota was raising prices, expanding production, col- lecting record profits of $11.8 billion in 2006, and closing in on the title of world’s largest automaker.

Toyota’s green focus is no accident. In the early 1990s, when Toy- ota wanted to design the 21st-century car, it made the environment a major theme, ahead of all the selling points that automakers tra- ditionally used: size, speed, performance, or even ability to attract beautiful girls or hunky guys. Smart move.

Similarly, BP has rebranded itself as an energy company, preparing to move “beyond petroleum” and investing in renewable energy. These companies have figured out that it’s better to remake your marketplace and eat your own lunch before someone else does.

Our research suggests that companies using the environmental lens are generally more innovative and entrepreneurial than their com- petitors. They see emerging issues ahead of the pack. They are better prepared to handle the unpredictable forces that buffet markets. And they are better at finding new opportunities to help customers lower their costs and environmental burden. By remaking their products and services to respond to customer needs, they drive revenue growth and increase customer loyalty.

The “gold” that smart companies mine from being green includes higher revenues, lower operational costs, and even lower lending rates from banks that see reduced risk in companies with carefully constructed environmental management systems. They also reap soft benefits, from a more innovative culture to enhanced “intangible” value, credibility, and brand trust.

Scholars and pundits have noted that businesses now face a world where traditional elements of competitive advantage, such as access to cheaper raw materials and lower cost of capital, have been com- moditized and whittled away. On this altered playing field, going green offers a vital new path to innovation and to creating enduring value and competitive advantage. Nike executive Phil Berry puts it

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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12 Preparing for a New World

simply: “We have two maxims. Number 1: It is our nature to inno- vate. Number 2: Do the right thing. But everything we do around sustainability is really about number one—it’s about innovation.”

The Downside Risks

Inside oil giant Shell, executives use the acronym TINA—There Is No Alternative—to explain why they do some things. To them, thinking about how climate change affects their business or caring how stakeholders feel about the company is no longer optional. It’s just a fact of life. Even through well-publicized problems with local communities and governments in places like Nigeria, Shell has con- tinued to hone its stakeholder relations skills. The company spends millions of dollars working with the people living around key oil and gas projects such as the massive Athabasca Oil Sands in Alberta, Canada.

As head of Shell’s famed scenarios group, Albert Bressand helped the executive team think about what could hurt the company in the long term. As he told us, “We are a prisoner of the market. . . . there are people who can remove our license to operate.”

The idea behind license to operate is simple: society at large allows companies to exist and gives them a certain leeway. If your company oversteps the bounds, societal reactions can be harsh and, in severe cases, destroy the company. Former partners of Arthur Andersen learned that lesson at great cost when the accounting giant vanished in the wake of the Enron scandal. Or remember the case of chemical industry leader Union Carbide? After the company’s 1984 disaster in Bhopal, India, which killed over 3,000 people, Union Carbide’s fu- ture fell apart until finally it was swallowed by Dow.

More pointedly, society’s expectations about company behavior are changing. A company that abuses the local environment can find it impossible to get permits to expand operations. Regulators, poli- ticians, and local communities raise fewer barriers for good neigh- bors.

Heavy industries are especially aware of this social license issue, but others feel the heat as well. After years of unfettered expansion, Wal-Mart has come under fire from protestors who contend that the company’s stores increase sprawl, destroy wetlands, and threaten wa-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 13

ter supplies. In some communities, regulators have joined the chorus and begun to impinge on the retail giant’s expansion plans. In inter- nal meetings, Lee Scott told Wal-Mart executives that their sustain- ability efforts would help protect the company’s “license to grow.”

Environmental challenges can seem like a series of small holes in a water main, slowly draining value from the enterprise. Or they can ap- pear suddenly as major cracks in a dam and threaten the entire busi- ness. Maybe the problem is unexpected costs for pollution control or a cleanup for which nobody budgeted. Maybe it’s a very public disaster like the Exxon Valdez. Sometimes, too, the downside of mismanaging these issues can get very personal. Executives who preside over the mishandling of toxic waste, for example, can face jail time.

Efforts to cut waste and reduce resource use, often called “eco- efficiency,” can save money that drops almost immediately to the bottom line. Redesign a process to use less energy, and you’ll lower your exposure to volatile oil and gas prices. Redesign your product so it doesn’t have toxic substances and you’ll cut regulatory bur- dens—and perhaps avoid a value-destroying incident down the road. These efforts lower business risk while protecting the gold—reliable cash flows, brand value, and customer loyalty, for example—that companies have painstakingly collected over time.

Smart companies get ahead of the Green Wave and

lower both financial and operational risk. Their

environmental strategies provide added degrees of

freedom to operate, profit, and grow.

The Right Thing to Do

Repeatedly during our research we asked executives why their com- panies launched environmental initiatives, some of which cost signif- icant money up front and had uncertain paybacks. More often than

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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14 Preparing for a New World

you might imagine—and far more often than we first expected—they said that it was the right thing to do.

Is the case for thinking and acting environmentally based on val- ues? Not primarily. At least that’s not what we heard from the ex- ecutives we interviewed. For most of them, the moral argument was not a separate imperative. It was deeply intertwined with business needs. Building a company with recognized values has become a point of competitive advantage, whether you have 2 employees or 200,000. Doing the right thing attracts the best people, enhances brand value, and builds trust with customers and other stakeholders. In fact, it’s hard to conceive of a business asset more central to long- term success than trust among stakeholders—or one that is more easily lost. As investing legend Warren Buffett once said, “It takes twenty years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.”

Even those who agree with Nobel Prize–winning economist Milton Friedman that the main “social responsibility of business is to in- crease its profits” can’t ignore the growing ranks who believe that companies have an obligation to do more. The logic of corporate environmental stewardship need not stem from a personal belief that caring for the natural world is the right thing to do. If critical stake- holders believe the environment matters, then it’s the right thing to do for your business.

Environmental leaders see their businesses through an

environmental lens, finding opportunities to cut costs,

reduce risk, drive revenues, and enhance intangible

value. They build deeper connections with customers,

employees, and other stakeholders. Their strategies

reveal a new kind of sustained competitive advantage

that we call Eco-Advantage.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 15

MAGNIFYING FORCES

The Green Wave, with its threats and opportunities, rises within a business landscape already in the throes of radical change. Compa- nies face a number of mega-trends that interact with the effects of the Green Wave, accelerating change and magnifying its impact and scope.

Globalization and Localization

As author Thomas Friedman describes it, outsourcing is just the tip of the iceberg. The “flattening” of the global markets for goods and services will disrupt nearly all industries. The continued rise of both China and India seems likely to have a profound effect on businesses across the world, especially in North America and Europe.

Economic integration and trade liberalization intensify competi- tion. Globalization creates opportunities for many, but fundamen- tally rewards scale. Size, however, creates suspicion of excess power. Large enterprises come under extra scrutiny for their business prac- tices, including environmental impacts.

Simultaneously, the world is fragmenting, with niche markets de- manding tailored products and services. For example, in many of its restaurants in India, McDonald’s serves curry, not its brand-defining hamburgers. Operating in ways that respond to localized needs and preferences is becoming essential. The scale of environmental issues, ranging from entirely local to inescapably global, only adds to the complexity of this already daunting management challenge.

Insecurity

The security tensions that have swept through the United States and much of the rest of the world in the wake of 9/11 are changing public attitudes and the political landscape. Beyond fears of terrorism, there’s a growing public distress over reliance on oil from the Middle East. Increasingly, people express a willingness to pay a premium for fuel supplies closer to home, including alternative energy sources such as wind or solar power. Thus, the energy future looks very different from the past, with profound environmental consequences.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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16 Preparing for a New World

Government ↓, Business ↑

While the era of big government is over, public expectations about the role of business in meeting society’s needs are rising. Many would say the regulatory system in America is becoming less burdensome, but in Europe regulations seem to be weighing more heavily on busi- ness. What’s common throughout the world is that companies are being asked to do more voluntarily, not just for the environment but for a constellation of social issues including poverty alleviation, ed- ucation, and health care. The debate about the appropriateness of these expectations rages on, but the trend is clear. An intensified focus on corporate social responsibility, or CSR, is here to stay.

Big business faces even more elevated expectations. Multinational companies, with their global reach and ubiquitous effects, are held to higher standards than are smaller companies. To those whom much is given, much is expected. When operating on foreign soil, companies must expect especially intense scrutiny. One telling ex- ample: While Coca-Cola faces ongoing protests in India over its wa- ter use at a plant in Kerala, the Indian-owned Kingfisher brewery down the road, which uses far more water, draws no political ire.

Rise of the Middle Class in Emerging Economies

Let’s look at just one statistic: The number of cars in China and India is predicted to rise from about 17 million today to 1.1 billion (yes, billion) by 2050. The addition of hundreds of millions of working, middle-class people in the developing world, all seeking a Western quality of life, will shake up nearly every industry. For those who are prepared, this new market offers considerable opportunity. But the same growth in consumption threatens to destroy natural re- sources and inflict pollution on the planet on an unprecedented scale.

Continuing Pressure from Poverty

Despite substantial middle-class growth, particularly in Asia, many parts of the developing world continue to struggle with chronic pov- erty. Expanding populations strain limited resource bases. Poverty forces short-term thinking that translates into environmental degra-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 17

dation. People cut down trees for fuel, for example, without regard to the soil erosion and other negative consequences that follow.

So while the rise of a consuming middle class creates one set of environmental threats, persistent poverty represents an equally seri- ous social and ecological challenge that the business world avoids at its own risk. As a top executive from ABN AMRO Real—the Bra- zilian subsidiary of the Dutch bank and a company on the front lines in the developing world—observed, “Companies cannot succeed in societies that fail.”

Better Science and Technology

The science underlying many environmental problems is getting clearer. But the downside of clarity is an increased obligation to re- spond. “Biomonitoring” and more sensitive measurement tools can now identify—at trace levels—virtually every chemical or emission found in the environment, whether in a polar bear in the Arctic Circle or in the breast milk of a woman in Ohio. Even exposures at the parts-per-billion level can trigger calls for action from an expanding army of advocacy groups. On the positive side, new developments such as nanotechnologies could provide solutions to environmental ills—and create market opportunities for entrepreneurial businesses.

Transparency and Accountability

“The web changes everything” seems like yesterday’s news, but the ripples of the Digital Age continue to move through our economy and society. The famous “Moore’s Law” predicts that the density of transistors on a microchip will double every 18 months. This trend has held for 40 years and relentlessly drives computing power up and the costs of digital technology down. For billions of people, an end- less variety of information—and perhaps a degree of disinforma- tion—is just a click away.

The unprecedented level of transparency provided by the Internet is transforming the business world. With bloggers everywhere, in- cluding inside companies, anything that goes wrong anywhere in your operations—or in your suppliers’ operations—can hit the web nearly instantaneously. As the New York Times put it, the Internet

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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18 Preparing for a New World

“has given the angry voices a more public outlet. The blogosphere is rife with postings castigating Coca-Cola, Wal-Mart, and other big companies, citing everything from water consumption to unfair labor practices and dangerous smokestack emissions.” And this is not just idle chatter among uber-geeks. The conversations that bloggers start can move from cyberspace to Main Street in the blink of an eye.

In a world of rising transparency and low-cost information, who is responsible for what becomes increasingly clear. As pollution and toxic chemicals become easier to track back to their sources, we will know which companies created them, shipped them, used them, and disposed of them. No question about it: Full accountability is the emerging norm.

WHO SHOULD CARE

For some enterprises, a new green perspective will be transformative, leading to fresh thinking, new markets, profitability gains, and in- creased value. For others, the environmental lens may emerge more gradually and modestly, as another critical element of corporate strategy. With time, these companies may find long-term, sustained advantage, but not dramatic immediate gains, from being green. For the big, heavy industries, the gains are closer to being assured. But smaller and “cleaner” companies will find surprising benefits as well.

In today’s world, no company, big or small, operating locally or globally, in manufacturing or services, can afford to ignore environ- mental issues. Of course, the opportunities and risks posed by the Green Wave vary by company and by industry. Context matters in the push for Eco-Advantage. No single strategy or tool will work in all companies or all circumstances. But Green Wave dynamics have become a fact of business life for nearly every organization. Com- panies that dive beneath the wave, submerging themselves in the hope that it will pass, will be disappointed by its enduring presence and pounding tenacity.

Why Small Businesses Should Care

What about small businesses? Can they sit this one out? In a word, no. Here are five reasons why.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 19

• Laws that once applied only to big business are encroaching on smaller enterprises. Even bakeries and gas stations must now com- ply with clean air regulations.

• Going after the consumption choices of individuals remains diffi- cult politically, but advocacy groups have no problem demanding that small businesses curb their impacts. So while personal cars may not come under NGO attack, the emissions from taxi fleets or delivery services make a relatively attractive target.

• The Information Age is reducing the costs of pursuing smaller-scale actors. New sensors, information systems, and communications technologies make tracking pollution and monitoring regulatory compliance cheaper every day. Even tiny enterprises now find it hard to fly under the radar.

• Large customers are putting pressure on small-business suppliers to comply with environmental standards. One little New York– based software developer we know found itself answering tough questions posed by a Tokyo-based telecom company with an ag- gressive auditing program for its supply chain. To stay on the list of preferred suppliers, the company had to implement an Environ- mental Management System—much more than a company its size would normally do.

• Small companies can be more nimble than their larger competitors. Entrepreneurial businesses can move quickly to take advantage of changing circumstances or meet niche demands. Q Collection, a “sustainable” home furnishings company, produces couches, ta- bles, and chairs without toxic dyes and with wood sourced entirely from sustainably-managed forests. The furniture is priced at the high end of the market, but the company has found a customer base of interior designers who want the natural option. And Hawaii-based Kona Blue has launched an environmentally friendly fish farm to meet the growing demand for fish raised free of hor- mones and antibiotics.

WHAT DOES A COMPANY SEEKING ECO-ADVANTAGE LOOK LIKE?

We studied dozens of companies during our four years of research. A few have not evolved in their thinking since the 1970s. They are still grousing about legislation and complying with it grudgingly.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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WHO SHOULD CARE THE MOST?

While we think this book is useful for anybody interested in a healthy environment and a healthy business community, clearly some companies need to worry about these issues more than others. And some sectors are poised for greater upside potential. We see growing risks and rewards for companies with:

• High brand exposure. Companies with substantial goodwill and intangible value (including Coca-Cola, Procter & Gamble, and McDonald’s) face special challenges.

• Big environmental impact. Those in extractive industries or heavy manufacturing (BP, Exxon, Alcoa, and LaFarge, for example) must expect growing scrutiny.

• Natural resource dependence. Companies that sell fish, food, and forest products (such as Cargill, Nestlé, and International Paper) are likely to be on the front lines as society faces very real natural limits.

• Current exposure to regulations. Environmental strategy questions play a particularly important role for those handling hazardous materials (DuPont) or operating in heavily regulated industries like utilities (AEP).

• Increasing potential for regulation. Automakers and electronics producers (like Ford and Intel) are facing new challenges with European “takeback” laws that require manufacturers to handle the disposal of their products after their customers are done with them.

• Competitive markets for talent. Companies in the service sector and the “new economy” (such as Citigroup, Intel, or Microsoft)— where primary assets can walk out the door if they are displeased with the company’s values—must stay on top of environmental issues.

• Low market power. Companies that rely on big customers that may start asking questions about environmental performance (most small- to-medium B2B companies) may be forced to raise their game. At the same time, those in highly competitive industries (such as small waste-handling businesses) will be hard pressed to step out in front of the competitors with initiatives that add costs or may not pay off for a long time.

• Established environmental reputations. Those with problematic histories should expect extra scrutiny. Companies with good track records will get more leeway—and may benefit from goodwill in the marketplace.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 21

Others have begun to see the business opportunities in going “beyond compliance.” A few have embarked on bold new initiatives to pro- vide solutions to the world’s environmental ills—like GE’s plan to sell renewable energy, efficient power generation, water purification, and much more.

The companies who “get” the interface between environmentalism and business—the ones that are on their way to reducing their en- vironmental impacts, or “footprints,” while generating significant profits and sustained Eco-Advantage—have no single profile. They range from global conglomerates to niche textile makers. However, we found certain patterns. The leading-edge companies go beyond the basics of complying with the law, cutting waste, and operating efficiently. They fold environmental considerations into all aspects of their operations. Specifically, they:

• design innovative products to help customers with their environ- mental problems or even create new eco-defined market spaces;

• push their suppliers to be better environmental stewards or even select them on that basis;

• collect data to track their performance and establish metrics to gauge their progress;

• partner with NGOs and other stakeholders to learn about and find innovative solutions to environmental problems;

• build an Eco-Advantage culture through ambitious goal-setting, in- centives, training, and tools to engage all employees in the vision.

For the top-tier companies, environmental management started out as something they had to do. But that’s no longer the case. They’ve evolved to the point where environmental management is second na- ture and their focus is now on mining the gold in environmental strategy.

