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green@work : Magazine : Back Issues : Sep/Oct 2005 : Special Section

Special Section

Innovation Paying Off in a Carbon-Constrained World
Around the globe, companies are taking a new approach to
environmental issues such as climate change. Some of the greatest successes are coming from businesses that look for opportunities where others see only threats.

By Alison Peters and David Payne


When officials at Inland Empire Utilities Agency (IEUA) began investigating the possibility of using dairy waste to power a desalination plant, they had no idea that their “cow power” project would end up contributing to the fight against global warming—and give the utility a whole new product to sell.

Inland Empire wanted to reduce water contaminants from local dairy farms, and stabilize their energy supply in the wake of California’s energy problems. They chose an integrated solution to both problems: generating energy from a biodigester using dairy waste. Had they been thinking only of threats, the agency could have stopped there and still been hailed as innovative.

But IEUA, thinking strategically, hired consultant Bob Spurgin to help them maximize income from the digester. Spurgin recognized that not only could IEUA create an economic benefit by using renewable energy to offset power purchased from the grid, but with a little more effort, they could take credit for their shift and sell renewable energy credits (RECs). In 2003, IEUA made the first U.S. sale of RECs from cow power. The agency then turned its attention to another asset: its methane and carbon reductions also represented salable greenhouse gas (GHG) emission-reduction credits. At current market prices for RECs and GHG credits, IEUA could make more than $34,000 annually from its sales. “IEUA now has a whole department chasing grants for new pilot projects,” Spurgin says. “You just don’t find many 50-year-old public utilities thinking this way.”

IEUA’s innovative general manager, Richard Atwater, is one of a growing number of organizations discovering that changes in the earth’s climate are creating a change in the business climate. Small-scale entrepreneurs, forward-thinking utility managers and large companies with an entrepreneurial mind-set are seeking out the opportunities inherent in this worldwide environmental challenge.

“ It definitely takes a shift in thinking,” says Roberta Barbieri, risk management director for North American Supply at Diageo, a multi-billion-dollar global alcoholic beverage company. “We came at climate change from a risk perspective. Once we began to study the issue, it became clear that Diageo could internalize a new set of skills in managing our supply chain. As a result, we’ll be more efficient, have more stability, and will be able to make smart business moves in terms of managing our carbon assets.”

What do the cow power designer and the risk manager have in common? They both looked at climate change from the perspective of the opportunities it presents. At Climate Change Strategies, an initiative at the University of Colorado’s Leeds School of Business, we’ve identified a four-quadrant model (see sidebar on page 24) of how an entrepreneurial perspective can give companies more bang for their buck in addressing climate change and other environmental issues.

The CCS framework begins with “business as usual” attempts to assess risk and comply with stakeholder demands (quadrants one and two), but transforms normal bounds by encouraging companies to think about their unique capabilities in a changing global climate, and how to capture strategic and entrepreneurial opportunities (quadrants three and four). 

Business As Usual: A Threatening Environment

The business response to environmental challenges has historically been framed as a reaction to government regulations. Under this approach, businesses seek to find the least-costliest ways to meet standards imposed on them, and to avoid making headlines with environmental disasters. In other words, they identify environmental issues as potential threats to their business, and respond accordingly.

In the CCS model, these companies spend the majority of their time addressing environmental concerns on the left, or the “threat” side of the box. Quadrant one represents their efforts to assess the issues they face, where they are vulnerable and what their options are. Then, in quadrant two, they take steps to achieve compliance with government regulations and/or shareholder expectations, or with other demands brought about by environmental risks.

The threats of climate change are real and growing. In the wake of Hurricane Katrina, businesses worldwide are increasingly aware of the potentially disastrous effects of extreme weather. Floods, droughts, heat waves and large storms are predicted to increase in frequency and intensity under global warming. While he is careful to caution that we can’t directly link Katrina with climate change, Jay Gulledge, senior research fellow for science and impacts at the Pew Center on Global Climate Change, says the lessons of the hurricane have broad implications. “We need to increase the efficiency of energy use, particularly in periods of increased demand,” Gulledge says. “There’s substantial opportunity to improve efficiency across the supply chain. Even where supply is not a problem, existing capacity may not be enough to keep up with increased demands due to rising temperatures.”

Companies face compliance challenges on two fronts: the mitigation of their climate impacts and their adaptation to reduce exposure to climate-related risks. Growing awareness of human-caused changes to the earth’s climate system has led to increasing regulatory, investor and consumer demands for businesses to mitigate their GHG emissions. Furthermore, as the impacts of climate change are projected with ever-greater scientific certainty, future risks to business as usual become more apparent, ranging from weather-related supply chain disruptions to fundamental shifts in energy and transport systems.

