Assessing the Implications of Climate Change on Business Strategy for the Future
Assessing the implications of climate change on business strategy for the future| Paper presentation, Windows [email protected]| | Climate change has introduced another significant variable in an already complex global business environment. In a global economy where the effects of climate change are increasingly being felt, organizations have to be prepared with their own strategy to factor in and use climate change as a tool for competitive advantage in the future.
This paper while examining the implications of climate change for businesses in the future, suggests a broad strategy that organizations may use for their future sustenance and growth. | | Harshavardhan, Bed Prakash Das , IIM Calcutta| 5/18/2010| | BACKGROUND The last two years have been a highly turbulent period for businesses worldwide, with the collapse of the financial markets in the US and a prolonged recession. The churn caused by the financial crisis has led to increased regulations, greater public scrutiny of businesses and a worldwide demand for supporting businesses that have a human face.
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In this context, climate change has become an important variable which shapes the way businesses run, with the potential of turning into the most significant factor which will influence the way businesses run. The climate change debate is no longer about its existence; it has evolved to a priority level where key stakeholders are deciding on how to react to the dynamic challenges that climate change poses. As an organization which is growing at the rate we are and with the nature of energy intensive businesses we are in to, evolving a long term position on climate change assumes strategic importance for us.
WHY CLIMATE CHANGE WILL DRIVE BUSINESS DECISIONS OF THE FUTURE There are some key factors which we believe will lead to climate change becoming a key driver of business decisions of the future IMPACT OF BUSINESS ON ENVIRONMENT Energy Information Administration (EIA) estimates show that nearly one third of the CO2 emissions worldwide will come from industrial activities and that the CO2 levels in the atmosphere will have to be brought down to 450 ppm by 2030 to contain the global rise in temperatures to 2? c. Any further rise in temperature levels could have catastrophic effects for human populations globally.
It is estimated that the cost of extreme weather events will increase from the current levels of US$ 200 billion to US$ 2160 billion by 2050. It is also estimated that the contribution of Asian countries to the global emissions will rise from 14% in 1990 to an estimated 35% in 2030 as the energy hungry economies of China and India expand rapidly. Recent statements by Western leaders such as Mr. Barack Obama have shown a increasing tendency to put additional pressure on these two economies to show greater initiative in their efforts to mitigate climate change.
It is a common perception that industry is a major contributor to environmental damage and therefore it is expected that there will be additional pressure on businesses to be proactive in their climate change strategy. CONSUMER PREFERENCES Consumer preferences are opting for a ‘green’ product over other options available. The McKinsey survey (2007) of consumers in eight (Brazil, China, India, Germany, France, UK, Canada and US) countries (Exhibit XX) shows increased consumer awareness about the green aspects of a product while making their purchasing decision.
This may have increase as heightened media coverage of climate change promotes awareness of sustainability initiatives in business. INVESTOR PREFERENCES Private Equity investors and venture capitalists have also shown an inclination towards funding ‘green companies’. Indices such as the Dow Jones Sustainability index provide investors with a measure of the greenness of companies, which they perceive as a key indicator of the state of operations of a manufacturer.
In the fifth annual (2010) National Venture Capital Association((NVCA) Predictions Survey of the US, clean technology is viewed by the highest percentage of respondents as potentially growing in 2010 with 54 percent predicting increased investment and 20 percent predicting unchanged investment. In view of this increased propensity of investors to opt for green assets in their portfolio, the companies who have green credentials will be the most preferred investment destinations.
Even at the height of the financial crisis, the Obama administration and governments across the world invested heavily in developing clean technology firms. The American Recovery and Reinvestment Act included more than $80 billion in clean energy investments to jump-start the US economy and build green technologies for the future. Harvard Business School research indicates that green firms command a higher share premium over the perceived non-green firms in the US stock markets. GOVERNMENT REGULATIONS Increased regulatory pressures are forcing manufacturers to go green with their products and processes.