ENVIRONMENTAL STRATEGY, SUSTAINABILITY, AND CORPORATE SOCIAL RESPONSIBILITY

Companies find many ways to talk about how they handle environ- mental and social issues. Some focus on “triple bottom line” perfor-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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22 Preparing for a New World

mance or sustainability. Others frame their work in terms of corpo- rate social responsibility, stewardship, citizenship, or environment, health, and safety. Any of these approaches can serve to galvanize action and create Eco-Advantage. The key lies in execution—includ- ing environment and social issues in business operations. But each company needs to find the language and organizational structures that work within its own culture.

At the operational level, managing sustainability issues, no matter what the company calls them, works best with a defined focus. Thinking about environmental challenges alongside social issues such as health care, poverty alleviation, or how to serve the “bottom of the pyramid”—the untapped market of the world’s poorest people— quickly becomes daunting. Our research suggests that the skills needed to manage environmental issues and social concerns are quite distinct. For example, what’s required to ensure that a company com- plies with air-pollution permits, say, will have little similarity to what’s needed to develop a strong employee wellness program.

Moreover, the environmental agenda has a concreteness that’s of- ten lacking on the social side. Obligations under the law are generally much clearer in the environmental realm, as are the opportunities for gaining a competitive advantage while doing the right thing. This is not to say that social issues are unimportant. Indeed, some are moral imperatives. As Professor David Vogel of Haas Business School has demonstrated, however, the business case for taking up the social agenda is much harder to establish. For all of these reasons, we focus on defining the strategies and tools companies can use to take ad- vantage of environmental opportunities.

WHY SOCIAL ISSUES CAN’T BE IGNORED

While environmental and social issues pose different kinds of challenges, they both connect to corporate reputation. Any company that thinks it can cover shortcomings in social performance with strong environmental results is kidding itself. Wal-Mart, for example, has recently started to work on a range of issues from renewable energy to sustainable fishing to its impact on land use. But it shouldn’t expect to win any prizes for corporate responsibility while falling short on basic social issues such as wages, health care, and labor relations.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 23

ECO-ADVANTAGE IS NOT EASY

We wish we could say that finding Eco-Advantage will be easy. But like excellence in any form, you have to work for it. We know this runs contrary to the message in many of the books and articles about “green business.” Ever since a few leaders like 3M demonstrated the payoffs of eco-efficiency, going green has been portrayed as a sure thing. Unfortunately, not every environmental effort produces win- win results.

Developing innovative products, bringing them to market success- fully, keeping customers happy, and other elements of business suc- cess are difficult enough. Adding an environmental dimension opens up new opportunities but adds another layer of complexity to the management challenge. Gaining an edge means learning new skills, operating in new ways, and working through some hard trade-offs. In truth, the story is even more subtle. Some initiatives “fail” by traditional measures but create intangible value for a company. It’s often hard to tell when hard-to-measure returns are worth pursuing.

This book attempts to bring nuance to a frequently oversimplified discussion. We dig into real-world experiences in all their complexity, highlighting pathways to success but also analyzing initiatives that didn’t go as planned or absolutely flopped. We’ve extracted lessons, both positive and negative, from these case studies so that those now seeking Eco-Advantage don’t need to start at square one.

WHY ENVIRONMENTAL INITIATIVES FAIL

Business strategies fail for many reasons, including poor planning, lack of commitment, and staffing the wrong people in key roles. But a few particular failings plague companies when they attempt to play in the environmental realm: focusing on the wrong issues, misunderstanding the marketplace, miscalculating customer reactions to green products, and failing to integrate environmental thinking fully into the work of the business. Chapter 10 reviews thirteen common stumbles that our re- search uncovered, but we’ll touch on some of them earlier in the book to highlight the challenges of the task executives have before them.

The bottom line: Environmental initiatives take no less work than other projects. And they fail just as often. Kermit the Frog was right: It’s not easy being green. But sound environmental strategy can be very rewarding.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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24 Preparing for a New World

WHO’S RIDING THE GREEN WAVE?

Defining a leader in financial performance is fairly straightforward. Pick your metric—stock performance, cash flow, or net income—and find the companies with the best or the most. Determining who the environmental leaders are proves far harder. Reliable data are often not available. Companies tend to measure performance in their own ways, if at all. No set of commonly accepted standards has yet emerged. Fundamentally, the environmental arena lacks the structure and rigor provided in the financial realm by the Financial Accounting Standards Board.

We began our research by trying to identify leading companies using the information available. (The details of our methodology can be found in Appendix II.) We drew on the environmental and sus- tainability scorecards generated by the analysts at Innovest Strategic Value Advisors, Sustainable Asset Management (which Dow Jones uses to produce its sustainability index), and others in the field of socially responsible investing. We combined these rankings with our own data, including a survey of executives. After narrowing a field of 5,000 companies to 200, we examined concrete measures of en- vironmental impact such as emissions and energy use. This process generated a list of leaders we call “WaveRiders” (see table). While they are unavoidably incomplete, these rankings provided a starting point for our in-depth company reviews and interviews.

We explored several dozen of these top companies in detail, seeking a diversity of industry, geography, and perspective on critical envi- ronmental issues. Aware that perception plays a large part in the rankings, we added to the mix a few companies that were too small to be noticed generally but were well-known in industry circles— outfits such as the Swiss textile manufacturer Rohner Textil. We also sought out leading companies that tend not to trumpet their envi- ronmental friendliness, like furniture maker Herman Miller or cell phone giant Nokia. Finally, we made a point of speaking to some companies, like GE and Coca-Cola, that have not been considered leaders but now are either expressly seeking Eco-Advantage or have elements of their operations that are top-notch and worth studying.

We’ve made no attempt to study every WaveRider. Some industries

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 25

Top 50 WaveRiders

United States International

1 Johnson & Johnson BP 2 Baxter Shell 3 DuPont Toyota 4 3M Lafarge 5 Hewlett-Packard Sony 6 Interface Unilever 7 Nike BASF 8 Dow ABB 9 Procter & Gamble Novo Nordisk 10 SC Johnson Stora Enso 11 Kodak Philips 12 Ford Bayer 13 IBM Holcim 14 Starbucks STMicroelectronics 15 Intel Alcan 16 Xerox Electrolux 17 McDonald’s Suncor 18 GM Norsk Hydro 19 Ben & Jerry’s Henkel 20 Patagonia Siemens 21 International Paper Swiss Re 22 Alcoa AstraZeneca 23 Bristol-Myers Squibb Novozymes 24 Dell IKEA 25 United Technologies Ricoh

are so well represented that it would have been repetitive to spend time with all the companies. Other stories are too unique to yield guidance for the typical business. Patagonia, for example, is arguably the most environmentally focused company in the world, but it’s owned almost entirely by the founder, Yvon Chouinard, who prides himself on putting values ahead of profits. Indeed, he often jokes that he never wanted to be a businessperson.

We did not shy away from companies facing significant environ- mental challenges due to the inherent demands of their industries. Many of the WaveRiders are still big polluters—some of the biggest

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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26 Preparing for a New World

in the world. But they have smaller footprints than others in their industries. We believe that relative position matters. As long as the demand exists for energy, chemicals, and metals, we think it’s valu- able to highlight those who do these dirty jobs best. But calling them leaders doesn’t mean that their work is done. In many ways it’s just beginning.

The Bottom Line

Have WaveRiders been hurt by their focus on environmental matters? Much ink has been spilled trying to prove or disprove the connection between environmental and financial performance. We don’t want to add to wild claims in either direction, but when we examine the stock performance of the publicly held WaveRiders versus the market over- all, the trend is clear (see chart). These companies have easily out- performed the major indices in the last ten years. (And yes, Dell is on our list. But even without this high-flyer, the value of WaveRider stocks has outpaced the market.)

A word of caution: correlation is not causation. The relative stock market success of our WaveRiders might well be a function of high- quality management generally rather than any specific green focus. Indeed, a number of studies have demonstrated that environmental performance is a powerful indicator of overall management quality.

A Sustainable Path?

No company we know of is on a truly long-term sustainable course. Three additional caveats are thus required:

• All of the WaveRiders are polluting and depleting the world’s nat- ural resource base to some extent.

• Many of the companies we highlight as leaders come from indus- tries with serious environmental impacts, but the WaveRiders are “best in class” or have practices from which others can learn.

• Not every environmental investment the WaveRiders have made has paid off. In fact, all of these companies have failed at times. But, overall, their environmental focus has helped them competi- tively.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 27

Stock Performance of WaveRiders

0

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200

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400

450

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These companies aren’t perfect. Some are strong on one aspect of environmental performance but weak on others. But they are all making strides. They are demonstrating a new way of doing business. In these companies, we see evidence of how to obtain Eco- Advantage—and the beginnings of a shift toward a world where en- vironmental protection and business success go hand in hand.

THE PATH AHEAD

The chapters in Part One, “Preparing for a New World,” describe the business playing field that increasingly makes environmental thinking both profitable and necessary. Chapter 2 spells out the ma- jor environmental challenges that every company faces. It reviews the state of the debate on ten major environmental problems facing the business world and humanity. In Chapter 3, we turn to the stake- holders who care about these issues and can affect a company’s for- tunes deeply. We lay out a framework for thinking about five groups of players, including watchdogs (such as NGOs), agenda setters (think tanks), business partners (customers), communities, and inves- tors (banks).

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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28 Preparing for a New World

After this important stage-setting, we lay out the basic elements of an environmental strategy in Parts Two and Three (Chapters 4 to 9).

Part Two, “Strategies for Building Eco-Advantage,” provides the playbook. Chapters 4 and 5 describe the eight key “plays” for cre- ating advantage from environmental thinking. We provide a frame- work for analyzing how these strategies reduce downside costs and risks or create upside opportunities—and whether the outcome is fairly certain or less bankable.

We turn to the nuts and bolts in Part Three, “What WaveRiders Do.” Chapter 6 spells out what leading companies do to foster an Eco-Advantage mindset. We lay out how WaveRiders make environ- mental thinking fundamental to their work. This approach sits at the core of a set of important tools and actions. Chapter 7 looks at how leading companies mine data, track their environmental performance, and work with others to refine their strategies. Chapter 8 explores the ways these leaders redesign their products and their supply chains. And Chapter 9 describes ways to build an Eco-Advantage culture that engages both top managers and line employees.

In Part Four, “Putting it All Together,” we provide an action agenda for building Eco-Advantage. Chapter 10 highlights what can go wrong on the path toward environmentally-driven competitive advantage. We review common pitfalls and demonstrate why so many environmental initiatives fail. In Chapter 11, we suggest a plan of attack with short-, medium-, and long-term action items drawn from the ideas and tools throughout the book. Finally, in Chapter 12, we review all of the elements required to execute an Eco- Advantage strategy.

GREAT TO GOOD

Sometimes people need a crisis to focus the mind. Wal-Mart CEO Lee Scott was moved deeply by the devastation wrought by Hurri- cane Katrina in 2005. He was also profoundly proud of his company for how it helped storm victims. But the company’s finest hour got him asking:

What would it take for Wal-Mart to be that company, at our best, all the time? What if we used our size and resources to make this country and

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Eco-Advantage 29

this earth an even better place for all of us: customers, Associates, our children, and generations unborn? What would that mean? Could we do it?

Scott went on in his speech to make the business case for attention to environmental issues and concluded on a note that many corporate CEOs might find mushy. “For us,” he said, “there is virtually no distinction between being a responsible citizen and a successful busi- ness. . . . they are one and the same for Wal-Mart today.”

What is Lee Scott really driving at? We think it’s a new definition of greatness. As business guru Jim Collins so clearly demonstrated in his pathbreaking book Good to Great, companies need a deep vision, culture, and commitment, as well as a set of critical approaches, to make the move to lasting greatness. What Scott and other CEOs are saying is that great, in the traditional sense, isn’t really good enough anymore. GE’s Jeff Immelt put it most succinctly during his ecoma- gination kick-off speech: “To be a great company, you have to be a good company.”

Companies that are both great and good inspire. Customers feel strongly about those brands, and employees work harder (and have more fun doing it). Seeking Eco-Advantage is a challenging road filled with significant potholes. There’s no easy route from green to gold. But the WaveRiders are showing the way.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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30

Chapter 2 Natural Drivers of the Green Wave

In the mid 1990s, executives at consumer products giant Uni- lever saw a big threat to one of their product lines coming over the horizon. The supply for the frozen fish sticks busi- ness was at risk because the world’s oceans were running out of fish.

Confronted with such a stark example of nature’s limits, Unilever decided to take action. With Dan Esty’s help, and in partnership with World Wildlife Fund, the company set up the Marine Stewardship Council, an independent body to promote sustainable fisheries around the world. The Council certifies fisheries where the total catch is limited so that fish populations do not diminish over time. To create specific in- centives for fishermen to seek certification, Unilever commit- ted to buying 100 percent of its fish from sustainable sources by 2005.

Unilever executives see this commitment—and the sub- stantial costs involved—as a business issue, plain and simple. Said Co-CEO Antony Burgmans, “As one of the world’s larg-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 31

est purchasers of fish, it is in Unilever’s commercial interest to protect the aquatic environment from fishing methods that will ultimately destroy stocks.” One supply chain manager put it succinctly: “We are not environmentalists. We are not scientists. But if we don’t do anything, we will be out of business.”

Such enlightened self-interest seems obvious. But getting a clear fix on pollution impacts and natural resource constraints is harder than it sounds. The voices out there on environmental issues can be loud— and sometimes shrill and unmeasured. Certain segments of the en- vironmental community have been preaching doom and gloom for so long that the public has tuned out. In some sense, the public has less reason to listen. In the four decades since the United States woke up to the environmental challenge, smokestack industries have re- duced their air and water pollution dramatically. Globally, though, the trend lines are broadly negative.

In 2005, the United Nations released its extensive Millennium Eco- system Assessment, a comprehensive study of twenty-four natural support systems. Most are in decline. From reduced freshwater avail- ability to soil degradation to the risk of climate change, the problems are pervasive and many require urgent attention.

Guess which national magazine wrote in 2006: “Around the world, humanity has reduced nature’s capacity to dampen extremes to an astonishing degree. . . . half the world’s fresh water now co-opted for human use, half the world’s wetlands drained or ruined. . . . the list goes on and on.” Mother Jones perhaps? No, it was Fortune, in an article about the growing dangers of climate change and our reduced capacity to handle it.

The fact that the remaining problems are not as “in your face” as the earlier issues of air and water pollution adds to the challenge. Today’s threats are often difficult to see and arise from diffuse sources, such as small businesses, households, and even individual behavior. For example, although no one car generates enough pol- lution to cause harm, Americans’ 300 million vehicles as a whole produce serious smog and substantial levels of carbon dioxide.

Issues like global warming and loss of species can seem physically remote, long-term, and not very pressing. Compared to the imme- diacy of the air we breathe or the water we drink, it’s hard to get worked up about consequences that are far off. But long-term issues

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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32 Preparing for a New World

have a nasty way of sneaking up on us. Left unattended, these types of problems can prove intractable when they do arrive.

SOME CONTEXT: PROTECTING OUR ASSET BASE

In our world of modern conveniences, it’s easy to forget one immu- table truth: We live within nature’s boundaries. The natural world is not just that pretty thing we admire on vacation. Natural resources are the assets on the planetary balance sheet. Some of this natural capital is renewable, such as forests. Other assets such as oil are being drawn down daily. Imagine a company that systematically depleted its own assets without any plan to replenish them. Wouldn’t it come under tremendous fire from angry shareholders, perhaps even finding itself struggling to survive?

As Mats Lederhausen, a veteran executive at McDonald’s, told us, “In a prosperous society, you really have only two assets: people— their creativity and skills—and the ecosystem around them. Both need to be carefully tended.”

ENVIRONMENTAL ISSUES TO WATCH

As the business world wakes up to the fact that many natural re- sources are finite, a second reality is emerging in parallel: Limits can create opportunities. Companies that manage nature’s bounty and boundaries best will minimize vulnerabilities and move ahead of their competitors. That much seems obvious, but turning environmental thinking into Eco-Advantage requires mastery of an astonishing range of issues. Which ones are real and pressing? Which can a com- pany safely ignore without placing itself at a serious competitive dis- advantage?

The environmental concerns that are most urgent in any particular company will vary a great deal. What’s more, environmental issues evolve over time. Scientific understanding becomes more refined. Cer- tain products, drawing on one set of natural resources, are overtaken by substitutes. Customer preferences and tastes shift. A successful manager needs to recognize the dynamic nature of the environmental management challenge.

In this chapter we offer up a quick sketch of the “Top 10” envi-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 33

TOP 10 ENVIRONMENTAL ISSUES

1. Climate Change

2. Energy

3. Water

4. Biodiversity and Land Use

5. Chemicals, Toxics, and Heavy Metals

6. Air Pollution

7. Waste Management

8. Ozone Layer Depletion

9. Oceans and Fisheries

10. Deforestation

ronmental issues facing humanity (see box). The most important is- sues for any particular company will depend on its specific circum- stances—industry, location, and business model. The precise order from a planetary scale is clearly up for debate, and scientists would argue over the magnitude and urgency of these challenges. Never- theless, as a starting point for business analysis, we’ve ranked them in rough order of importance.