The impact of climate change can already be seen in the changing regulatory landscape. Government actions such as carbon taxes or cap-and-trade regulations on GHGs are also worldwide trends with significant potential effects. Although the United States has yet to adopt binding federal regulatory action on GHGs, legislation such as the McCain-Lieberman Climate Stewardship and Innovation Act continues to push the issue. Some states are taking matters into their own hands. For example, the Regional Greenhouse Gas Initiative (RGGI) is a cooperative effort by northeastern and mid-Atlantic states to reduce carbon dioxide emissions via a multi-state cap-and-trade program.
While climate change is driving the formation of new regulatory markets, its effects are being felt in stock and consumer markets as well. Numerous tools have sprung up to guide investors with an interest in climate, including the Carbon Disclosure Project, the Institutional Investors Group on Climate Change and the Global Climate 100 list created by Boston’s KLD Research and Analytics. A report commissioned by the Carbon Trust concludes that airlines are particularly vulnerable to consumer opinion shifts, because of the impact that airlines have on the climate and the ease with which customers can switch to other airlines. Trees for Travel, TerraPass and TriplE are offering carbon offsets for travelers. Nike has already implemented an “eco-class” travel plan with Delta Airlines, purchasing offsets for each employee ticket. By getting ahead of the curve, Nike and Delta are “out-complying” their competition for customer approval, and crossing the line from threat to opportunity.

The Next Step: Thinking Strategically
Virtually all strategic issues—social, environmental and economic—contain aspects of both threat and opportunity. Looking through only the threat lens tends to limit companies to reactive strategies. Add the opportunity lens and the picture changes. Instead of just fighting the environmental battles that crop up over and over, a company integrates its challenges into its overall business planning and development—and looks for ways to make money, and make a positive impact, in the ever-changing environmental landscape.

One business that has no trouble seeing the direct relevance of climate change is the ski industry; warmer weather equals less snow, which equals less business. At the same time, ski areas utilize enormous amounts of energy to fuel their operations. The concept of carbon assets is allowing savvy ski companies to address both sides of the issue. At Oregon’s Mt. Hood Meadows, skiers can buy two-dollar renewable energy “Mini-Green Tags”— similar to the travel industry’s carbon offsets. One round trip from Portland to Meadows produces 140 pounds of carbon dioxide. Each Mini-Green Tag represents 100 kilowatt-hours of wind power entering the energy grid and offsetting those emissions. Skiers can say they’re skiing “pollution free”—and the ski area has a presence in GHG reductions.

The ski areas taking the lead on climate change are turning their double-edged liability—the risk of diminishing snow and the contribution that the industry itself is making to climate change—into a proactive stance. Aspen Ski Company’s director of environmental affairs, Auden Schendler, recommends that ski resorts get behind climate legislation such as the McCain-Lieberman Climate Stewardship and Innovation Act. “This stand is what the consultants call a win-win-win,” Schendler says. “Skiers will appreciate resorts taking action to protect the sport we all love. Resort managers will be praised by shareholders for intelligent long-range business planning to ensure corporate sustainability over the long term. And ski resorts will reclaim their rightful mantle as environmental leaders.”

Another risk-turned-opportunistic-strategy example comes from Federal Express. FedEx bills itself as a transport company offering integrated transportation, information and logistics solutions. The company applied its whole-systems approach to the dual challenges of dependence on a fluctuating and increasingly costly energy supply and their desire to be an environmental leader, and leapfrogged the competition by developing the next generation of delivery vehicles. FedEx is adding 75 new hybrid electric trucks that will decrease particulate emissions by 96 percent, reduce smog-causing emissions by 65 percent, and travel 57 percent farther on a gallon of fuel, reducing fuel costs by more than a third. FedEx’s proactive response not only provides some buffer from energy price fluctuations, but it also begins to shift the playing field for the entire industry.

These companies started by assessing their risks and business threats. Having invested in environmental activities, they began to look at their capabilities to expand their efforts and build on their budding expertise. The result: They’ve crossed over into quadrant three, where they are discovering new strategic advantages. Government, investor and consumer reactions to climate change are shifting the business landscape by making investments in the environment profitable. Saving energy or turning waste products into electricity always made environmental sense. But only recently have the economics of energy and climate change begun to generate financial rewards for “doing the right thing.” Once economics and environment begin to align, the market becomes a powerful force to support change. Reducing GHGs becomes a strategic move, not just a politically correct one.