With the Kyoto Protocol gaining widespread acceptance amongst most nations, countries have adopted targets to reduce their environmental impact in the long term, e. g. , UK is committed to CO2 emissions reductions of 26-32% by 2020 and 60% by 2050 to match 1990 levels. Most of the focus of governmental regulations is around industrial emissions and further tightening of emission norms is expected to meet abatement targets. It is significant to note that the regulatory strategies tend to focus on reducing emissions from industries as the first step more often than not, ‘forcing’ manufacturers to change their manufacturing strategies.
Governmental agencies use the actions of the first few to derive regulations for all players in that sector, thus organizations that will be first movers in revolutionizing green technologies will have the unique advantage of being able to influence regulations in that field as well. A proactive GE urged the U. S. Federal government to enact stringent national legislation on climate change, as a member of the United States Climate Action Partnership (USCAP).
The Copenhagen summit in December 2009 may have failed to reach a consensus on the extent of the regulations required for a worldwide action on climate change, a major outcome of the summit has been the announcement of unilateral targets by developing countries including India. The Copenhagen Accord recognized climate change as one of the greatest challenges of our time with critical impacts. It stresses the need to establish comprehensive plans to reduce the sources of human-induced climate change (mitigation), as well as plans that help moderate the effects of climate change (adaptation) with international support.
The Accord also creates an immediate focus for national-level policies from 2010 to 2020, as well as an important focus for companies’ climate change strategies. They need to remain focused on current regulations, as well as monitor future national, regional and global regulations. They should be ready to implement a low carbon transition strategy for 2010 to 2020 to optimize opportunities and mitigate risks amid the increase in new regulations. IMPACT ON BOTTOM-LINE Traditionally companies have looked at green initiatives from the perspective of government regulatory pressures and to some extent for being responsible corporate citizens.
It is an often held myth that green technologies require significant investments and have a high payback period. McKinsey research shows that 70% of the abatement opportunities till 2030, do not require new technology investments, while reaching 450 ppm of emissions could cost as little as 0. 6% of the Global GDP if all low cost opportunities are properly addressed. Additional benefits accrue from the tax incentives that governments provide to companies investing in green technologies. HOW BUSINESSES CAN PREPARE FOR STRATEGIC ACTION IN THE FUTURE
As Essar expands it businesses globally, there would be increased scrutiny of the environmental impact of its operations. Typically energy firms are under the greatest scrutiny as far their sustainability track records are concerned. The recent oil spill on the Gulf Coast has brought under the public eye a company like British petroleum which has a very strong track record of sustainable practices in the news for the wrong reasons. A well articulated yet implementation focused approach is necessary to factor in the effects of climate change in future business scenarios.
Most academic research suggests a dichotomous approach towards this issue; through an article in the Harvard Business Review , Jonathan Lash and Fred Wellington suggest a simple approach based on evaluating the effect of climate change on the top line and bottom line growth of the company. They suggest looking at every climate change risk with the lens of being a cost or revenue driver, with the organization positioned to take competitive advantage of such risks. Other approaches suggested by industry experts include looking at it from the point of view of demand and supply points.
Any business activity can be linked to its impact on the environment and hence can be viewed as a demand driver or supply constraint. A perception of being a “Green” company may be a strong demand driver, whereas a oil spill such as in the case of BP may become a supply constraint. While the two approaches suggested reconcile in terms of their impact on the bottom and topline growth of the company, we feel that for any strategy to be effective it has to be time horizon based. We suggest a strategy which takes into account the time horizon as well as the business scenarios that any organization is likely to encounter.
Exhibit “xxx” defines three different business scenarios –business scenarios,business as usual, slow growth and accelerated growth over three time periods- the short term, the medium term and the long term. Source: McKinsey and Vatenfall(AB) combined study on carbon footprint reduction,2007 Exhibit 1: World Marketed Energy Consumption by Region, 2004-2030 (Quadrillion BTU) 1990 2010 2020 2030 14% 19% 57% 10% 347 27% 11% 49% 14% 513 31% 10% 44% 14% 608 35% 10% 41% 14% 695 Non-OECD(Asia) Non OECD( Europe and Eurasia) OECD countries Middle East,Africa,South and Central America