Is the Greening of Business for Real?
"There is one and only one social responsibility of business," economist Milton Friedman wrote in the New York Times Magazine in 1970, "to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game."
Such thinking defined the stereotypical us-against-them tension between businesspeople and environmentalists for decades. Corporations rolled along, crushing any person, place, or endangered frog standing in the way of quarterly returns, while groups like the Sierra Club tried to put on the brakes, lobbying state and federal governments for regulation and educating consumers about business excesses.
Green-conscious companies such as clothing manufacturer Patagonia (annual revenue: $260 million), commercial carpet maker Interface ($1 billion), and Whole Foods ($4.6 billion) long ago proved that a business can thrive by paying attention to the environment as well as to Adam Smith's "invisible hand" of financial self-interest.
Back then it pretty much took a mountaintop epiphany for a CEO to see the benefits of going green. No more. Now, with energy costs soaring, supplies of raw materials becoming more tenuous, and regulations -- particularly in regard to climate change -- transforming business, companies are finding ingenious ways to reduce their risks and costs and increase their profits. A sequel to the 1987 movie Wall Street might find bare-knuckle trader Gordon Gekko imploring, "Green is good."
Wringing More Money From Less
Today companies are taking steps that "didn't make sense three years ago," says Daniel C. Esty, an environmental law professor at Yale University and coauthor of Green to Gold (Yale University Press, 2006), which discusses the competitive advantages a company can reap by adopting environmental strategies. Among the most "head-slappingly obvious" steps a business can take, he says, is to reduce energy use and boost efficiencies. For example:
- Office Depot says it saved nearly 66 million kilowatts of electricity due to energy-efficiency efforts in its warehouses and stores in 2006, trimming its electricity bill by $6.2 million.
- Coca-Cola, PepsiCo, and Nestle have all responded to rising energy and shipping costs (and critics' charges of waste) by reducing the amount of plastic in their beverage bottles.
- Ikea's customer-boggling "flat pack" boxes save the retailer 15 percent per item per year in transportation costs, the company reports.
After the low-hanging fruit has been plucked, businesses seeking ways to cut energy costs quickly look beyond their walls, says Elizabeth Sturcken, managing director of Environmental Defense's corporate partnerships program. "A company's real power," she says, "is with its supply chain."
As much as three-quarters of a company's carbon footprint comes from the way it manages the flow of goods, energy, and other resources from start to finish. A recent report from the industry group EyeforTransport found that a whopping 94 percent of supply-chain professionals consider green issues a priority. Among them, 59 percent are improving or plan to improve energy efficiency, 42 percent are redesigning warehousing and distribution networks, and 39 percent are measuring and/or reducing greenhouse-gas emissions.
Saving energy is not enough, though, says Esty. To stay alive, every company must also anticipate higher energy costs and the prospect of new regulations 5, 10, and 15 years down the line.
When more than 150 companies, including Unilever, Coca-Cola, and Royal Philips Electronics, signed a United Nations-sponsored climate declaration that commits them to setting and reporting carbon-reduction goals, they saw it as good business -- and a chance to promote a market-based plan instead of having more-onerous rules imposed on them.
The U.S. Climate Action Partnership, whose 27 corporate members include Alcoa, Duke Energy, DuPont, and General Electric, is pushing Congress to enact federal climate legislation. In doing so, the companies are looking to avoid a patchwork of state-by-state regulations and to influence how global-warming solutions shake out.
Most companies, for example, prefer a cap-and-trade mechanism that would allow businesses to buy, sell, and trade "allowances" to pollute, instead of a carbon tax, which many economists consider simpler and more efficient. (In cap-and-trade discussions, the Sierra Club supports a system in which pollution allowances are sold at auction, rather than granted to companies for free.) In the meantime, many large companies are acclimatizing to the new economics of climate change. Among them:
- Citigroup announced that it will invest $50 billion over ten years on projects related to reducing its carbon dioxide emissions.
- ConocoPhillips worked out a deal with the state of California to spend $10 million to offset the greenhouse-gas emissions from a proposed refinery expansion in Northern California.
- Computer maker Dell announced that its entire operation will be carbon neutral by 2008, a year earlier than it previously planned.
- DuPont says its carbon-reduction efforts over the past two decades have saved the company some $3 billion.
Hot on the CEOs' heels are investors pushing companies to act. Last fall a group of institutional investors and states petitioned the U.S. Securities and Exchange Commission to require publicly traded companies to disclose their climate-change risks. Meanwhile, the Investor Network on Climate Risk, an offshoot of Ceres, a group of investors and environmental organizations, wields $4 trillion in assets held by more than 60 of the nation's largest institutional investors.
The London-based Carbon Disclosure Project, representing 315 institutional investors worldwide and managing $41 trillion in assets, recently surveyed 500 companies; 76 percent of respondents said they're implementing greenhouse-gas initiatives. According to the group, climate change is spurring a "worldwide economic and industrial restructuring" that has begun "to redefine the very basis of competitive advantage and financial performance for both companies and their investors."