For each issue, we provide a “state of play” assessment that spells out our best scientific understanding, as well as an analysis of busi- ness consequences that highlights how the issue might affect specific companies and industry groups. By necessity, this chapter is more executive summary than exhaustive study.

CLIMATE CHANGE

Overview

No issue looms larger in terms of potential strategic impact on busi- ness than the buildup of greenhouse gases in the atmosphere. In the media, all this fits loosely under the heading “global warming,” but the problems go far beyond rising temperatures. What we’re facing is more accurately described as “climate change.” This catch-all in- cludes rising sea levels, changes in rainfall patterns, more severe droughts and floods, harsher hurricanes and other windstorms, and

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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34 Preparing for a New World

new pathways for disease. (Malaria, for example, spreads to places with warmer climates.) Without being overly dramatic, it’s fair to say that climate change could threaten the habitability of the planet.

Some skeptics suggest that the science underlying this problem is not very solid. So let’s review what is known and what is not by focusing on a few questions:

1. Is global warming real? 2. What and who are causing it? 3. What could climate change do to the planet and to us? 4. Who’s going to be hit hardest?

The short answers are (1) yes, (2) humans, (3) destabilize our basic ecosystems, and (4) mainly the poorest, lowest-lying, and hottest countries, but everyone is vulnerable.

is it real?

Let’s start with what we know. First, greenhouse gases in the atmo- sphere—including carbon dioxide, methane, and several other trace gases—trap heat that would otherwise bounce off the planet back into space. In fact, without the greenhouse effect, the Earth would be too cold to support life.

But humans have added substantially to this heat-trapping capacity over the past several centuries. Since pre-industrial times, the level of carbon dioxide in the atmosphere has increased from about 280 parts per million (ppm) to 380 ppm today (see figure). This may not seem like much of a difference, but it is. What we’re seeing now is un- precedented. Ice core samples from the Arctic show that the green- house gas levels over the last 650,000 years had never risen above 300 ppm—until the modern era. Now we’re facing the real prospect of a further increase to 500 or even 600 ppm over the next 50 to 100 years.

The scientific consensus that this change is caused by human activity is strong. Are there uncertainties in climate change science? Of course. The speed, magnitude, and regional distribution of effects are all mat- ters of dispute. But out of over 900 peer-reviewed articles in scientific journals on climate change, none disagreed with the “consensus posi- tion” that climate change is real and deserving of policy attention. As Science magazine said, “Politicians, economists, journalists, and

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 35

Carbon Dioxide in the Atmosphere

250

300

350

400

1700 1750 1800 1850 1900 1950 2000

Year

n oilli

m r e

p str

a p

2 O

C

CO2 concentration

Peak CO2 for past 650,000 years

Source: Carbon Dioxide Research Group, Scripps Institution of Oceanography, Univer- sity of California.

others may have the impression of confusion, disagreement, or dis- cord among climate scientists, but that impression is incorrect.”

who and what are causing it?

We know where greenhouse gases come from. Carbon dioxide (CO2) accounts for over 70 percent of the problem. CO2 emissions come mainly from the burning of fossil fuels. These emissions emerge from three sectors in roughly equal portions: transportation, residential and commercial, and manufacturing. The next most important source of greenhouse gas emissions is methane, particularly from natural gas leaks and off-gassing from rice paddies and flatulent cows (believe it or not). The remainder is a mixture of trace gases, including oxides of nitrogen.

Two other points about greenhouse gases bear mentioning. First, these gases blanket the earth, so it really doesn’t matter where they

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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36 Preparing for a New World

are emitted. This means that no country (or small group of countries) acting alone can solve the problem. Global cooperation and joint action is essential. Second, greenhouse gases persist in the atmosphere for decades or even centuries, so today’s problem is a function of emissions over many decades. On the other side of the equation, even if we were to reduce greenhouse gas emissions drastically and im- mediately, atmospheric concentrations wouldn’t begin to fall until mid-century.

Some say the human contribution is small compared to the natural carbon cycle, which includes everything from decaying plants to vol- canic eruptions. Technically, that is true. But it’s actually beside the point: What humans do contribute is throwing off the natural equi- librium. Think of a bathtub with the faucet on and the drain open. As long as the water flowing out matches the water flowing in, the tub will not overflow. But open the faucet just a tiny bit wider and the water will eventually spill over the sides.

We also know that the current problem has built up over many years. Emissions from developing countries, especially China and In- dia, are growing fast and cannot be ignored. But it is indisputable that the industrialized countries, particularly the United States, have caused the bulk of the existing problem.

what will happen to the planet and to us?

To be honest, no one knows exactly what climate change will do. But we’ve got some pretty good theories and forecasts:

Hotter temperatures. Nine of the ten hottest years on record hap- pened after 1995, with 2005 the hottest ever. While the average tem- perature increase may seem small, much of the strain comes from higher and more frequent temperature spikes. The 2003 heat wave in Europe killed 26,000 people, and half the summers in Europe could be that hot by 2040.

Rising sea levels. Ice is melting all over the world. The U.S. Rockies have seen a 16 percent decline in snowpack, and Africa’s Mt. Kili- manjaro has lost 80 percent of its ice in recent years. The potential result of some of this melting, specifically in Greenland and Antarc- tica, is a significant rise in sea level. Large portions of many low- lying countries could be permanently flooded, and coastlines could recede well into coastal communities worldwide.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 37

Increased intensity of windstorms. A year before Hurricane Ka- trina slammed the Gulf Coast, the New York Times reported a wide- spread belief among scientists that climate change is noticeably in- creasing the intensity of hurricanes. Whether any single mega-storm, such as Katrina, is a signal of climate change remains unclear. As ocean temperatures rise, however, the prospect of more severe hur- ricanes and typhoons cannot be doubted.

Disrupted ecosystems. Fundamental changes in what grows where and which species die or thrive loom on the horizon as temperatures rise, rainfall patterns shift, and hydrological (water) flows change. Maple trees may no longer survive in Vermont. Warmer temperatures in British Columbia and Alaska have already allowed the pine bark beetle to thrive where it once could not, destroying millions of acres of forests. Some forecasts suggest that parts of the U.S. Midwest may become as drought plagued as it was in the Great Depression, dra- matically reducing productivity across America’s breadbasket.

Displaced peoples and environmental refugees. The tragic scenes from post-Katrina New Orleans showed us the chaos and suffering that often results when thousands of people are suddenly forced to move. In the coming decades, we may see a forced exodus from both small Arctic villages and large swaths of countries like Bangladesh, where tens of millions of people live just above sea level. Where will all these people go?

who will be hit hardest?

Countries without the capacity to handle drastic change will likely not fare well. Low-lying countries, especially those close to the Equa- tor, face especially significant hurdles. The most exposed nations are often among the world’s poorest, making the potential consequences all the more dire. Parts of the United States are also at risk. Low- lying areas in the hurricane belt, including much of the southeastern United States, will be exposed to increased wind damage and greater storm surges.

Business Consequences

Climate change is a highly contentious issue because the costs both of addressing the problem and of not addressing it could be very

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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38 Preparing for a New World

high. Greenhouse gases are linked to the burning of fossil fuels, so successfully controlling emissions will require action on the part of not only every business on the planet but every individual.

Rising temperatures and more unpredictable weather could affect a broad range of livelihoods and industries. Changed rainfall patterns could be devastating to farmers. Ski resorts could melt away. And more severe storms could wreak havoc on transportation systems and airlines.

Some businesses are already feeling the effects profoundly, such as the insurance industry. The economic cost of extreme natural disas- ters has increased tenfold since the 1950s. In the face of further risk and uncertainty, reinsurance companies, like Swiss Re and Munich Re, are actively pushing for action on climate change.

Beyond the direct weather and temperature effects, every company will face the second-order effects of climate change, particularly as regulatory policies to control greenhouse gas emissions kick in. Car- bon charges and higher fuel prices will require redesigning distribu- tion systems, supplier relationships, and many other aspects of busi- ness operations. For airlines, logistics companies, and any business with heavy transportation needs, vehicle fuel efficiency will become critical. Those industries that rely on petroleum feed stocks, such as chemical and plastic manufacturers, will need to rethink their mate- rials use strategies.

Regulations limiting greenhouse gas emissions are already a real- ity in Europe and Japan. Most observers of the policy process expect that carbon constraints will be imposed in the United States in the next few years. Indeed, at a recent summit of power company lead- ers, a GE executive asked how many of his peers thought that a mandatory cap on greenhouse gas emissions was coming, no matter which party wins in the post-Bush era. Nearly all raised their hands.

Changes on this scale create large opportunities. Consumers, com- munities, and businesses will need new technologies, products, and services as they adapt to climate change and a carbon-constrained world. Plenty of smart companies have the product lines and inge- nuity to make money filling this need. As households and businesses move to reduce their energy consumption, for example, a company like Honeywell can offer sophisticated thermostats as well as efficient

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 39

heating and air conditioning equipment. And those who provide tech- nologies that mitigate the problem at its source—with greenhouse gas–free energy supplies, for example—will clearly profit. Likewise, any company that demonstrates cost-effective ways to capture and hold carbon dioxide instead of letting it reach the atmosphere, called “carbon sequestration,” will win big markets very quickly.

THE CLIMATE CHANGE IMPERATIVE

Climate change is shaping up to be the biggest environmental strategy issue the business world has ever faced. The potential effects are both broad and substantial. The need to rethink strategy with an eye on cli- mate change impacts and regulatory constraints is fast becoming a cor- porate imperative.

ENERGY

Overview

In 2005, ChevronTexaco began running full-page ads in major mag- azines, declaring, “the era of easy oil is over.” A high-ranking official at another major oil company told us that world-wide oil production would peak in the next few years. Geologically, oil gets more difficult and more expensive to extract every day. Whether or not climate change policies drive us away from fossil fuels in the short run, the bottom line is clear: the energy future will not be the same as the energy past.

Energy is not exactly an environmental problem like the others on our list. But every society needs energy, and energy production, no matter what the method, can damage the environment. Fossil fuel burning, of course, causes pollution and contributes to the build up of greenhouse gases in the atmosphere. Even “clean” energy sources like hydro power have their own environmental consequences like changed groundwater flows and obstructed fish migration.

Some forecast an end to what energy guru Dan Yergin has called the era of “Hydrocarbon Man.” Others dispute this claim. While acknowledging that a carbon-constrained world is upon us, they en- vision new technologies that will allow the capture of carbon dioxide

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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40 Preparing for a New World

and dangerous pollutants like mercury, thereby enabling fossil fuel burning for years to come.

Clearly the exact path of our energy future is yet to be charted, but whatever course it takes will affect every industry. To cite only one example: At present more than two-thirds of U.S. electricity is generated from fossil fuel combustion—51 percent from coal, 17 per- cent from natural gas, and 3 percent from oil. With energy demand continuing to rise, particularly in the fast-growth areas of the devel- oping world such as India and China, the price of such fuels will likely remain high for the foreseeable future.

That’s the bad news. The good news is that oil prices above $50 per barrel transform the energy marketplace. Renewable energy sources such as wind, solar, geothermal, bio-based fuels, and tidal power become increasingly price competitive. In some regions, wind power has already begun to capture a noticeable market share. Al- though the levels of current production are low, the growth rates of the renewable energy industries are impressive. Global wind power capacity has been growing at over 30 percent per year, and solar power at over 60 percent. Simultaneously, support for nuclear power has been rising, even in some environmental camps, because it pro- duces no local air pollution and no greenhouse gases. Nuclear plants remain highly controversial for security and waste disposal reasons. But the economics of energy can create both new opportunities and odd bedfellows.

Some energy commentators, as well as public figures like Governor Arnold Schwarzenegger, have heralded the arrival of a hydrogen economy as the solution to both our energy and climate change prob- lems. But hydrogen is really a way of storing and distributing energy, not an energy source. As a fuel for vehicles, hydrogen would ensure zero local emissions, a boon to cities. Electricity would still be needed, however, to generate hydrogen from water. Thus, hydrogen is only zero-emissions if the electricity to produce it comes from a renewable non-emitting source such as wind or solar power. Hydro- gen may be an important part of the energy mix down the road, but we are many years from having an affordable mass-market system for converting, transporting, and delivering it.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 41

Business Consequences

Inevitably, the changing energy picture creates new competitive pres- sures. For big energy users—those in heavy manufacturing or trans- portation, for example—resource and energy productivity may be- come a major point of strategic advantage. With higher prices a near certainty, incentives for energy conservation will rise, and energy ef- ficiency investments will pay substantial dividends. Companies selling goods and services that promise to improve energy efficiency will claim market share. For example, Tide has released a new cold-water detergent with advertisements touting the substantial energy savings from not having to use hot water.

The demand for renewable energy is also rising. Many large U.S. states, including California and the entire Northeast, now mandate that utilities provide a certain percentage of their supply through renewable energy. Some companies are following suit without legal pressure. Microprocessor manufacturer AMD has committed to pur- chase renewable energy to power all its Austin, Texas, facilities for ten years. Companies as diverse as Starbucks, FedEx Kinko’s, and Johnson & Johnson buy 5 to 20 percent of their energy from renew- able sources. Most strikingly, Wal-Mart has committed to having 100 percent of its energy come from renewable sources.

Alternative energy companies are hot investments as venture cap- italists large and small envision an energy future that looks quite different from the past. Major Silicon Valley players, including the celebrated investors Kleiner Perkins, have started “clean tech” funds to invest mainly in renewables. The share of venture capital going into these funds has been rising rapidly (see figure). By all accounts, these markets for environmental investments will be extremely large: a United Nations report indicates that money flowing into clean tech will be in the trillions over the next decade. From solar cells to wind turbines to hydrogen vehicles, entrepreneurs are working to make their solution the energy source of the future. Like all new ventures, not all of these businesses will succeed. But some will profit mightily.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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42 Preparing for a New World

Percent of Total Venture Capital Invested in Clean Tech (United States and Canada)

0%

1%

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Source: Cleantech Venture Network, 2006

WATER

Overview

Water is the essence of life. It’s also a critical input to agriculture and many industrial processes. Companies around the world now face real limits on access to water. A rising population and growing econ- omies are putting substantial stress on resources in drier regions. Even where water is relatively plentiful, water pollution is increas- ingly a concern. For business, these multiple, complementary factors create both water quality and water quantity challenges.

quality

Everywhere you look governments and communities are growing more concerned about protecting the quality of drinking water sup- plies. In the United States and other developed nations, quality has generally improved in the past several decades. Long gone are the days where waterways were so contaminated that they might catch on fire, as the Cuyahoga River in Cleveland did in 1969.

But our waters are still threatened by industrial effluent, agricul- tural runoff, and contamination from sources as diverse as mining

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 43

operations, construction sites, and our lawns. Governments across the world continue to mandate ever-lower flows of pollutants into rivers and streams. Companies must plan for increasingly stringent water pollution standards.

In the developing world, a dismal 90 to 95 percent of all sewage and 70 percent of industrial waste goes untreated directly into rivers, lakes, or the ocean. Protecting precious water supplies has emerged as a priority in every country.

quantity

The Millennium Ecosystem Assessment estimates that as many as two billion people live with water scarcity. It’s a central issue in drier regions the world over. The problem boils down to simple supply and demand. The Earth is a closed system, so freshwater supply is basically fixed. But rising populations and an increase in irrigated crops continue to drive up water demand. Indeed, agriculture con- sumes about 70 percent of the water we use. In many regions, we use more water than the natural rainwater cycle provides. As a result, nature’s underground water supplies, called aquifers, are being drawn down. The giant Ogallala Aquifer, for instance, which lies under parts of eight U.S. states and holds more water than Lake Huron, has been dramatically depleted. Once again, we are drawing down our natural capital.

The problems of water quantity are already acute in China. Hun- dreds of cities face potentially severe shortages within the next few years. The water table under some of China’s main wheat-growing regions is dropping precipitously. In just six years, grain production has fallen by 70 million tons (equal to Canada’s total crop), driving up food prices for people who can’t afford it.

These water quantity concerns may actually be understated. There’s a growing recognition that immediate human needs are not the only ones that matter. Nature also needs water to support plants and animals, which in turn support us. The conflict between human demands and ecological needs can get ugly at times. In 2002, more than 34,000 Chinook and Coho salmon died in Oregon’s Klamath River as the water flow, drained by expanded irrigation, fell below the level needed to support fish life.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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44 Preparing for a New World

10-SECOND PRIMER: WETLANDS

A relatively new issue on the corporate radar is the need to protect wet- lands. In the bad old days (pre–1989), the Army Corps of Engineers would drain what they then called swamps to prevent disease or control flooding. We now see wetlands as a vital ecosystem that provides life support and habitat for plants and animals. For humans, they filter pol- lution and control storm surges. (The loss of wetlands in the New Orleans area is one reason the 2005 flooding was so catastrophic.) Companies must now manage their land resources and any development plans with careful attention to wetlands preservation.