A New Perspective: ‘E’ is for ‘Ecopreneur’
The final quadrant of the Climate Change Strategies model is “entrepreneurship.” Companies that have fully embraced an entrepreneurial mind-set recognize that any environmental issue can create business opportunity. These firms look for ways to innovate their current products and skills into new products and services.

DuPont took an early lead in this approach, even before climate change became a driving issue. In response to scientific evidence linking chlorofluorocarbons (CFCs), widely used in refrigerants, to the depletion of stratospheric ozone, DuPont invested substantially in research and development to develop substitutes for CFCs. When DuPont announced its exit from the CFC business ahead of anticipated regulation, they signaled to governments that substitutes were available, and helped facilitate a worldwide regulatory phase-out of CFCs. As a result, DuPont’s market position shifted from selling CFCs in markets crowded with competitors to selling patented “ozone-friendly” refrigerants, propellants and solvents—helping to mend the ozone hole while achieving competitive advantage.

Perhaps not surprisingly, as scientific consensus emerges on the causes and impacts of climate change, DuPont is a world leader in GHG emissions reductions. In 2003, DuPont’s GHG emissions were 72 percent below its 1990 levels, and in so doing the company has begun amassing a multi-million-dollar “war chest” of carbon credits that continue to rise in value as carbon markets mature.

Of course, this war chest would be worth nothing without a market in which to sell it. Enter Richard Sandor and his brainchild, the Chicago Climate Exchange (CCX). CCX is a voluntary carbon-trading market. U.S. companies aren’t currently subject to cap-and-trade regulations on GHGs, but the forward-thinking Sandor saw that they might be, convinced companies that they should prepare, and developed a market with a growing membership of businesses and other organizations committed to getting a jump on the business of carbon trading. In an interview with Forbes, Sandor summed it up this way: “I think being able to price what it costs to clean up somebody’s mess is very important. The idea here is to get a profit motive into the system for the greater social good.” From its experience in CFCs, where environmental regulations created a profitable market for their “greener” products and services, DuPont saw the benefits immediately, and wasted no time developing expertise in carbon markets, through its early participation in CCX and other emerging market-based regulatory schemes.

The prospect of a carbon-constrained world is drawing entrepreneurs at all levels. In addition to corporations taking a new look at their carbon assets, the changing climate has produced favorable conditions for start-up businesses to develop alternative technologies, market “carbon-neutral” products and assist with GHG management. Companies like Clipper Wind and Blue Sun Biodiesel are finding new markets for alternative energy. NativeEnergy, another seller of renewable energy credits, has established a niche working with Native-American and farming communities, enabling its customers to help finance the construction of new wind farms and other renewable energy projects. And companies like Environmental Credit Corporation, which advised IEUA on its carbon trading options, and others such as Econergy, Trexler and Associates and CO2e market GHG management solutions.
Firms that go out on an entrepreneurial limb may face the challenge of creating new markets—but they also have the advantage of being able to influence policy and design the playing field for those markets. If and when the United States develops cap-and-trade regulations, you can be sure that CCX and its trading companies will be front-and-center in shaping the regulations to reflect their real-world trading experience. Ski resorts supporting change regulations are looking out for their long-term interests, and innovative companies are setting themselves up with products that could skyrocket in value when the regulatory climate changes.

The other big benefit of the entrepreneurial lens is that it provides a new perspective on threats, risks and challenges—the left side of the box starts to look more like the right side. Once a company starts to think outside the box, like IEUA, it finds that addressing a single threat like a need for energy can be put in a broader perspective, and become a chance to create not only energy stability, but also use up waste products and create new products such as energy credits. These are the types of non-linear innovations that can turn cost centers into profit centers.

DuPont, for example, is selling its “green” knowledge through DuPont Safety Resources, providing environmental health and safety services with some 500 staff consultants. The overall opportunity here is tremendous. In 2000, U.S. companies incurred more than $60 billion of workers' compensation costs due to employee injuries. And now that it has a model to sell their expertise, DuPont could easily take the same approach to offer its world-leading GHG-reduction expertise to an increasingly carbon-constrained marketplace.

