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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. |