Business Consequences

Companies must expect increased scrutiny of their water use. Those deemed to be using too much water or degrading water quality will face political attack, public backlash, intensified regulation, and even legal action.

For Coca-Cola, it’s impossible to disentangle the company’s license to operate from how it handles water. In Kerala, India, the local government shut down Coca-Cola’s bottling facility for two years out of concern about the plant’s water consumption. Coke isn’t alone. Many companies depend on water and are growing more active in managing the problem. As Unilever’s environmental report recog- nizes, “Working with consumers to foster the responsible use of wa- ter is clearly in our long-term interest . . . because without clean wa- ter many of our branded products would be unusable.” Put simply, people can’t wash clothes using Unilever detergent if there is no water.

Water quality concerns are a world-wide issue, not just a luxury item for rich countries to worry about. Just ask the managers at Celulosa Arauco’s $1.4 billion Valvidia pulp and paper mill in Chile. In the past, untreated waste entering a local wetlands might not have seemed like a big deal. But when the company’s effluent was impli- cated in the deaths of thousands of swans, the government shut the mill down for a month, costing the company over $10 million. As the tragedy unfolded, a series of executives were demoted or ousted, including the CEO and environmental manager. Ultimately, the com-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 45

pany had to shut the plant down for another two months to fix the problems.

Coca-Cola, Unilever, and many other companies operating in the developing world are trying to manage downside risks. On the pos- itive side of the ledger, companies that provide solutions to water problems may gain favor with local communities. Some may even profit as they identify new market opportunities. Over the last few years, mainly through acquisition, GE has built a multibillion dollar water infrastructure business. With these investments, GE has posi- tioned itself to “solve the world’s most pressing water reuse, indus- trial, irrigation, municipal, and drinking water needs.” GE has clearly spotted the Green Wave and wants to ride it.

BIODIVERSITY AND LAND USE

Overview

“Our personal health, and the health of economies and societies, depends on the variety of ecological goods and services that nature provides.” A statement from Greenpeace? No, it’s from mining giant Rio Tinto.

Biodiversity—a catch-all term for the spectrum of plant and animal life around us—preserves our food chain and the ecosystems on which all life depends. It also holds the prospects of new drugs, foods, and other products derived from newly discovered species. By its very nature, biodiversity is hard to measure, but it’s increasingly consid- ered a critical natural resource that society must manage like any other. As a ballpark figure, one respected team of researchers put the value of biodiversity and ecological services in the trillions of dollars per year.

signs of decline

How serious is the problem of biodiversity loss? The U.N.’s Millen- nium Ecosystem Assessment affirmed one scientific hypothesis: The extinction rate is now as much as 1,000 times higher than the average rate over Earth’s history. Over the last five billion years, biologists tell us, the Earth has gone through five major tumultuous periods with rapid evolution and massive species purging. We have now en-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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46 Preparing for a New World

tered the sixth major extinction period, but this is one of our own making.

The main problem is the pattern of human development, which tends to destroy natural habitat. Toxic chemicals and pollution also play a key role, and climate change is rising on the list of causes. Recent evidence shows that the pending extinction of many frog spe- cies—the canaries in the coal mine of biodiversity—is caused by warming temperatures.

The best ecological scientists estimate that one-quarter of the planet’s species are in some danger of extinction within a single hu- man generation. We may live to see the end of the polar bear, many of the big cats, including the majestic tiger, and millions of less char- ismatic species. Some casual observers might mock concern over lost insects and micro-organisms, yet these species play a critical role in the complex web of life. The not-so-funny joke is that bugs and bac- teria could get along fine without us, but we wouldn’t survive long without them.

A related problem is the introduction of non-native plants and animals into ecosystems. These “invasive” species, often arriving as a result of trade and shipping, can threaten ecosystems, damage na- tive wildlife, and cause of millions (even billions) of dollars of harm. For example, zebra mussels in the Great Lakes clog water intake pipes and damage boats. Congressional researchers estimated that these pesky mollusks cost the power industry alone more than $3 billion in the 1990s.

land use

A key factor in the decline of biodiversity is habitat loss. With pop- ulation growth fueling more land use and a rising standard of living, pressures on ecosystems are seemingly unavoidable. But our devel- opment choices have often made matters worse. Suburban sprawl, with little attention to the preservation of open space, has fragmented ecosystems, jammed highways, and diminished the quality of life for humans and animals alike. In the developing world the problem is very different, but no less acute. The development pressure comes from land conversion for crops and slash-and-burn agriculture. It’s a matter of survival for the world’s poor, but the price is high in terms of lost biodiversity.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 47

With open space in decline, environmentalists are pressing govern- ments to preserve wild places by creating new parks. A number of companies have contributed land and resources in support of these efforts. Wal-Mart, in a bid to overcome its image as the #1 engine of sprawl, launched a program called Acres for America. The com- pany committed to preserve land equal in area to what it says is its entire operational footprint, over 130,000 acres, providing something of an offset for the land it has consumed. This action isn’t a full environmental strategy by any means, but it is one attempt to answer the concern some communities have about how Wal-Mart gobbles up land.

Business Consequences

Many companies face pressure about their contribution to sprawl. Communities are recognizing that they must plan land use carefully to avoid breakdowns in transportation systems and a reduction in quality of life. Companies in the densest areas of development— northern Virginia, Florida, metropolitan Atlanta, California, and the entire Southwest—are justifiably worried about how they’ll get their goods and even their employees where they need to be.

Wherever companies locate factories or stores, communities and governments are demanding more careful consideration of the dam- age to ecosystems. Those who use natural resources most intensively, including real estate developers, mining enterprises, and timber com- panies, will face the biggest scrutiny. (In Chapter 6, we’ll see how Rio Tinto is proactively managing biodiversity issues to reduce en- terprise risk and improve access to new lands.)

Aside from the drug industry, which harvests new compounds from plants and animals, the upside of managing for biodiversity is more speculative and the stories fewer. But the potential is big. Bil- lions of years of evolution have produced some stunning products for human technology to copy. Spider silk, for example, is five times as strong as steel, yet stretches. A spider-silk net, if it were big enough, could stop a jet in flight without breaking.

It’s no surprise, then, that some companies are quietly studying animals and plants for what we can learn about how they operate. When Interface Flooring sent its designers out to the forest to study

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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48 Preparing for a New World

how the natural world is designed, they noticed extraordinary simi- larities in nature’s patterns, but no exact repetition. The company then captured that feel by creating a new line of carpet tiles with varied designs that can be placed in any order on the floor and still make a coherent whole. This natural look allows for lower produc- tion costs and much faster installation. The new brand, called En- tropy, became Interface’s fastest selling product ever.

From an economic point of view, biodiversity and natural habitats have real value, though the precise economic benefits are difficult to quantify. Forests, for example, provide more than wood: They purify polluted water and reduce floods. We see a growing interest in the public and private sectors in finding ways to measure and price the “ecosystem services” the natural world provides. Even without exact measurements, some governments have taken action. China banned logging near areas where flooding has become a problem. They clearly valued the flood protection more than the forestry revenues. And instead of building a $4 billion water filtration plant, New York City spent only $600 million to buy land in the Catskill Mountains to preserve the natural water purification services.

The private sector is also getting in on the act. In an effort to keep its water pure, Perrier subsidizes the reforestation of watersheds and pays farmers near its water sources to go organic.

Finally, efforts to control the effects of invasive species are gaining momentum. From the Asian long-horn beetle to zebra mussels, these stowaway species promise to add to shipping costs for anyone mov- ing goods internationally as governments pass on the burden of pro- grams to control the problem.

CHEMICALS, TOXICS, AND HEAVY METALS

Overview

Part of what makes air pollution—and all forms of pollution—more dangerous is the presence of toxic elements. Exposure to chemi- cals like dioxin, a by-product of production processes such as pap- ermaking, and heavy metals such as lead and mercury can create severe public health risks. The fear of cancer or possible birth defects has led to stiff chemical control laws in both the United States

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 49

10-SECOND PRIMER: THE PRECAUTIONARY PRINCIPLE

The “precautionary principle,” a bias toward safety in the face of uncer- tainty, lies at the heart of the EU approach to environmental regulation. “Better safe than sorry” seems like common sense to many. Others note that, in practice, the precautionary principle works as a bias toward the status quo. It may also deter innovation or be used by “protectionists” to shield existing producers from new competition.

and in Europe, where a strict precautionary principle is in place (see box).

The European Union’s new REACH directive mandates that man- ufacturers, not regulators, must prove the safety of every new and old chemical—a complete reversal in the burden of proof. The law is not without controversy, but given the public support for height- ened protection, it’s likely to stand.

The legal liability surrounding toxics can turn out to be virtually unlimited. For years, scientists knew that exposure to asbestos was dangerous, but the legal system is just now catching up with the science as judges and juries are imposing sizable damages on com- panies that produced asbestos. More than 70 companies have been driven into bankruptcy, including longstanding businesses such as Johns Manville and W.R. Grace.

New sources of concern could easily follow the path of asbestos, becoming significant sources of legal exposure in the years ahead. Endocrine disruptors, chemicals used in everything from insecticides to detergents to plastics, may change hormone levels in animals and people, and thus throw biological processes such as reproduction, growth, and immune function out of whack. The amount of scientific research and critical attention on how these chemicals affect us is rising fast. One telling sign: The annual number of articles in medical journals studying the health effects of hormonal agents rose from 200 in 1990 to nearly 1,000 in 2002.

Another relatively new concern, at least in the United States, are chemicals in flame retardants called PBDEs. These chemicals were adopted for public safety reasons and applied to a wide range of products from electronics to clothing. We now know that PBDEs are

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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50 Preparing for a New World

neurotoxins that potentially affect learning and attention and can be passed along through breastfeeding. Breast milk studies show con- centrations 20 to 100 times higher in U.S. women than in countries where they’ve been banned. California has decided to ban PBDEs by 2008.

heavy metals

The science on lead could not be more clear. The metal can cause brain damage and severe developmental problems in children. Its elimination from gasoline, paint, water systems, and other pathways of human exposure is one of the great public health success stories. Governments are now applying the same regulatory rigor to mercury, cadmium, and other heavy metals.

One particular area of concern is the airborne mercury released from burning coal. The vaporized mercury settles in waterways and from there enters our fish, our food, and us. The United States houses over 600 coal-fired power plants and thousands of smaller-scale boil- ers. Activists are pressing the U.S. Environmental Protection Agency (EPA) for action, and stronger standards on mercury releases are a near certainty in the coming years.

Mercury is one of the main reasons for recent EPA fish advisories, warning the most sensitive populations such as pregnant women and children against even moderate consumption of certain types of fish. And the concern about mercury is justified. A study from Mt. Sinai Hospital and Albert Einstein Medical School in New York suggests that prenatal mercury exposure increases the risk of reduced brain function and developmental problems in 630,000 children each year, at a cost to society of $8.7 billion. Roughly 10 to 20 percent of women of child-bearing age have mercury levels in their blood in excess of EPA health standards.

Business Consequences

Companies today must pay careful attention to what they produce and how they produce it. Products containing toxics or heavy metals face special regulatory hurdles. Failure to track these rules carefully can lead to trouble, as Sony found out during its PlayStation Christ- mas debacle. The cost of managing chemicals in production pro-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 51

EVEN WAVERIDERS CAN TAKE A TUMBLE

Chemicals and toxics are complicated issues to manage correctly, with ugly consequences for companies that get caught on the wrong side. DuPont has recently fought charges that it ignored the dangers of a chemical called PFOA, which is used to make Teflon. In 2004, the com- pany agreed to a $100 million–plus settlement in a class-action law suit involving PFOA-contaminated drinking water in Ohio and West Virginia. The company also faced a U.S. EPA accusation that it had withheld in- formation about the safety of the chemical. DuPont paid $16 million in fines and penalties to settle the charges. Notwithstanding the fact that PFOA is unregulated, DuPont concluded that it was not worth continu- ing the legal battle given the damage being done to its reputation.

cesses, including the disposal of toxic waste, can be very high. Toxics can cost a business in many ways; just try to unload a contaminated property, for example.

Tracking chemical use carefully, with an eye toward the redesign of products and processes to eliminate unnecessary toxins, is often a good investment. Computer and printer giant HP, for example, is removing flame retardants from its products ahead of the likely reg- ulations.

Moreover, concern is growing about whether chemical exposures are contributing to an increase of certain diseases and conditions, particularly in children. Is the rise in rates of autism, childhood can- cer, and certain allergies related to toxics? It may be that doctors are better at diagnosing these conditions now than in the past. But some parents wonder if chemicals in our food are playing a role. And when parents become emotional, pressure always mounts on companies and governments to manage the chemicals more closely.

The potential legal liability for companies producing and using toxic substances or heavy metals is very high. And the potential for “court of public opinion” decisions that condemn companies that now know better could be even higher. That’s why cosmetic giants like Revlon and L’Oréal agreed to remove the chemicals called phthalates from their cosmetics.

On the upside, we see an opportunity to feed the growing demand for healthy alternatives in everything from food to cosmetics. Whole

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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52 Preparing for a New World

Foods, a leader in providing a health-seeking public with fresh or- ganic foods, is one of the fastest growing supermarkets in the coun- try. What was once a niche play is now turning into a large market opening.

AIR POLLUTION

Overview

Not long ago, commuters couldn’t see six traffic lights ahead in Los Angeles. Today air quality is not perfect, but it’s much better. Sig- nificant air quality controls on factories, cars, and other emissions sources have radically reduced air pollution levels over the past thirty years in the United States, Japan, and Europe. We all can breathe a little easier.

The gains have also helped ecosystems, like the forests and lakes in the northeastern United States that suffered from acid rain in the 1980s. One of the big success stories in recent environmental policy is the vast reduction of sulfur dioxide emissions in the United States. The 1990 Clean Air Act amendments, signed by the first President Bush, created a free market for companies to trade sulfur dioxide emissions allowances. The program proved to be a bigger success than anyone predicted. The concentration of sulfur dioxide in the atmosphere is less than half of what it was—all for a fraction of the cost originally projected.

While our air is cleaner, it is still not clean in many places. Serious health risks remain for people who suffer from respiratory illnesses like asthma. The European Commission estimated that air pollution causes over 300,000 premature deaths in Europe and costs $100 bil- lion in lost work time.

In the developing world, outdoor—and especially indoor—air pol- lution remains a very serious problem. Indoor air pollution, caused mainly by open fires for heating and cooking, creates particularly severe health risks. In the developed world, indoor air pollution cre- ated by chemical relases from furniture, carpet, and paints is a factor in so-called sick building syndrome.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 53

Business Consequences

Controls on air emissions will remain strict across the board. Stan- dards and enforcement are likely to tighten modestly in the developed world while rising substantially in developing countries. Companies with potentially significant air pollution impacts must plan to face this challenge. It is no surprise that those in dirty businesses, like cement, are at the front of the parade. Lafarge, for example, has led its industry into a major sustainability initiative with the Geneva- based World Business Council for Sustainable Development.

As air quality factors are better understood, the air quality issue affects a more diverse group of companies. Regulations that used to apply only to the big guys now also apply to smaller businesses. In addition, companies that make indoor products treated with chemi- cals are hearing some noise from customers. Questions from the mar- ketplace are a big reason that WaveRider Herman Miller spends a quarter million dollars annually testing its office furniture for off- gassing.

WASTE MANAGEMENT

Overview

In the 1970s, the “don’t pollute” messages—and the crying Native American on TV—alerted the public to the problem of litter and waste. Suddenly, everyone began to worry about garbage. A gener- ation grew up understanding that we had too much waste and needed to recycle, and the results have been dramatic. Today, the United States recycles about 20 percent of its glass, 40 percent of paper, 50 percent of aluminum, and 60 percent of steel. Other countries have done as well or better. Sweden recycles 90 percent of its glass and aluminum, and Japan 86 percent of its steel.

But the disposal of wastes from factories, offices, and residences is still a challenge. By volume, the largest part of the problem is solid waste—the everyday materials discarded by homes and offices—that we either incinerate or dump in landfills. Although smaller in volume, toxic waste presents a bigger management challenge. In most devel- oped countries, a manifest system requires the tracking of waste in

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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54 Preparing for a New World

10-SECOND PRIMER: SUPERFUND

In older industrial areas, the cleanup of abandoned hazardous waste sites remains a big issue. The EPA estimates that the 1,200 Superfund sites across the country will require about $200 billion to clean up over the next thirty years. As anyone who’s seen the movie A Civil Action knows, under the liability provisions of the Superfund law, anyone found re- sponsible for the waste at a site can be held liable for the full cost of cleanup, even if the toxics were disposed of legally. Escaping liability for cleanup costs is difficult, and the penalty for mismanaging Superfund issues can be very high.

great detail, often from “cradle to grave.” Indeed, the failure to keep track of toxic waste can be a serious crime. In the United States, more people go to prison for mishandling hazardous waste than for any other environmental issue.