Climate change represents one of the greatest environmental challenges in human history. Addressing it in a comprehensive manner demands bigger thinking than traditional compliance-based approaches to environmental issues. In the new, globally networked marketplace, it is becoming all too obvious that resource shortages, disease or natural disasters in one region of the earth can have worldwide ripple effects. To succeed in this economy, companies need strategies that make them resilient and positioned to capitalize on change. Additionally, business is a key player in providing solutions to climate change. As Pat O’Donnell, Aspen Ski Company’s President/CEO puts it: “With global warming, we’ve got a problem, and when you understand the scope, it really isn't an environmental one. It’s a business problem, a social problem, a quality-of-life issue and a government challenge.”

The CCS model offers a framework and key questions to ask to ensure that a business approaches climate change strategically and takes the win-win opportunities available to it. A company with an entrepreneurial approach to climate change has created natural advantages of good design, effective use of resources and innovative shifts to serve new markets. These skills will serve it far beyond meeting environmental mandates.

If further proof is needed, the ever-resourceful Inland Empire Utilities Agency is hot on the trail of new market opportunities. IEAU’s latest idea? To monetize a trading program for ammonia and particulate matter, two more un-products that they can sell. Recent reports are that state and regional energy and air quality managers are eager to investigate the options. Once a company gets the entrepreneurial bug, it’s hard to get rid of. And that’s good news for the world’s climate.
The CCS Model
Assessment—Quadrant 1, assessment, is where the issue is typically first addressed by the firm (assuming the firm is alert to the issue to begin with). In this quadrant, businesses gather intelligence from the market, science and policy realms; attempt to understand the challenges and risks facing them; and assess their particular vulnerability to such threats. Risks may arise from climate-change impacts, regulations, or customer or shareholder pressures.
Questions to be asked include: Are we alert to issues of strategic importance to our company? How can we best “diagnose” current and potential threats? Do we have the information necessary to assess our vulnerability?

Compliance—Having assessed the challenges, firms seek to mitigate threats and comply with regulatory and stakeholder requirements and expectations. To do so, they must have or build organizational capacity: the knowledge, skills, people, processes and structures required to achieve compliance.

Questions include: How can we most efficiently and effectively mitigate threats? Are we considering explicit as well as implicit compliance expectations? In other words, are we considering and managing the full range of stakeholder expectations (government, stockholders, customers, NGOs, others)?

Strategy—As businesses become adept at managing threats and complying with stakeholders’ expectations, opportunities for competitive advantage often emerge. By “out-complying” their competitors—avoiding penalties, reducing compliance costs, identifying synergies with profitable endeavors—firms can achieve competitive advantage in the marketplace.

Recognizing their compliance capabilities as strategic assets, firms can reframe external threats into drivers of strategic opportunity, and seek innovative solutions to climate-change-related problems. For example, by outperforming regulatory expectations when reducing GHG emissions, firms create a carbon asset, leading to carbon trading opportunities and further opportunity for competitive advantage over competitors via superior carbon management.

Questions include: How does viewing the climate-change issue as an opportunity lead to different strategies and actions? Are we overlooking opportunities for competitive advantage? Can we develop superior compliance capabilities, synergies with other internal capabilities and activities unique to our firm? By managing our liabilities are we creating strategic assets? How can we leverage these assets, and what are the barriers to doing so?

Entrepreneurship—From an entrepreneurial perspective, any environmental issue can create a business opportunity. Acting innovatively in response to climate change, firms develop new products and services (e.g. “climate-friendly” alternative technologies and “carbon-neutral” products, GHG management solutions, etc.). Where such products and services are undervalued, firms can act collaboratively to influence policy and create new markets in which solutions can be sold.

Viewing the climate-change issue from an entrepreneurial perspective—a creative, forward-looking, opportunity orientation—stimulates new ideas and opportunities in the other aspects of addressing the issue. During assessment (Q1), firms are more alert to the opportunities arising from the issue; in compliance (Q2), firms may seek to fulfill unrecognized or latent stakeholder needs; and strategy (Q3) may develop quickly into innovations and new business ideas that turn cost centers into profit centers.

Questions include: Has climate change created demand for new products and services that we can sell? Can we tap into latent demand by collaborating to change policies and create new markets? Does an opportunistic, entrepreneurial perspective lead to different strategies and actions in the other three categories of action?

 


Alison Peters is the sustainable venturing coordinator at the Deming Center for Entrepreneurship in the University of Colorado's Leeds School of Business. David Payne is a Ph.D candidate at the Leeds School, and a consultant with the environmental consulting firm DOMANI, LLC. They are co-directors of the Climate Change Strategies Initiative at the Leeds School.

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