Brave New Product Line
Cutting costs and reducing risk are only part of the story. There's also money to be made in new products for a resource- and climate-challenged world. According to the London-based research firm New Energy Finance, venture capital and private equity investments in clean technology -- wind, solar, biodiesel, geothermal, and the like -- reached $18.1 billion worldwide in 2006 and were estimated to surpass $20 billion in 2007. Among the companies trying to cash in:
- BP reports that it plans to pour some $8 billion into alternative energy over the next ten years.
- At press time, General Electric expected to sell $14 billion of environmentally friendly products in 2007 as part of its "ecomagination" initiative.
- In a neat one-upmanship to beverage makers' efficiency announcements, reusable-bottle maker Nalgene recently teamed up with water-filter manufacturer Brita to push beverage alternatives that require no throwaway containers at all.
- While Detroit's Big Three automakers have fought legislative attempts to increase fuel efficiency (and foundered financially), Toyota's fortunes have soared. Today its Prius is the world's best-selling hybrid, and the company expects to make as much money from hybrids as it does from conventional cars by the end of the decade.
Consumers are prodding companies greenward too. A formidable 16 percent of U.S. adults are what advertising types call "deep greens," those who will pay a premium for healthy and sustainable products -- or products perceived to be so. But individual shoppers tend to be fickle.
Highly visible signs of green consumption -- including such luxury goods as eco-timber, certified flooring, and hybrid vehicles -- do well, says Erica Plambeck, a professor at Stanford University's Graduate School of Business. But environmental products that wind up "hidden in walls" don't sell.
Up to 80 percent of shoppers say they're environmentally "oriented," according to Green to Gold coauthor Esty. But most lose interest if buying becomes burdensome.
"A manufacturer has about one minute to sell its product based on environmental merits," Esty says -- and that's only if the product's price, quality, and performance are as good as the non-environmental alternative. Unilever introduced its All Small and Mighty concentrated laundry detergent in 2006 to reduce shipping costs and slash its plastic (and water) needs nearly in half. Retailers saw a quick way to open up valuable real estate on their shelves. But it took extensive marketing efforts to persuade consumers that a small bottle could clean as many laundry loads as a large one at the same price.
There is hope for businesses that want to capitalize on consciences. Esty points out that women, who make up 80 percent of food shoppers, tend to be 10 to 15 percent more environmentally aware than men. And "Generation Y," the 76 million Americans born roughly between 1978 and 2000, considers the environment "a baseline operation," he adds. "You had better embrace it if you want to sell to this crowd."
Shades of Green
All of this sounds good, but to date, only about a dozen Fortune 500 companies have made sustainability a central business value, says Joel Makower, founder of the online magazine GreenBiz.com.
Even some vaunted green leaders are subject to easy criticism. Despite GE's ecomagination initiative, the company still sells coal-fired steam turbines and is investing further in oil and gas production, while its finance arm continues to invest in coal-fired power plants. "I don't want to change the economic flow of the company," CEO Jeffrey Immelt told the Wall Street Journal last fall.
So have environmental costs been "internalized" by U.S. business? "I'd love to say we're close, but we're not," says Andrew Winston, Esty's Green to Gold coauthor.
That leaves a huge gray area amid the green, and more than a few environmentalists may find consorting with any big corporation inherently distasteful, if not counterproductive. To understand this reluctance, consider:
- Starbucks, whose 2006 revenue was nearly $8 billion, created its own (relatively lax) coffee-bean-certification system because it can source only 6 percent of the 300 million pounds of coffee it buys each year from fair-trade-certified co-ops. But plenty of smaller companies claim to use 100 percent fair-trade beans.
- Toyota makes the lovable Prius, but it makes the gas-hog Sequoia too -- and joined Detroit to fight increased fuel-efficiency standards. Besides, even the Prius is dirtier than a bicycle. In fact, Norway recently enacted rules prohibiting auto companies from promoting their vehicles as "environmentally friendly," since even the best can merely do less damage than other cars.
Many green business supporters argue that it's shortsighted for environmentalists to snub corporate good deeds. "When the Titanic is sinking," says William Barnett, a professor at Stanford's Graduate School of Business and senior fellow at the school's Woods Institute for the Environment, "it doesn't do much good to stand around saying, 'I told you so.'"
Esty, too, argues that environmentalists should celebrate the business world's new passion for things green. "Private companies can do 100 times more than what governments could ever do," he says. "They can take risks that governments can't."
Last summer, two months before a Murray Energy Corporation mine in Utah collapsed, killing six miners and three rescue workers, the company's president and CEO appeared at a Senate Energy Committee hearing to protest proposed global-warming regulations. Bob Murray aimed his vitriol not only at liberal committee chair Barbara Boxer (D-Calif.) but also at corporate executives who support the Climate Action Partnership's efforts to legislate reductions of CO2, labeling them "un-American."
The C-Span showdown was a throwback to hearings watched on black-and-white TVs. But today's bottom-liners would probably smirk at Murray's hoary implication that green is the new red. Most are too obsessed with converting green into greenbacks.