An emerging problem is what to do with all our outdated elec- tronics equipment. This “e-waste” is becoming a burden for countries and companies alike. Every older computer has about four pounds of toxic materials including a who’s who of the worst offenders— flame retardants, lead, cadmium, and mercury. Given that over 300 million computers are awaiting disposal in the United States alone, the toxic waste math is not pretty.

Business Consequences

What’s behind the now-famous business mantra, “Reduce, Reuse, Recycle”? We see three main issues. First, it’s often the law. No busi- ness can afford to be careless with hazardous waste. The penalties— from possible jail time for managers to multimillion dollar liability settlements—are just too great.

Second, waste reduction can cut costs. Companies save money on landfill tipping fees when they produce less garbage. Hazardous waste disposal costs can be ten times greater. Many of our Wave- Riders have drastically reduced waste by redesigning products and processes and by increasing recycling efforts. Furniture maker Her- man Miller has even set a goal of zero waste to landfill, and fully

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 55

expects to meet it. This is a monumental feat, and not every company can pull it off. But many companies can save a lot of money just by producing less waste, and not only because they’re going to the dump less often. Too many companies are throwing out valuable stuff. If they capture it instead, they will save both money and materials.

Third, new “extended producer responsibility” laws, particularly in Europe, are forcing industries like electronics to design out some elements or take their products back and handle disposal themselves. As a result and in anticipation of such laws spreading globally, smart companies are developing “take-back” programs. Nokia, for exam- ple, saw the emerging legislation and developed an extensive program in Europe, ahead of regulations.

Apart from reducing cost and risk, some businesses are seeing up- side potential—a chance to profit from recycling and reuse. The For- tune 100 list of the fastest growing companies includes firms like Schnitzer Steel Industries and Steel Dynamics that recycle scrap metal into steel—very “old economy” but very high growth potential. A number of bigger companies are trying to head off the niche recyclers and keep the profits from the end of the value chain for themselves. Xerox reclaims toner cartridges in part to keep others from refilling and reselling them.

In some industries, recycling helps companies reduce their contri- bution to nearly all of our Top 10 environmental problems. Take aluminum production, one of the dirtiest and most energy-intensive processes in modern society. More aluminum recycling means less need for virgin ore, less smelting, and fewer new mines. These re- ductions mean lower greenhouse gas emissions, less toxic runoff (from mining), and reduced land use and biodiversity problems. In short, recycling in the aluminum industry greatly reduces the burden on air, land, and water—a win-win situation for everyone.

OZONE LAYER

Overview

In what became worldwide news in the 1980s, a hole in the planet’s protective ozone layer opened up over Antarctica. The culprit was a set of chemicals called chlorofluorocarbons (CFCs) breaking down

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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56 Preparing for a New World

the ozone in the stratosphere. Like climate change, the depletion of the ozone layer is an inescapably global issue. Emissions of CFCs from anywhere spread everywhere. No country can address the prob- lem on its own.

With a thinned ozone layer, the world becomes a more dangerous place, with reduced agricultural productivity, higher risk of skin can- cer, and other health problems. One EPA study pegged the potential damage at 150 million cases of skin cancer and three million deaths during the course of the 21st century at an economic cost of $6 trillion. These facts and the solid science behind the findings of a growing ozone hole led the global community to respond. In 1985, twenty-two countries—representing most of the world’s CFC pro- duction—negotiated a treaty, the Vienna Convention, to address the problem. Two years later, the same parties and twenty more coun- tries added the Montreal Protocol to the treaty agreeing to phase out the production of CFCs. Such stringent new regulations might seem like a business burden. In Chapter 4, however, we’ll see how DuPont developed CFC substitutes, then advocated tough regulations to gain a competitive advantage in a transformed marketplace.

The Montreal Protocol and follow-on amendments are perhaps the greatest success in international environmental law. Even the most morose doom-and-gloomers agree that we’ve made substantial pro- gress on this problem. The ozone hole has stopped growing. If cur- rent emissions controls are maintained, it will be largely closed by about 2065.

Business Consequences

The world has banned CFCs and related chemicals. Many businesses had to find substitutes to use in the production of aerosols, solvents, coolants, and cleansers. But some of the substitutes were also found to be dangerous to the ozone layer, and they have also been banned. Some chemicals slated for phase-out by international agreements have particularly important uses and few substitutes, so controversy remains. Most notably, the U.S. government has argued that methyl bromide, which is used as a fumigant on farms, should not be banned despite its recognized harmful effect on the ozone layer.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 57

NORTH ATLANTIC FISHERY COLLAPSE

During the 1990s, North Atlantic commercial fish populations of cod, haddock, and flounder fell 95 percent. The value of the British catch alone declined $300 million from 1994 to 2002. The U.N.’s Food and Agricultural Organization estimated that sustainably managed fisheries would yield $16 billion in higher revenues.

OCEANS AND FISHERIES

Overview

The capacity of the world’s oceans once seemed endless both as a source of fish and as a place to dump waste, but humanity has out- stripped even this vast scale. As Unilever found out, fish stocks have decreased dramatically. Over three-quarters of the world’s fisheries are over-exploited and beyond the point of sustainability. Put simply, we are catching fish faster than they can reproduce. Gigantic fishing nets scour the ocean and sweep up every swimming thing with a shocking efficiency, while traditional trawlers now deploy sophisti- cated sensors to find schools that previously evaded traditional fish- ermen. Fish have nowhere to hide.

Ocean habitats are also in trouble. About 20 percent of the world’s coral reefs are dead, and more are dangerously degraded. In the end, though, our waters are really indicators of other environmental prob- lems. Climate change kills the coral, air pollution settles into water- ways, and farm runoff moves down rivers to the ocean. In the Gulf of Mexico, we’ve created a dead zone with virtually no sea life. At the mouth of the Mississippi River, chemicals and fertilizers have killed everything in an area bigger than New Jersey.

Business Consequences

Is the demise of our oceans a problem for most businesses? Probably not directly. But for those whose livelihoods depend on fishing, rec- reation, and tourism, the effect of declining fisheries may be severe. And for anyone who eats fish—a major source of protein for many

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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58 Preparing for a New World

people around the world—the issue will be immediate. As noted ear- lier, Unilever’s response is to work to increase the supply of certified fisheries that protect populations. Other solutions are emerging, too, like increased fish farming.

DEFORESTATION

Overview

Deforestation should not be a big issue in the United States; forest cover is increasing across most of the country. But how trees are cut remains an issue. Clear-cutting scars the landscape and leads to soil erosion and water pollution. Cutting down “old growth” forest de- stroys precious habitat and often inspires an uproar of protest. And while some North American and European timber companies have gotten religion on the need to manage their forests with care, others around the world have not.

In South America and in some Asian countries (Indonesia, for one), deforestation is barely slowing. Logging for wood is only part of the problem. A bigger issue is converting lands (a nice way of saying cutting and burning) to agricultural use to feed a growing population coupled with a growing demand for meat that requires vast areas for cattle grazing. Even with reforestation, we lose millions of acres of forest every year. Since 1990, the net result is the destruction of for- ests equal in area to Texas, California, and New York combined, or in European dimensions, an area larger than Spain and France com- bined.

Business Consequences

Every company that uses wood, paper, or even cardboard packaging has some stake in, and responsibility for, the state of our forests. When McDonald’s first realized 15 years ago that litter was an issue, it began working with a New York–based NGO, Environmental De- fense, on reducing packaging. Now activists are turning on less ob- vious users. Catalogers are being held responsible for something that they never thought about before. Limited Brands, owner of Victoria’s

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Natural Drivers of the Green Wave 59

Secret, has faced a torrent of protests about where its catalog paper comes from—a campaign abetted by clever ads claiming the com- pany has a “dirty secret.”

For years, service businesses with no smokestacks or other visible effects on the environment worried little about environmental issues. No longer. We’ll see later how a group of big companies—some obvious (Staples), some more surprising (Bank of America and Toyota)—have banded together to deal with issues such as paper use.

OTHER ISSUES TO LOOK OUT FOR

Environmental issues resist categorization. Specific concerns are vital to some companies or industries and all but invisible to others. Every company needs to be on the lookout for fast-changing realities and how they affect its own circumstances. By way of an all-purpose checklist, here are a few additional issues to watch:

Food Safety

Fears about bioterrorism and the security of food and water supplies loom large in some people’s minds. Consumer pressure to reduce chemical use in agriculture is also growing fast. The demand for or- ganic food has skyrocketed. But perhaps the most potentially explo- sive issue is the use of genetically modified organisms. Many consum- ers, particularly in Europe, fear that genetic modification might make food more dangerous or that we’ll face problems we can’t predict as we “play God.” To date, there is little evidence that genetically mod- ified food causes health problems. As we’ll get to in later chapters, however, we live in a world where what stakeholders feel can be just as important as the facts.

Radiation

Emissions-free nuclear power could be an answer to climate change, although serious fears remain about exposure to radiation from ac-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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60 Preparing for a New World

cidents or from improper handling of spent fuel. Many people are also questioning the use of radiation as a sterilizer. Irradiating food, for example, can be an effective way to prevent spoilage, but the word “radiation” in the same breath as “food” makes many people uncomfortable.

Desertification

In a number of places around the world, deserts are growing and encroaching on human livelihoods. Poor land use choices, over- development, and the general warming and drying of the planet are the likely causes. The effects are unpredictable but could be far reach- ing. In 2002, schools in Seoul, South Korea, were shut down when a dust cloud blew in from China’s growing deserts 750 miles away. China’s dust has even reached the United States.

A TOOL TO MANAGE THIS COMPLEXITY: ISSUE SPOTTING THROUGH AUDIO ANALYSIS

The sheer range of environmental issues companies need to track can seem overwhelming. Before launching into the process of creating a corporate environmental strategy, every business needs to develop an “issue map.” To get started, we suggest undertaking what we call an AUDIO analysis.

The purpose of this analysis is to help you “listen” to your busi- ness, up and down the value chain, for issues and opportunities. It starts with a grid of the ten key challenges that we’ve identified on one axis, and five categories on the other: Aspects, Upstream, Down- stream, Issues, and Opportunities (see the table on pages 62–63 for a sample AUDIO analysis for a big-box retailer).

For this exercise, bring together people from a range of business functions including environmental professionals, purchasing agents, marketing executives, and so on. Together, brainstorm on what as- pects of environmental issues touch the business. For example, do you use a great deal of energy and produce greenhouse gases in large quantities? Do you rely on fresh water? Next, look both back in the value chain (upstream) and forward (downstream) and ask a similar

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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set of questions. How do these issues affect your suppliers or your customers? Even if an issue is not central to your business, it could be critical to your suppliers, which ultimately makes it your issue, too. You may not use toxics or heavy metals in your production, but as Sony found out, if your suppliers do, it can wreak havoc on your business. Downstream effects are also your problem. What do your customers do with your product, especially when they are finished with it? The fact that your own business does not directly cause harm will not shield you from responsibility. Your customers’ problem is your problem.

After this first big picture view from 30,000 feet, dig down and ask what kind of challenges or issues arise from these environmen- tal problems—both for you and the rest of the value chain. Are there areas in your operations that rely on a particular resource (like water), and what would happen if that resource were in short supply? Finally, look for opportunities to profit. Would lowering your product’s energy use help your customers? Could you sell more product?

We’ll come back to this tool in Chapter 11, but for now, think of the AUDIO as a starting point and a foundation on which to build a corporate environmental strategy. This issue map looks at how environmental dilemmas affect your business, your suppliers, and your customers simultaneously. The problems are real and here to stay. An AUDIO analysis can help you think carefully about how to develop strategies to deal with the risks and exploit opportunities presented by these issues. Only then can you create Eco-Advantage.

Natural Drivers of the Green Wave 61

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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62

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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63

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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64 Preparing for a New World

THE ECO-ADVANTAGE BOTTOM LINE

Environmental problems can’t be ignored. Yes, conditions are improving in some cases. But rising threats are sure to change traditional ways of doing business and even our way of life. The range of issues is daunting. A few, like climate change and water concerns, will be major problems for all of society. Nearly every company, large and small, will be forced to address them. Other problems, such as toxic exposures, hit some industries much harder than others. In the face of these diverse pressures, companies need to stay on top of the big issues, understand where the science stands, and know where in their value chain the impacts lie. The precise effects of these sizable forces on markets, industries, and com- panies are unpredictable, creating both risks and opportunities. But smart companies develop tools to make sense of the rapidly evolving market conditions they face.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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65

Chapter 3 Who’s Behind the Green Wave?

In 1995, activists from the environmental group Greenpeace boarded Shell’s defunct North Sea oil platform, the Brent Spar. Protesting Shell’s plan to dump the rig in the North Atlantic Ocean, they unfurled giant banners claiming the platform would pollute the ocean with thousands of pounds of toxic chemicals. The situation went from bad to horren- dous when Shell turned water cannons on the protestors in one of the worst public relations moves in corporate history. Customers across Europe were soon cutting up Shell credit cards and boycotting its gas stations.

The irony of this international incident is that Shell’s plan to sink the Brent Spar had real scientific merit. Outside ex- perts and Shell scientists had studied the disposal plan care- fully, and it was even backed by the British government. Greenpeace later admitted it had its facts wrong, exaggerat- ing the level of pollution a thousandfold. But being right was not the point. In the court of public opinion, Greenpeace made its case and won. Its pitch was convincing and super-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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66 Preparing for a New World

ficially plausible—after all, how could sinking a 300-foot oil platform not be harmful to the environment?

To its credit, Shell learned from the fiasco and is now a global leader in the evolving art of stakeholder relations, including the craft of dealing with tenacious NGOs like Greenpeace. But a company that worries only about activists and associated public relations nightmares will miss the bigger picture.

Like it or not, an ever-growing chorus is demanding that compa- nies explain and justify how they treat the environment. Among the major new players:

• Consumers who wonder what’s in the products they buy and how safe they are for themselves, their children, and the environment

• Business-to-business customers who demand that suppliers reveal how they make their products and exactly what’s in them

• Employees who want to align their personal and professional val- ues and need to know what their company stands for

• Banks which reinforce all these concerns by factoring environmen- tal variables into their loan decisions

• Insurance companies that have come to view environmental risks as business threats

• Stock market analysts who study environmental performance as a signal of over-arching management quality.

All these pressures can dramatically affect a company’s fortunes and determine what projects get financed, whether the best employees stay with the company, and how easy it is to get products to market. Smart companies are dealing with these pressures head on. In the aftermath of its Brent Spar embarrassment, Shell launched a well publicized “Tell Shell” campaign and now does a great deal of stake- holder management to avoid problems down the road. At its Atha- basca Sands operations in Canada, the company has spent millions on countless meetings with local communities, regional governments, and indigenous populations. The goal is to make sure that everyone who can seriously affect Shell operations is heard early and fully.

Companies like Shell work hard to catch the Green Wave before it catches them. But before we dig into the how, it’s vital to under- stand the who. Below is the Eco-Advantage “playing field”—five core categories of stakeholders who care about the environment:

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 67

Eco-Advantage Playing Field

Investors

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• Rule-Makers and Watchdogs such as government regulators and environmental groups

• Idea Generators and Opinion Leaders including think tanks and academics

• Business Partners and Competitors as well as suppliers and B2B customers

• Consumers and Community including local officials and the gen- eral public

• Investors and Risk Assessors such as stock market analysts and bankers

An executive responsible for corporate social responsibility (CSR) at a large consumer products company recently asked Andrew, “Can

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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68 Preparing for a New World

you think of a company that’s embraced CSR without feeling pres- sure from outsiders first?” She stumped us—not many come to mind. Sure, a small number of WaveRiders have deep-seated beliefs and the culture to back them up. Herman Miller, the Michigan-based office furniture company, is one. But in general, big brand-centric compa- nies don’t have an epiphany without a push from true believers.

In the following brief tour through the five core stakeholder groups, we’ll look at examples of how they influence companies to- day and at what trends will shape tomorrow’s playing field.

RULE-MAKERS AND WATCHDOGS

Traditionally, these players have been the “muscle” that motivated corporate environmental awareness. Strict regulations, mostly at the federal level, have been driving progress for decades.

Today, the governmental role is changing as rule-makers and watchdogs expand both vertically and horizontally. By “vertical,” we mean the different levels of government that now issue regula- tions, from local planning commissions to global accords. Down the vertical scale, we find state and local officials who have been more aggressive enforcers of environmental laws than the federal govern- ment in the United States in recent years. At a higher level, we see global agreements like the Kyoto Protocol creating new worldwide demands on companies to reduce greenhouse gas emissions. The “horizontal” dimension refers to the emergence of new actors track- ing environmental performance, such as NGOs, the media, and self- appointed watchdogs, including bloggers with websites read by millions.

