green@work : Magazine : Back Issues : March/April 2004 : Timing Is Everything

SINGLE BOTTOM LINE SUSTAINABILITY

Timing Is Everything
Responding too late to critical environmental issues can be fatal.

by Paul Gilding

One of the CEOs I most respect, Michael Hawker who runs the very successful Australian insurance giant IAG, describes the essence of business success as having “the edge”—the ability to make the right judgment calls on uncertainty.

Environmental issues provide a myriad of these kinds of business uncertainties and, therefore, many opportunities for applying “the edge.” Yet in an interesting twist, the end state in each case is generally far more predictable than most other business challenges—largely because the outcomes are driven not by technology or other market developments, but by the science of ecological impact and the predictable societal responses to them. So while the end state may be predictable, the essence of the business challenge is in the timing of response.

Take climate change for example. The end state is very clear. The climate is changing and will change more, the world will not stand by and do nothing, and so dramatic reductions in CO2 emissions will be made. (“Business certainty” is not the same as “scientific certainty”—it is an assumption for business planning purposes.)

Another business certainty is that things will not stay as they are. Therefore, not taking some kind of preparatory action or hedge strategies would be a failure of fiduciary duty. But the business certainty ends there. Questions of timing of different actions and the way society will get to the end state are far from clear.

There are key issues business needs to consider: Will the market shift before a significant crisis occurs? Will the change be driven by competitive pressure or national regulation? Will there be global governance like Kyoto? What are the key technologies that will succeed? Will there be a public backlash in response to climate events? Will there be successful litigation?

Making these calls and the timing of them will be commercial life and death for some companies. Move too early and you risk wasting investment dollars and distracting the business from more immediate priorities. Move too late and you risk losing technological advantage, cultural preparedness and damage to your brand as a laggard. If the shift is discontinuous, as I believe is likely, then acting too late could be fatal.

I have spent 30 years working on social issues—20 years campaigning in NGOs and, for the last decade, helping large companies predict and respond to social issues that impact markets. A passionate advocate of action on climate change, I have long predicted that the issue would at some point take hold with the mass public—with dramatic implications for regulation and markets. I think we are now reaching the critical mass of circumstances that indicate take-off. There’s no science as to when issues take hold, so this is more of an intuitive judgment. The key indicators?

First, the science has reached as near as consensus as we’re likely to achieve while predicting the future. The evidence is clear that we’re in trouble and it’s getting worse.

Second, the failure of Kyoto means there is a huge vacuum with no action framework and indeed little action. Such vacuums have two impacts: they create business uncertainty and nervousness and they generally get filled. With the failure of Kyoto leaving no global policy framework, the obvious opportunity for focus is the global market. The irony of this is fascinating, with a possible outcome being that those CEOs that spent a decade destroying Kyoto, like ExxonMobil’s Lee Raymond, are likely to be the victims of their own success. After all, market change is far scarier for business than the steady process of regulation.

Third, mainstream culture is picking up the issue with the release of movies like “The Day After Tomorrow” and with increasing talk about the climate being different than it used to be.

Finally, and perhaps most significantly, is action by major players in some key sectors. Examples include Honda and Toyota having released hybrid electric vehicles and Ford now about to release the first hybrid SUV. Others include financial markets studying climate risk exposure, such as the recent Carbon Disclosure Project, and the insurance industry starting to get very nervous at the increasing unpredictability, and therefore higher risk and insurance cost, of climate events.

If the issue does hit in a major public way, the market may start to do its job. The joy of markets is that they are fast and global so if the momentum builds, the process that follows will leave alternative processes of social change for dead. While Kyoto took 15 years to fail to do the job, the market may well take just five years to succeed. In the mean time, you may want to review your stock portfolio for exposure to slow responders.