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Green or profitable - must companies choose?

Posted by James Smith | 16 August 2013 | Viewpoint

Business has an essential role in defending the atmosphere, land and water that sustain us, argues James Smith, Chair, The Carbon Trust.

Business people

Business has an essential role in defending the atmosphere, land and water that sustain us, argues James Smith, Chair, The Carbon Trust.

 

Business has an essential role in defending the atmosphere, land and water that sustain us.  Getting onto a sustainable footing is good for all of us and good for business.

I want to start this essay with three beliefs. Firstly, I believe that industrialisation and high consumption pose grave risks to the environment and therefore to biodiversity and to economies. Secondly, I believe that achieving sustainability is not a problem of technology or economics. The technologies for getting the job done are available at affordable cost. It’s a question of individual and political will. Thirdly, I believe that profits and markets are essential tools for putting our modern industrial society onto a sustainable footing.

The third belief may seem contradictory. Profits and markets are portrayed as the environmental villains. I see profits and markets as means to an end. We can choose to put ourselves onto a sustainable footing by creating the right profit and market incentives. Profits and markets stimulate innovation, move resources to where they are needed and get things done efficiently.  Getting profits and markets right also means that all companies have to participate, not just those that are already committed. We won’t succeed if we try to fight market forces. We have to make markets force us in the direction of sustainability.

I’ll go further and say that companies are essential to the solution. Society has placed much of its innovative and productive capacity in companies. A major portion of the resources that society needs to create sustainability exists in companies.

Of course, while all companies must play their part, there are a few sectors where the biggest and most difficult changes have to be made. These are the extractive industries, energy companies, energy intensive industries, the transport industry and food companies. They have by far the biggest part to play. They can only do it if their terms of trade are placed on a new and sustainably levelled, competitive playing field. Don’t expect them to incur costs that will drive them into bankruptcy. Change the market so they can recover their costs and ensure competition drives those costs down. Because their markets are global, global concerted action is required.

I think that companies need to get much more engaged in making policies for sustainability.  A lot of industrial engineering is needed for sustainability and a great deal of careful thought is needed about the right kinds of regulation and price signal.  Companies owe it to themselves and to society to earn a place in the policy-making. If companies are not at the sustainability policy-making table, they could well be on the menu.

One last introductory thought. It’s human nature to try to take the muddle through option. Often that works. But for sustainability I don’t believe there is a mop up and muddle through option. If we leave it till the damage is clearly evident, it will be too late. So we have to force ourselves to act now. Good companies are good at being proactive.

The green economy and the greenback dollar

Some people can be quite choosy about what they regard as green. For me, green means achieving sustainability at least cost.

If it’s too expensive it’s not green. Green has to include least cost, otherwise money is wasted that could be spent on schools and hospitals and houses.  Of course, cost has to include the cost of correcting market failure, in particular, the cost of carbon emissions.

As an example, when it comes to green energy, we are well past that euphoric phase when people hoped there might be a simple solution that was clean and cheap and always on.  Solar energy is vast in aggregate but very dilute compared to fossilised energy.  We know now that lots of energy means lots of engineering. There are low carbon solutions that can be made to work, though none is perfect. It’s low carbon at least cost that matters.

Correcting market failure

The major market failure causing climate change is the absence of a price on carbon emissions. This has to be corrected. But, because time is short, pricing emissions is not sufficient. Public subsidy is needed to accelerate the development of low carbon technologies.

But we should not fall into the trap of open-ended subsidies for unacceptably high cost technologies. Open-ended subsidies undermine innovation and waste money. It is a difficult judgement both for governments and companies to know when technology has to stand on its own commercial feet.

Containing demand

Resource efficiency is vital. For example the energy efficiency of economies will need to triple in the first half of this century. That means much improved efficiency in every nook, corner and cranny of the economy. A combination of consumer preference, strong regulation, pricing incentives and business innovation will be vital.

But efficient delivery is one thing. Dampening our demand for stuff is another. Technology and behavioural nudges may help us to move supply and demand around to reduce the overall cost of the delivery infrastructure.

But perhaps the hardest task of all will be for companies to become less interested in topline growth. Encouraging their customers to use less, is the piece of the corporate sustainability jigsaw puzzle that doesn’t yet fit.

Green competitive advantage

Environmental challenges will get tackled sooner or later. However ‘later’ is bad because of the damage that will be done and because of the eventual need to rush in new policies and new technologies, with haste probably leading to mistakes and inefficiency.

Starting sooner is more than a moral issue. It just makes plain economic sense to start early and get it right.

It has to be in the interest of companies to get involved early. They will have more time to give views on policy development and they will have more time to develop new technologies. Companies working on sustainability should also get some credit from their customers and be able to recruit the best talent. So an early start on sustainability boils down to companies pursuing enlightened self interest.

Sticking to the green knitting

Companies will serve society best by focusing on what they’re good at.

Take Shell, where I used to work. They are fundamentally a hi tech engineering and logisitics company specialising in high energy liquids and gases. They don’t manufacture devices in the way General Electric, Siemens and others do.

So a focus for Shell should be on reducing the carbon impact of fossil fuels through the absolutely vital technology of carbon capture and storage. Based on their established skills they also have the best chance of making high energy but low carbon transport fuels. Gas instead of diesel in lorries would be a significant transitionary measure. But don’t ask them to manufacture millions of solar panels or thousands of wind turbines. That’s not what they’re good at. Other companies will do it much better.

What companies should do

Companies that see a better future through sustainability should do four things:

Speak out about the sustainability risks;  Companies should be consistently vocal about environmental risks. They should speak out individually and in allegiance, not just with other corporates, but also with NGOs and governments.

Call for correction of market failures; For climate change, the biggest market failure is the absence of a price on carbon. Carbon pricing provides the means of a level competitive playing field and enables companies to recover the costs of new technologies. Companies should also argue for regulation to improve energy efficiency and to lower the carbon content of energy sources. It might seem odd for companies to call for more regulation. But this is a sensible way to use markets to drive sustainability.

Prioritise research and innovation; Sustainability creates strategic opportunity for companies that can secure competitive advantage through new technologies.

Report on sustainability performance;  Companies should report on their emissions of carbon dioxide and other pollutants. This should report on their use of land and water, their safety performance and any operational mishaps. Such reporting enables a critique of performance and stimulates improvement.

Conclusion

When it comes to sustainability should we be daunted or invigorated?

We have every reason to be daunted. The change required is immense and urgent. The damage from failure is very high - for economies and for life on the planet. It is daunting to realise that it is down to us, during this half-century, to succeed or fail in moving the world to a sustainable footing.

But being daunted doesn’t get the job done. We should lift our spirits and be invigorated both by the prospect of a more sustainable world and the competitive advantage for companies that see the new opportunities.

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