Some of these influencers are even creating parallel, privately run initiatives that take on the feel of regulations as more companies adopt them. The Forest Stewardship Council (FSC) is an independent body that has set criteria for how to manage a forest’s resources sustainably. Increasing numbers of retailers and big purchasers of wood and paper are asking for the FSC label on what they buy. Whether it’s FSC or the competing industry-led set of guidelines (the Sustainable Forestry Initiative), some sort of quasi-regulation is likely to be in place for forest companies in the coming years.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 69

NEW AND SURPRISING PARTNERSHIPS

How NGOs and business interact has changed dramatically over the last few decades. All of the mainstream environmental NGOs now include engagement with the business world as a core function. They’ve learned to use the stick and the carrot. As the Financial Times noted:

Environmentalists have smartened up their act. Gone are the woolly jumpers and sandals. In their place are smart suits and ties. . . . just days after Greenpeace activists scaled a British Petroleum offshore rig to protest against new oil exploration . . . [Greenpeace director] Mr. Melchett had dinner with John Browne, British Petroleum’s chief executive.

NGOs have only gotten more sophisticated as interactions have ex- panded from the occasional dinner to full-fledged partnerships. At the 2002 Earth Summit in Johannesburg, Greenpeace stood shoulder to shoulder with the World Business Council for Sustainable Development to seek global action on climate change.

NGOs

It’s nearly impossible to know how many NGOs are out there for sure, but one study found over 20,000 multinational NGOs. Hun- dreds of thousands more are based in individual countries. Many thousands at both levels are focused at least partially on the envi- ronment.

The biggest environmental NGOs have established themselves as multinational entities of immense reach and influence. These include Environmental Defense, World Wildlife Fund, Natural Resources De- fense Council, Sierra Club, Greenpeace, Conservation International, Nature Conservancy, National Wildlife Federation, and Friends of the Earth. These are the old guard, with many pushing past the ripe old age of 30. Despite recent cracks in the foundation of the envi- ronmental community, these groups retain considerable public influ- ence. One study showed that 55 percent of opinion leaders trusted NGOs, while only 6 percent trusted business.

Many of these organizations were founded on models of confron- tation, whether making waves in the courts (like the Natural Re-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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70 Preparing for a New World

sources Defense Council) or sitting in trees and boarding oil plat- forms (like Greenpeace). Pressure can be global as in Shell’s case, or it can shine like a spotlight on key executives at corporate head- quarters. A few years ago, some clever agitators stood outside Fen- way Park in Boston to hand out baseball cards depicting both the Chairman and CEO of Staples, Inc. as perpetrators of global defor- estation. Printed on the back of the cards were some strong criticisms of the office supply giant. In the words of one Staples executive, “They basically accused us of single-handedly clear-cutting the world’s forests.”

Sometimes these “in your face” tactics can go too far, such as when Michael Dell’s wife faced angry protestors outside her place of busi- ness about Dell’s lack of electronics recycling. Or they can go way over the line to illegal and dangerous action. In 1998, Vail, the fa- mous Colorado ski resort, was the victim of arson when extremists torched multiple buildings, supposedly in protest over the resort’s expansion into pristine habitat. No company can plan completely for irrational action, but every company can greatly reduce the odds of even coming under attack. Other ski areas—most notably Aspen— have avoided aggressive criticism by making environmental concerns a central element of their business strategies. In fact, the Aspen Skiing Company recently committed to using wind power for 100 percent of its operations. Respected watchdog groups rate the company the number one ski resort in the West on environmental dimensions, while Vail continues to get low marks.

In fact, confrontational approaches are on the decline. NGOs are now choosing to partner with companies at least as often as they attack them. In a later chapter, we further explore partnerships and how to make sure they are effective and create real value, but we want to highlight here two of the longest running and best NGO– corporate partnerships out there:

• Chiquita and the Rainforest Alliance. A company with a checkered past, Chiquita felt immense pressure to change its ways in the early 1990s. Over the next decade, working closely with Rainforest Al- liance, the company transformed its Latin American banana op- erations.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 71

• McDonald’s and Environmental Defense. McDonald’s may be the king of fruitful NGO partnerships. The company started in the early 1990s working with Environmental Defense on packaging, and together they eliminated the Styrofoam “clamshell” in which McDonald’s had sold a billion-plus hamburgers.

Even though NGOs frequently collaborate with companies these days, the watchdog role remains very much alive within many groups. Often an NGO can work with a company on one issue and attack it publicly on another. Companies find this more than a little frustrating, but it’s a reality they must face. Whether global in focus or local in scale, whether pushing their agenda from behind the scenes or in front of the cameras, whether making nice or making trouble, NGOs are a force to be reckoned with. A company without a plan or strategy for dealing with them runs a growing risk of getting dunked.

Government and Regulators

Jim Rogers, the CEO of energy producer Cinergy, has said that he’s always worried about new regulations that can change the value of a business instantly—what he calls “stroke of the pen” risk. The world of environmental regulation is dynamic. Legislators are con- stantly revising federal laws and agencies routinely issue new regu- lations. More dramatically, regulatory requirements are emerging from new places in the legal hierarchy. From ordinances issued by local zoning commissions to directives from the European Union, environmental law is getting ever more complicated and multilay- ered.

Companies that fail to track regulatory developments

risk serious competitive disadvantage.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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72 Preparing for a New World

“vertical” changes—local pressure

Across the United States, local and state governments are stepping in to fill gaps they see in environmental management. About thirty U.S. states have plans to cut greenhouse gases within their borders, often including renewable energy portfolio standards that force utilities to generate up to 25 percent of their energy from non–fossil fuel sources. California has adopted tough new air quality standards re- quiring a 30 percent reduction in greenhouse gas emissions from ve- hicles by 2016. This mandate promises to reshape the market for cars and trucks. Auto companies who are ready with “clean car” technologies, such as hybrid gas–electric engines, will thrive. Others will suffer lost market share and decreased profitability.

Even cities are getting in on the act. Mayors across the world are taking action to reduce greenhouse gas emissions, cut back on waste, and control sprawl (see box).

MAYORS ON THE MOVE

In early 2005, the Kyoto Protocol, an international agreement to cut greenhouse gas emissions, went into effect. It was ratified by 160 coun- tries—with the notable exception of the United States. Seeing that gap, Seattle mayor Greg Nickels led the U.S. Conference of Mayors to unan- imously adopt its own Climate Protection Agreement. Over 350 mayors of large and small cities from across the political spectrum have individ- ually committed to match Kyoto goals and cut greenhouse gas emis- sions.

“vertical” changes—international pressure

At the other end of the vertical spectrum, new international regula- tions promise to reshape the competitive playing field. In the face of global-scale climate change concerns, China has implemented strin- gent requirements for fuel efficiency in cars that are five miles per gallon higher than U.S. standards. Guess which superpower’s auto companies are least prepared to meet these emerging market stan- dards.

In recent years, the European Union has developed a series of hard- hitting directives. Some observers believe these new laws will greatly

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 73

improve environmental quality, while others say they will destroy entire industries. They will almost certainly do both. Three directives in particular are having enormous impact:

1. Restriction of Hazardous Substances Directive (RoHS, pronounced “rose”)

2. Waste Electrical and Electronic Equipment Directive (WEEE) 3. Directive on Registration, Evaluation, and Authorization of Chem-

icals (REACH).

The first two focus mainly on toxics and recycling in the electronics industry, but they are powerful indicators of the laws coming down the pike. Today, the focus is on computer and cell phone manufac- turers. Tomorrow, many more industries will be on the hot seat. And don’t think these rules affect only European companies—any com- pany making a product for the EU market must comply.

RoHS bans a list of hazardous substances such as lead, mercury, and cadmium from use in new electrical equipment. Manufacturers have been working hard to find substitutes for the lead solder that holds integrated circuits together. Of course, there’s been grumbling about the selective focus of the requirements and questions raised about how effective RoHS really will be. But perfectly constructed or not, this directive is not going away. The rule also represents an interesting shift in regulatory strategy. As IBM’s top environmental executive Wayne Balta puts it, “Laws like RoHS show the movement from regulating outputs to regulating inputs—from what comes out of the smokestack to what goes into products.”

WEEE concerns the other end of the product’s life cycle. It de- mands that all manufacturers from a wide range of industries, from electronics to appliances, pay for proper disposal or recycling of their products. WEEE represents the latest development in the growing category of take-back laws that place cradle-to-grave responsibility for products on the manufacturers. These laws encourage value chain thinking by imposing a real cost on companies that do not design products with the end of life in mind. Some estimate that RoHS and WEEE compliance could translate into a surcharge of as much as three percent of the cost of goods sold—not a trivial amount.

Forward-thinking electronics producers are starting to explore de- signs that eliminate all toxic substances so they’ll be ready for any

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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74 Preparing for a New World

THE POLLUTER PAYS PRINCIPLE

The long-term regulatory trend in every country we’ve studied is toward making those who pollute (1) limit their harms and/or (2) pay for the damage they cause. This Polluter Pays Principle ensures economic effi- ciency and protects property rights, giving it a strong legal logic as well. The push for companies to “internalize costs,” as economists would say, means that a competitive edge based on sending pollution up the smokestack or out a waste pipe will be hard to maintain over time.

possible legislation. Even if no future legislation comes, the effect of these directives on the electronics industry has already been pro- found. The American Electronics Association declared that the new rules “fundamentally alter every high-tech company’s business strat- egy not just for the European Union, but also for its global supply chain management.”

When we spoke with executives at Intel, Dell, and AMD, we heard repeatedly that the laws are forcing changes in their designs and pro- cesses globally. It makes no fiscal sense, they say, to produce chips or assemble electronics one way for distribution in a market as big as the European Union and differently everywhere else. Bottom line: The EU’s aggressive policies are driving change around the world.

over-reach-ing?

The most ambitious piece of legislation working its way through EU headquarters in Brussels is the Directive on Registration, Evaluation, and Authorization of Chemicals, known as REACH. This sweeping restructuring of Europe’s approach to the regulation of chemicals threatens to realign a number of major industries.

REACH requires producers to register every chemical they make— about 30,000 in all—and measure the potential risk to public health. REACH builds on the idea that society should not introduce new materials, products, or technologies if the risks are unknown. It’s the poster child for the precautionary principle. The directive shifts the burden of proving safety from governments to business. Companies will have to demonstrate that a product is safe or that the benefits to society outweigh the risk.

Many companies, including several pharmaceutical giants, claim

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 75

REACH will kill innovation and become a competitive drag on com- panies operating in Europe (see box). Advocates for REACH say the requirement that companies prove the safety of their products is long overdue and will reduce the risks of releasing chemicals with un- known affects on humanity. Both sides make plausible arguments— REACH could be needed for public health and compliance just might cost billions of euros while constraining new product development. Either way, REACH will undoubtedly have a large impact on some very big industries.

BEATING THE COMPETITION ON REGULATORY COMPLIANCE

Business leaders often overestimate the cost of regulations and under- estimate their own capacity for innovation. For example, industry esti- mates of the compliance costs for cutting acid rain under the U.S. Clean Air Act of 1990 ranged up to $1,500 per ton. Over the first ten years of the program, the price per ton never went above $200, and was usually far lower. As BP’s Lord John Browne has said about his industry, “Every time there’s a new piece of legislation, we say it’s the end of our industry. . . . [We have] an appalling track record in this regard.” Companies that figure out cost-effective ways to comply with regulations can cut costs relative to their competitors and establish Eco-Advantage.

beyond regulation: a new governmental toolbox

Over time, governments around the world have broadened their ap- proaches to environmental protection. The French, for instance, have recently enshrined the right to a safe and healthy environment in their constitution and deeply embedded the precautionary principle in their regulatory regime. While some use of “command and control” man- dates persists, the shape of regulation is changing.

Rather than dictating a particular pollution control technology, governments are coming to recognize the value of setting perfor- mance standards, which give companies discretion in how to re- spond. Many countries, led by the United States, have moved toward regulations that use economic incentives. Such market mechanisms include taxes on pollution or polluting products, tradable emissions allowances, and deposit-refund schemes for harmful products such

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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76 Preparing for a New World

as batteries. The United States has used market mechanisms to phase out lead from gasoline, eliminate ozone layer–damaging CFCs, and reduce acid rain.

Europe is using an emissions trading market to reduce greenhouse gas emissions and meet its requirements under the Kyoto Protocol. Under this scheme, thousands of facilities (utilities, refineries, and so on) across the continent receive greenhouse gas allowances. The com- panies must then either reduce their emissions to meet their quotas or buy more pollution allowances in the marketplace.

Even well-intentioned regulatory regimes that harness economic incentives and promote maximum efficiency can have negative effects on business if not carefully structured and coordinated. The EU’s Kyoto Protocol rule, adding charges of roughly $30 per ton on car- bon dioxide releases, promises to impose significant burdens on com- panies and even whole industries. If the results were simply to reward those who are most effective at cutting greenhouse gas emissions, the reshaping of markets might be of little consequence. But this pollu- tion surcharge could broadly diminish Europe’s industrial competi- tiveness unless companies find low-cost emission reductions or until major competitors, including the United States and China, take on the same burdens.

Another important trend is the move toward “information regu- lation.” The Toxics Release Inventory in the United States requires companies to report on their chemical releases to air, water, and land. Similarly, the PROPER law in Indonesia gives industrial facilities public, color-coded scores based on their pollution management. The ratings run from black for no pollution control to green for signifi- cant pollution prevention efforts to the top score of, yes, gold for facilities that keep emission levels near zero.

The pressure for transparency focuses on more than reporting on emissions and pollution. Companies are increasingly required by the Securities and Exchange Commission, the Financial Accounting Stan- dards Board, and the European Union to share information about their environmental performance and how it affects their financial status. Although implementation rules are still being developed, the United States’ Sarbanes-Oxley Act (see box) appears likely to require companies to disclose much more about environmental risks than

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 77

ever before. And the law makes CEOs responsible for knowing about these liabilities or risk going to jail for their ignorance.

SARBANES-OXLEY ACT OF 2002

As often happens in the U.S. Congress, quick reactions make for strange legislation. In 2002, legislators felt pressure to do something about the scandals plaguing the corporate world. One significant result was the Sarbanes-Oxley Act, a law aimed mainly at improving financial liability disclosure but causing a flurry of activity on related, broader topics. A critical clause of the act, Section 401(a)(j), mandates that companies “shall disclose all material off-balance sheet transactions, arrangements, obligations . . . that may have a material current or future effect on fi- nancial condition.” The “material” issues in this broad provision, and the related Section 409, include environmental liabilities.

The precise contours of what Sarbanes-Oxley requires are still being clarified. Some potential liabilities are fairly obvious, like the costs of cleaning up a contaminated manufacturing site. But what about more remote risks? Should companies estimate their potential liability for con- tributing to climate change? The only certainty is that the trend is toward more disclosure, not less.

Disclosure as a category includes more than just financial risks. A growing body of “right-to-know” laws requires that companies dis- close potential risks to public welfare. The U.S. Toxics Release In- ventory is the best known law of this sort, and the gold standard. But other, smaller laws are making waves as well. California’s Prop- osition 65 forces companies to label products containing any chem- ical that creates a 1-in-100,000 risk of cancer. Faced with having to label their products as carcinogenic, tuna packers removed lead from the solder used to seal cans. And winemakers have shifted from lead foil to plastic bottle-top wrapping.

While some disclosure laws mandate the release of information on negative environmental attributes, others focus on highlighting pos- itive characteristics. The U.S. EPA has created a number of programs and awards, such as Energy Star and Climate Leaders, to recognize companies with top-tier performance. Governments are also using substantial purchasing power—buying everything from recycled pa-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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78 Preparing for a New World

per to buses powered by natural gas—to make markets in environ- mentally preferable products.

Don’t believe all the talk about governments being stodgy bureauc- racies. Sure, some officials do seem to think they are in the business of producing red tape, but many more in city halls, state capitals, and Washington (or Brussels) are actively seeking new and clever ways to reduce emissions, save open space, and conserve the land’s natural bounty. Smart companies do not see regulators as enemies. Instead, they work with government officials to shape incentives and create successful environmental programs. It makes much better stra- tegic sense to partner with regulators and anticipate their demands (and public expectations) than to develop contentious relationships and be unwillingly prodded from behind.

Politicians

Dedicated regulators rarely play to the camera, but politicians are always running for reelection. To show how they stand up for the wronged little guy, they’ll publicly rebuke suspected bad actors.

Political showboating is endemic all over the world. Take an ex- ample from the Philippines. After floods and landslides killed hun- dreds of people, President Gloria Arroyo blamed illegal loggers. The logic of her criticism was that forests retain water, lessen the effects of floods, and help reduce landslides. Since the line between illegal and legal logging is not very distinct, the forestry industry in general looked pretty bad. Arroyo’s criticism was not misplaced. Bad forestry practices and clear-cutting do make floods worse. But blaming the effects of natural disasters solely on one industry is classic political theater.

To avoid becoming a politician’s scapegoat, we suggest concen- trating on a few key points. First, build relationships with elected officials up and down the political ladder. Second, “immunize” your company by building a deserved reputation for environmental ste- wardship. Finally, and most fundamentally, don’t present an easy target through bad behavior. In the political arena, big business and those whose behavior can be portrayed as outrageous on any dimen- sion stand out.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 79

The Plaintiff’s Bar

One of the biggest environmental dangers every company faces, es- pecially in the United States, is the risk of being sued for pollution or ecological harm. No company can afford to ignore the “plaintiff’s bar,” lawyers who specialize in bringing such tort law claims.

From asbestos class action law suits to neighbors claiming that a factory is a nuisance, legal action is not going away anytime soon. If anyone thinks the travails of the asbestos industry represented an isolated problem, think again. In 2006, a landmark case in Rhode Island found producers of lead paint legally responsible for the neg- ative health effects of their products. Legal threats are growing and getting more sophisticated. One company’s top environmental official recently told us that she considers the plaintiff’s bar to be the stake- holder to watch.

A few brief additional examples of interesting cases that multina- tional companies need to take to heart:

• W.R. Grace, which once had a multibillion dollar market capital- ization, was driven into bankruptcy in 2001 by an avalanche of asbestos-related lawsuits.

• Plans for a new coal plant in Australia were scuttled by a lawsuit focusing on greenhouse gas emissions and the facility’s contribu- tion to global warming.

• A class action lawsuit for Hurricane Katrina victims was filed against ten oil and gas companies for destroying wetlands that might have reduced the severity of the floods.

“Frivolous. Preposterous. It won’t happen to me.” So you might say. But beware the plaintiff’s bar. It’s stocked with creative, pas- sionate lawyers looking for new lines of attack.

Don’t miss this vital point: Even if a company fully complies with the law and ultimately wins in court, it may be hurt badly by the fight. Defending against lawsuits can be prohibitively expensive. Even when a company wins, unflattering facts can emerge that will doom it in the court of public opinion. That’s why going beyond compli- ance and managing stakeholder relations carefully is so vital.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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80 Preparing for a New World

IDEA GENERATORS AND OPINION LEADERS

Media

From the Love Canal hazardous waste crisis, which led to the U.S. Superfund program, to the Exxon Valdez oil spill, which triggered the U.S. Oil Pollution Act of 1990, to hundreds of smaller, local pollution stories, media reaction drives public understanding and shapes the political response. To turn green into gold, you need to manage media relations with care, but that’s not as easy as it used to be. Beyond TV, radio, and newspapers, the rise of the Internet means that the “media” has become utterly diffuse. Anyone with a video camera, a website, and an opinion can break a story.

Most dramatically, bloggers, self-appointed on-line commentators, are reshaping how news stories unfold. Blogs, both anonymous and open, are popping up from within companies with frank discussion about the company’s products, executives, policies, and actions.

How does a company handle this? “Do nothing that might em- barrass you” is the easy answer, but not especially helpful. Better to avoid presenting a prominent target. This means not only managing environmental issues systematically and earnestly but also looking for and eliminating vulnerabilities anywhere in the product’s entire life cycle. Are your suppliers dumping toxic waste in a river in the de- veloping world? Do your customers dispose of your product in a way that creates an environmental problem?

Every company needs an emergency response plan. When an issue emerges or an accident occurs, the executive team can’t wing it with the public and the media. Exxon’s plodding response to the 1989 Exxon Valdez oil spill in Alaska sealed the company’s reputation for environmental insensitivity. To this day, Exxon and the Valdez serve as poignant reminders of corporate malfeasance, regardless of whether the company warrants the distinction. The key to positive media coverage—or the least negative possible under the circum- stances—is real action to mitigate the harm. Turning crisis manage- ment over to a public relations firm, as Exxon did, is a surefire way to add fuel to the media flames.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 81

Think Tanks and Research Centers

The media can spread or kill ideas, depending on the coverage. But reporters get their leads from somewhere. Over the last few decades, think tanks have provided many of the ideas that have framed the public policy agenda and shaped the political debate. In very fun- damental ways, a few key think tanks, such as the Heritage Foun- dation, American Enterprise Institute, and Cato Institute, have rea- ligned public attitudes about the role of government in society.

In the environmental realm, several groups have played a similar transformational role. Resources for the Future led the charge to shift environmental protection strategy from command and control regu- lation to the use of market mechanisms such as pollution charges and tradable emissions allowances. Another Washington-based group, the World Resources Institute, has been instrumental in sharpening the focus on the link between economic development and environmental progress and has added momentum to the concept of sustainable development.

To stay on top of the leading ideas that set the framework for environmental and social strategy, companies need to monitor these important idea generators. Strategic ties to think tanks offer a way to do this. At the very least, companies should track the policy pro- posals coming out of these and other leading research centers.

Academia

New ideas across the spectrum, from policy to science, also come out of our institutions of higher learning. Creating links with universities can help a company stay at the cutting edge on evolving issues. In a knowledge-based economy, it makes sense to be connected to those in the knowledge production business. In addition to the flow of ideas, companies may find that these relationships provide a mech- anism for connecting with talented future employees.

More and more companies are creating these linkages. Microsoft partners with the Indian Institutes of Technology to forge greater ties with the part of the world producing the most new software engi- neers. BP has developed structured relationships with a number of universities and uses these links to help refine its strategic planning.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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82 Preparing for a New World

Before launching a new China initiative, top company officials paid a visit to Yale University to review with academic experts a range of issues from Chinese history to corporate governance and environ- mental challenges.

Not all of these links focus on pollution or natural resource man- agement concerns. But when problems crop up—and they will—a working relationship with one or more universities or research cen- ters gives a company a place to turn for new ideas and perspectives. In a marketplace that puts a premium on innovation and fresh think- ing, connections to centers of knowledge provide a wellspring for generating Eco-Advantage.

BUSINESS PARTNERS AND COMPETITORS

Managing the traditional business playing field—supply chain, cus- tomers, and competitors—lies at the heart of any successful strategy. With environmental issues, this basic reality does not change. While NGOs get all the headlines and government regulations shape the marketplace, the traditional players continue to exert real pressure, forcing companies to realign their business plans to meet changing expectations. But smart companies don’t just react. They manage these relationships proactively for strategic advantage.

Industry Associations

Environmental reputations are often defined for a whole industry. The major chemical companies know this well. When Union Car- bide’s facility in Bhopal, India, exploded in 1986, the entire chemical industry faced a make-or-break moment.

The industry responded with a broad-based initiative to tighten standards for chemical manufacturing, storage, and transportation. Under the banner of “Responsible Care,” DuPont, Dow, and other leading chemical companies committed themselves to environmental requirements well above those set by law.

The industry association has continued aggressive self-regulation. By doing so, the major chemical companies have fended off govern- ment mandates, rebuilt the reputation of the industry, and pressured

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 83

sub-par performers to improve their environmental stewardship. All association members are now required to have environmental man- agement systems and to seek third-party certification of Responsible Care practices. Although the industry still has plenty of critics, Re- sponsible Care has filled a void, making a higher level of safety and environmental focus mandatory for entry into the community of chemical producers.

A range of industries from forestry and coffee to apparel and elec- tronics now use industry-wide initiatives to set guidelines for social and environmental practice. As reputations are ever more connected, industry pressure to meet acceptable minimum standards is a growing trend that will not slow down.

Beyond standards, industries often collaborate in other positive ways. Working with colleagues offers a number of benefits. It pro- vides the comfort and security of group action; no one company sticks its neck out. Combined effort may lead to more cutting-edge science, policy, and analysis as everyone pools resources to find so- lutions to group problems. Finally, group members can exchange best practices, raising the bar for everyone.

Industry associations have their dark side as well. They can cover for their member companies and mask the source of opposition to new regulations. In a few cases, such associations have far exceeded the bounds of appropriate advocacy and sought to confuse the pol- icymaking process. The now-disbanded Global Climate Coalition, a seemingly neutral name for a fossil fuel industry organization, was notorious for trying to obscure the emerging science on global warm- ing.

As an individual company, remember that your

reputation is inescapably linked to that of your industry.

And the industry associations you’re a part of will reflect

on you for good or bad.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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84 Preparing for a New World

Competitors

Even if no industry organization is driving change, one company’s leadership and bold action can change the competitive playing field, sometimes in dramatic ways. In 1990, Heinz’s Star-Kist tuna seized an environmental advantage over its competition by publicly com- mitting to fish in a manner that avoided dolphin deaths. With a “dolphin-safe” label, Star-Kist’s market share climbed rapidly. Oth- ers soon had to match Star-Kist’s pledge as children all over America wouldn’t let their parents buy tuna from a company that hurt dol- phins.

More recently, facing questions about its supply chain, the Gap released a groundbreaking 2004 Corporate Social Responsibility re- port providing detailed data on its suppliers’ compliance with envi- ronmental and social standards around the globe. In a flash, the com- pany accepted the principle of extended producer responsibility and continued the transformation of its industry.

As one VP at a multibillion dollar manufacturing company told us, “I know I need to do something different on the environment because competitors are doing things, but I don’t know why exactly.” This defensive position is a recipe for trouble. Smart companies keep a close eye on competitors. They even look to partner with the enemy on thorny issues if industry-wide solutions make sense.

Business-to-Business Buyers and Greening the Supply Chain

Big customers can be a source of great stress. They want ever lower prices with no cut in quality or service. But increasingly, they are also demanding information on what’s in everything you sell them, where it comes from, and how it’s made. Wal-Mart, for example, has sup- pliers across the world scrambling to meet its new sustainability de- mands. The retail giant is pushing major suppliers like Kellogg and General Mills to produce organic versions of well-known brands like Rice Krispies.

“Greening the supply chain” is the technical term for all this ac- tivity. Customer pressure represents one of the fastest emerging and most powerful forces in our long list of players. In many industries, proof of environmental responsibility has become a requirement for

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 85

GIVE ME A LEVER . . .

The ripple through supply chains is no accident. NGOs are smart enough to go after large customer-facing brands (such as Victoria’s Secret and McDonald’s) that can apply pressure up the supply chain. As Archimedes said, “Give me a lever long enough . . . and I shall move the world.” Big buyers are the end of a very long lever, and NGOs are pushing hard.

getting major contracts and keeping customers. But the conversations can be more positive as well—like when Nike calls on DuPont to talk about how they can help create a sustainable shoe. The ripples of this trend are moving through many ponds. A couple of examples:

• In 2003, Boise Cascade, which had resisted calls to protect endan- gered forests, announced that it would no longer harvest from some forests in Chile, Indonesia, and Canada, and that it would stop logging U.S. virgin forests. The pressure for the change came both from NGOs and big corporate clients such as Kinko’s, which had dropped Boise Cascade as a supplier.

• Limited Brands recently faced a very public campaign against its Victoria’s Secret line. Forest Ethics, an activist NGO, protested the fact that the paper in millions of Victoria’s Secret catalogs came from fragile forests in Canada. In response, the company asked International Paper, its big paper supplier and the company actu- ally harvesting in that region, to develop alternative solutions.

Suppliers

We expected to find buyers insisting that their suppliers meet ever more stringent environmental standards. More surprisingly, we’ve also seen suppliers pressure their big customers. When Dell, Inc. felt some heat from NGOs because of paper use in its catalogs, Pat Na- than, the newly minted Sustainable Business Director, took up the issue. With Michael Dell’s strong support, Pat formed a working group with the procurement people. Together, they steered the com- pany toward 10 percent recycled paper. No surprise. But what hap- pened next is really interesting. The company realized that while it was not one of the top ten catalog mailers (as the NGOs had sug-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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86 Preparing for a New World

gested), many of its customers were. Big mail order companies have call centers and other facilities with many computers, often supplied by Dell.

Dell sent a short letter to its customers suggesting they explore recycled content paper. The request was positioned as part of Dell’s continuing effort to serve its customers. “In addition to providing a reliable and cost effective product and service,” the letter said, “it is important to share best practices in areas such as supply chain and global citizenship.”

Perhaps “pressure” isn’t the right word for this, but questions and suggestions from suppliers will get more forceful. For years now, product categories such as alcohol, tobacco, and firearms have seen lawsuits aimed at manufacturers for what their customers do with the products. That sensibility may be spreading. As take-back laws rise in importance, more companies will look forward in the value chain to make sure their products—and any environmental problems and liabilities associated with them—don’t come back to haunt them. As they say, watch this space.

CONSUMERS AND COMMUNITY

CEO Peers

The days of corporate titans deciding the fate of markets on the 9th tee seem to be on the wane, but leadership networks remain strong and important. Corporate bigwigs meet in many different contexts, from the health club to the board room to the charity ball. And they compare stories. No executive wants to be the one who created an environmental mess. They all want to be seen as upstanding citizens. Pro-environmental speeches from CEOs like BP’s Lord Browne and Wal-Mart’s Lee Scott—whether or not their companies are currently at the leading edge—up the ante for all executives. Peer pressure does not end in high school.

CEOs now face a world of ever-greater transparency and increas- ing emphasis on performance metrics and corporate rankings. Today, indicators cover not only sales and market share but also social and environmental results. Enjoying Sunday brunch at the club gets trick-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 87

ier when a CEO’s company is bottoming out on the latest green index.

Consumers

Companies love their customers, but they also fear them. Every few years, a new wave of books comes out praising the virtues of cus- tomer focus above all. Consumers, however, can be fickle, and no- where more so than in the environmental arena.

Give consumers products that support vitality and a healthy life- style, and the younger ones especially are likely to beat a path to your door. (In the trade, this is known as the LOHAS market, which stands for Lifestyles of Health and Sustainability.) But offer them products that are demonstrably good for the environment more gen- erally, and the results are far harder to predict. Unilever got clob- bered, for instance, when it tried to introduce concentrated detergent that reduced packaging. Consumers just thought they were getting a smaller box of soap at a higher price.

Despite this note of caution about relying on a huge turnout for “eco” products, certain product areas have succeeded in turning green to gold. In the food business, sales of organic products are growing much faster than the rest of the industry. Across the United States, there isn’t enough organic milk to meet demand. In the con- sumer products arena, companies like Tom’s of Maine have found a profitable niche in designing natural alternatives for everyday per- sonal care items like toothpaste and shampoo (so profitable in fact, that the relatively small company was recently bought by Colgate for $100 million). And with sky high gas prices, it won’t be just the Toyota Prius that is selling on fuel efficiency in the coming years.

Kids, the “Future”

This may seem like an odd category, but many executives told us they want to do right by future generations. Sometimes the pressure comes from within their own households. As he was contemplating accepting the CEO’s role at Gap, Paul Pressler’s daughter asked, “Dad, doesn’t Gap have a bunch of sweatshops?” He still took the

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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88 Preparing for a New World

RELIGION AS A NEW (AND VERY OLD) INFLUENCER

In the summer of 2003, a group called the Evangelical Environmental Network launched a campaign titled “What Would Jesus Drive?” The group ran ads encouraging Christians to buy fuel-efficient cars. Increas- ingly, religious consumers feel that caring for God’s creation is a moral imperative. A poll of U.S. evangelicals showed that 48 percent rated the environment as an “important” priority—just behind abortion at 52 per- cent. Richard Cizik, an executive with the National Association of Evan- gelicals said, “That’s an amazing statistic, considering that we’ve been talking about abortion for thirty years and we haven’t even begun to make a case to a lot of our folks about environmental issues.”

In 2006, a group of evangelical ministers committed themselves to the cause of stopping global warming. This move shocked some who thought the evangelical movement was a wholly owned subsidiary of the Republican Party. In breaking with the Bush Administration, the min- isters made clear that Christians have a duty to stewardship of the Earth—and they ran full-page ads in the New York Times and Christianity Today saying so.

job, but it can be no coincidence that Gap’s 2004 CSR report took a giant leap forward on transparency about worker conditions.

Sometimes the pressure is more organized. The “official” story on Chiquita’s historic turnaround on social and environmental issues goes something like this: sophisticated consumers and powerful food- buying co-ops in Europe demanded better performance from Chi- quita—the company had no choice. Of course, customer pressure was important, but as Dave McLaughlin, Chiquita’s chief environ- mental executive on the ground in Latin America, told us, something else played a key role. “We give Europeans lots of credit, but the big- gest effect came from kids from elementary schools in the U.S.” The children’s magazine Ranger Rick had started a postcard campaign to the CEO of Chiquita. Thousands of kids made appeals, and execu- tives felt both moved and obligated to change the company’s ways.

Kids can also put pressure on governments. When the Exxon Val- dez ran aground, kids struggled to cope with the images of birds and other wildlife drowning in oil. Schools around the country asked kids to draw pictures of what they saw and felt. As a Special Assistant to the EPA Administrator, Dan Esty had the unenviable task of crafting

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 89

a response to the thousands of schoolchildren who sent in pictures of the oil-soaked beaches and dying birds of Prince William Sound.

Communities

In 1995, Alcan, a Canadian aluminum company, learned a difficult lesson about the need for community support. This was not a com- pany that was accustomed to mismanaging community issues. When it had to close one of its oldest smelters in Scotland, Alcan handled the disruption to local workers extremely well. But in British Colum- bia, its relationship with local communities was practically nonexis- tent—at best it was a zero sum game between corporate and com- munity needs.

Alcan had done little to integrate its business plans with local in- terests and NGO concerns. For years that worked just fine. But when the company tried to divert a river to create hydro power for a giant smelter, it learned that times had changed. The local indigenous pop- ulation, called “the peoples,” objected. Traditionally, Alcan looked to the Canadian government to handle community issues, but that wasn’t working this time. To continue its water-diversion project, the company needed direct community buy-in, but it had no experience in moving the local population in its direction and no accumulated goodwill, either.

Dan Gagnier, Senior Vice President for Corporate and External Affairs, told us, “We ‘won’ the environmental hearings and made the changes required of us to get permits . . . but the political environ- ment had changed, so we actually lost.” Added Environmental Di- rector Paola Kistler, “In the past, we thought government represented communities . . . but we see now that we have to directly involve stakeholders—it’s a changing world.” In the end, Alcan walked away from the project, leaving over half a billion dollars in stranded costs. The company still owns half a tunnel.

As the Alcan case shows, it’s vital for companies to engage local communities before, during, and after opening or expanding opera- tions in a region. Local concerns are a rising priority for many com- panies as breaking ground on new buildings or factories gets harder and harder. Given the deeply complicated issues associated with in- digenous communities, anti-sprawl campaigns, and not-in-my-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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90 Preparing for a New World

backyard attitudes, local support or opposition can make or break even the best-laid plans.

WaveRiders learn to develop extensive community

outreach. They recognize that conversations with local

leaders and groups are not just a good practice, they

are now a business imperative.

INVESTORS AND RISK ASSESSORS

Employees

Employees are perhaps the most powerful of the players since they can spell defeat or victory for an initiative or an entire company. They fit every category, from watchdog to community member, but we place them here for their role as investors of their time and skills in the companies they work for. Competition for talent is getting ever more fierce, which means any edge that makes an employer more desirable is worth pursuing. Without diving into too much psychol- ogy, what employees need from a workplace is shifting dramatically, particularly in the developed world. Companies want committed em- ployees, and employees want companies they can commit to.

In 2004, Stanford Business School surveyed graduating MBAs to gauge how important different aspects of a potential employer really were. How much money would students trade to land a job with a company in the right location or with the right values? The surprising result: 94 percent would give up some salary to work for a company that cared about employees, cared about stakeholders, and commit- ted to sustainability. On average, these supposedly money-grubbing business students would give up $13,700 per year.

Over the last decade, CEOs have been waking up to the new dy- namic. The executives of the future want a company they can brag

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 91

about, not just on Wall Street, but on Main Street. Even the hardest of hard-nosed CEOs, GE’s “Neutron” Jack Welch—who was more than a little skeptical about the role of environmental issues in busi- ness strategy—saw this trend coming. While he battled with regula- tors over the role GE played in dumping toxic chemicals in New York’s Hudson River, he told his executives, “Good people won’t want to work for us if we don’t get on the right side of this.”

Values-driven employees create values-driven companies. As our WaveRiders are finding out, infusing a company with larger princi- ples can significantly improve morale and commitment. Doing so can even save the company. CEO Anne Mulcahy has seen Xerox through dark times and near bankruptcy, and she believes that the company’s commitment to corporate social responsibility saved it. “At the depth of our problems, we asked employees to roll up their sleeves,” she says, “and most stayed with the company because they believed in what the company stood for . . . that we were ‘grounded’ in being a good corporate citizen.”

So, yes, managing all these players well is about more than down- side risk reduction and cost control. It offers potential upside benefits in increased productivity, lower turnover, and inspired employees.

Shareholders

Traditionally, we think of shareholders as being narrowly focused on corporate profits, not good citizenship. In fact, this simple logic is rapidly breaking down. “Shareholders” are hardly one monolithic group. True, average retail shareholders know very little about sus- tainability, but more and more people are investing through mutual funds and other vehicles that screen companies for social or environ- mental responsibility.

These investments fall under the category of socially responsible investing. According to the nonprofit Social Investment Forum, over $2 trillion in assets are screened in some way. That number is a bit misleading since it includes any fund that avoids “sin” stocks like tobacco or gambling. The assets of funds that really look for the best environmental or socially responsible companies to invest in are more likely around $200 billion—hardly chicken scratch, but dollars tell only part of this story.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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92 Preparing for a New World

Even Wall Street, never a hotbed of environmental thinking, is feel- ing the effects of the Green Wave. A number of stock pickers now see environmental management as an indicator of good general man- agement. As resource limitations—especially related to fossil fuels— increasingly impinge on corporate performance, more investors will include a company’s environmental strategy as a variable in their analysis. In fact, a recent Merrill Lynch report picked auto stocks based on which companies were prepared to deal with a “world of finite resources” and the “clean car revolution.” No surprise, Toyota was a winner, along with Hyundai and the parts manufacturer BorgWarner.

The infrastructure is growing for identifying companies that are more environmentally responsible. The Dow Jones Sustainability In- dex and FTSE4Good in Europe steer investors—and companies look- ing for a benchmark—toward superior performers. These lists are backed by research from such firms as Ethical Investment Research Service, Innovest, and Sustainable Asset Management. They assemble data on companies’ environmental strategies and outcomes, then rank or “tier” the companies. Mirroring the debt rating system, In- novest ranks companies from AAA down to CCC.

Niall Fitzgerald, Chairman of Reuters (and former Chairman and Co-CEO of Unilever), believes these rankings will matter more and more: “In time people will take the FTSE4Good seriously. It won’t be for soft, social reasons, though. It will be because people will understand that if you don’t operate responsibly wherever you are, your ability to operate in those places will diminish.”

Even when Wall Street firms are not clamoring for better environ- mental results, other elements of the capital markets are pressuring companies. A series of institutional investors, in particular pension funds, are jumping on the bandwagon. In May of 2005, state treas- urers and comptrollers representing trillions of dollars of investment clout met at the United Nations to discuss environmental risks. In- surance companies and union pension investors were also on hand, as the Associated Press put it, “to debate ways to pressure more U.S. companies into openly acknowledging the financial risk of climate change and exploring ways to reduce it.”

Some funds are going further. Two of the three largest pension funds in the United States, both in California, set aside more than a

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 93

MORE PRESSURE FOR DISCLOSURE

In 2002, a group of institutional investors, including ABN AMRO and Merrill Lynch, launched the Carbon Disclosure Project, which was simply a questionnaire sent to the world’s 500 biggest companies. It asked them to document their emissions so investors could gauge climate change– related risk. Every year, over 60 percent of the companies post all their answers on the project’s website (www.cdproject.net). The institutions joining forces behind this project represent over $20 trillion in assets.

billion dollars for direct investment in environmental companies and technologies. California Treasurer Phil Angelides took heat for bet- ting state pension funds on the growth of environmental markets. But this is not the last we’ll hear of direct involvement from these asset holders.

A number of NGOs have started to push shareholder resolutions on environmental issues. The Interfaith Center on Corporate Re- sponsibility, a coalition of 275 faith-based institutional investors, has cast a spotlight on oil and gas companies. Other groups, like the Boston-based coalition of investment and environmental groups called Ceres, have insisted on more transparency of the financial risks associated with climate change. Although these resolutions generally lose, they regularly get 20 to 40 percent support from shareholders.

To avoid continuing votes, a number of companies have given in. Six major oil and gas companies, including ChevronTexaco and Apache, agreed to acknowledge publicly the potential financial im- pacts of climate change, adopt plans to reduce greenhouse gas emis- sions, and change governance practices to give board-level support for these actions. Building on the success of these efforts, the Inter- faith Center and others are expanding their targets to include smaller oil and gas companies and big players in financial services and real estate. Those service businesses will not be alone in facing questions once reserved for heavy industry. Beleaguered insurance giant AIG has recently responded to mounting shareholder pressure by creating a new climate strategy.

While the biggest splash is in the climate-change arena, activists are also using shareholder resolutions to push for action on a wide range of issues. Recently, companies as diverse as Avon, Dow, Wal-

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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94 Preparing for a New World

Mart, and Whole Foods have faced resolutions about environmental health issues tied to certain chemicals and toxics. The Green Wave rolls on, not just among activists but also among investors deadly serious about the finances. Mindy Lubber, executive director of Ceres, notes: “This is not about progressive politics or conservative politics. It’s not an activist campaign as much as it’s a fiduciary duty to assess financial risk.”

Insurers

At a recent speech, Peter Levene, chairman of insurance giant Lloyd’s of London, spoke about the biggest risks facing the insurance indus- try. In a post-9/11 world, terrorism would seem to be number one, but here’s what Levene said:

Terrorism is a risk that is being taken care of in large part by governments right now. . . . The real issue for insurers is natural disasters, which are a very great concern. And the impact of those disasters has been increasing because the climate has been changing, which presents some very serious challenges for insurers.

Insurers don’t mind risk, but they hate uncertainty. Their job is to predict the likelihood of something bad happening and spread the cost across all those facing the risk. To make money, they must ac- curately forecast the scale and frequency of the possible harm. Behind these companies lie the masters of risk management, reinsurers. An industry normally content to sit behind the scenes and provide in- surance to the insurers, and thus take on a portion of their risk, reinsurers have gotten very vocal about environmental issues in gen- eral and about climate change in particular.

Big reinsurers like Munich Re and Swiss Re have good reason to worry. The total cost of natural disasters has risen rapidly in recent years. The 1990s saw more economic losses than the previous four decades combined, and the 2000s are not looking better. Super floods in Europe in 2002 cost $15 billion. The 2003 European heat wave killed 26,000 people and caused $16 billion in damage. In 2004 nat- ural disasters cost the reinsurance industry $40 billion, not including the tsunami in South Asia. And in 2005, worldwide economic losses from natural disasters topped $200 billion.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 95

Banks and Capital Markets

Over the last few years, banks have been waking up to the fact that the environmental and social risks on projects they lend money to, while hard to quantify, can be very damaging to their business. De- fault risk is an obvious problem, but risks to the bank’s reputation are even more threatening. Again, we can thank some tenacious NGOs for making that connection clearer to international financiers. Organizations like Rainforest Action Network realized an obvious truth: Influence those who hold the purse strings, and you don’t need to force change directly on the companies creating the problems. You don’t like how a forestry company treats the forests and waterways near its mills? Then go after the people who give it the money to build those mills in the first place.

One of the first companies to respond to the early pressure and get ahead of the curve was ABN AMRO, a Dutch bank with over half a trillion euros in assets. ABN AMRO is roughly the twentieth largest bank in the world, and it’s a true leader in trying to incor- porate environmental thinking into the business. Executives at the bank initiated the environmental review obligations embedded in the Equator Principles and are pushing the envelope much further. As André Abadie, the head of the bank’s Sustainable Business Advisory

THE EQUATOR PRINCIPLES

In 2003, ten global banks including Citigroup, Credit Suisse, and ABN AMRO, announced a new agreement they dubbed the “Equator Princi- ples,” creating new standards for how the banks make decisions about project finance loans. Big developers of massive projects like pipelines and power stations now need to prove that the environmental and social impacts of the construction have been thought through and will be mit- igated. So intense has been the pressure to join the agreement that the signatories have already expanded from the original ten to over forty. These banks represent the vast majority of project financing worldwide. More and more projects are being rejected or modified. A pipeline in Peru, a mine in Romania, and other projects are being abandoned be- cause environmental considerations were not taken seriously enough.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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96 Preparing for a New World

Group, told us, “the Equator Principles are just the tip of the ice- berg.”

Abadie’s group was founded only a few years ago, but its impor- tance in the company has grown very fast. His team is brought in to assess potential deals for environmental and social risks, only a frac- tion of which are project finance–related. Deal volume has doubled each of the last three years. Of the hundreds of deals reviewed during one recent year, the group restricted over 20 percent and nixed 15 percent outright. ABN AMRO is also building checks and warning flags into some of its automated risk assessment tools, so that as- sessment of environmental and social risk is ingrained deeply in the process. The bank has been publicly recognized for this deep and meaningful commitment, earning the World Environment Center’s 2006 Gold Medal for International Corporate Achievement in Sus- tainable Development.

Banks are realizing that their lending portfolios are an enormous source of risk. Lending to an oil refinery, for example, may seem like a good idea today. But over the forty-year time frame of the invest- ment, a lot about what the world values and expects could change, making a fossil fuel project a very bad investment. Even JPMorgan, a bit late to the party in 2005, told the world that it would “calculate in loan reviews the financial cost of greenhouse-gas emissions, such as the risk of a company losing business to a competitor with lower emissions because it has a better public standing.”

Top Citigroup executives have also committed their bank to screen projects for adverse effects on natural habitats, refuse loans to com- panies with illegal logging violations, invest in renewable energy pro- jects, and report on the greenhouse gas emissions from all power projects in the company’s portfolio. Hedge funds, too, are getting into the act, wielding influence over governance and strategy deci-

THE GREENING OF FINANCIAL SERVICES

As the Green Wave rolls through the financial world, questions are being asked of borrowers of all sizes. Even small businesses must expect to be quizzed on their environmental impacts before receiving a loan.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 97

sions at major corporations. We see this trend migrating rapidly through the world’s economy, making the management of capital flows a leading edge of the Green Wave.

A TOOL TO MANAGE THIS COMPLEXITY: STAKEHOLDER MAPPING

As simple as it sounds, the best way to deal with all the different players out there is to take a structured approach. In Chapter 11, we discuss stakeholder strategy in more detail, but we start here with a simple tool for mapping 20 critical stakeholder groups (see figure).

Eco-Advantage Players

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Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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98 Preparing for a New World

We use this tool to help companies develop forward-looking strat- egies for dealing with diverse and growing stakeholder pressures. But it also shows how much the world has changed. In traditional busi- ness analysis, the world of strategy involves a handful of key players that make up the value chain from suppliers to customers, plus own- ers (shareholders), rule-makers (regulators), and employees.

Today’s world is almost unrecognizable from this traditional per- spective. The “Five Forces” identified by Harvard Business School professor Michael Porter two decades ago still matter, and the play- ers representing these forces are still very powerful. But the nature and ferocity of competition has changed, and business strategy has to be updated to keep pace. Environment-oriented stakeholders, who ask tough questions about a range of issues, can radically affect a company’s future. Keeping track of this broader set of players is now essential.

Mapping this world can seem overwhelming at first. But start sim- ply. Sit down with our player’s wheel and ask, for each category: Who are the organizations and even individual stakeholders who matter? Then drill down: Which NGOs follow the industry and your company specifically? What are competitors doing about environ- mental issues? Do you know what your employees think about your environmental performance? And so on . . .

Once you’ve got a sense of the players, it’s time to figure out what they might want. The NGO agenda is often quite easy to ascertain— look at their websites and at their media coverage. Or call them up. They’ll usually tell you what their priorities are. The agendas of other groups may be harder to figure out, but not impossible. Starting in- ternally is not a bad idea—Alcan does an annual survey of employees on sustainability issues. Painful as it may be, make sure you listen to critics as well as those more likely to tell you you’re doing great.

Finally—and here’s the important part—ask whether the company is prepared to deal with the issues that any one of these players might bring to the table. What would the company do if approached by an NGO about a specific issue, like what happens to your products at the end of their useful life? What should the company do? Dell was surprised at the intensity of an NGO protest—and the level of media coverage it got—at the big annual Consumer Electronics Show over

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Who’s Behind the Green Wave? 99

the company’s social and environmental practices. A year later when an NGO dumped a truckload of electronics in front of the annual shareholder meeting, the company was more prepared. Now, Dell maps stakeholders regularly and keeps a very close eye on external relations.

THE ECO-ADVANTAGE BOTTOM LINE

• The set of players affecting environmental strategy is growing in number, diversity, and power.

• Every company needs to watch the full stakeholder playing field carefully. Start by constructing a stakeholder map.

• Assess the influence and impact of the various players. But be careful: The ones you think are most influential may not be. Beware of underestimating others.

• Systematically review the players in each category as they relate to your company. Ask what they might want, and what the company’s reaction could and should be.

• Look for opportunities to connect with critical players, even ones who might seem hostile.

• A “we’ll cross that bridge when we come to it” approach invites trouble. Build relationships before you need them.

Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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Esty, Daniel C., and Andrew S. Winston. Green to Gold : How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, Yale University Press, 2006. ProQuest Ebook Central, http://ebookcentral.proquest.com/lib/ashford-ebooks/detail.action?docID=3420338. Created from ashford-ebooks on 2020-05-12 15:07:26.

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