Global warning

Global warning

In 2008, McKinsey and Co. joined those claiming that the reductions in greenhouse gas emissions the scientists say are needed will drastically affect the future value of companies, as factors such as consumer behaviour regulation and technical innovation bring value-creating opportunities to some while posing competitive threats to others

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Yet, for all of the urgency implied by the scientific consensus on climate change (or warnings by McKinsey), corporate change so far has been painfully slow. Climate change is, according to Michael Blowfield, Teaching Fellow at London Business School, a reality that business leaders must not just accept. They must also be at the forefront of solving this global crisis.

Why is business falling short when it comes to climate change? There is plenty of blame to go around. Initially, there was denial and obfuscation - sometimes with industry, scientists and politicians in cahoots or, worse, talking past one another. Based on the weight of the evidence I have studied, there is little doubt that unprecedented anthropogenic interference is affecting the climate. Although there are still differences of opinion about what this means, it means at least this: mankind and the business world have affected the environment in an insensitive and destructive way. Even business leaders with the most ideological resistance to owning up to their share of the problem are finding the will to rethink their positions. Of course, sometimes the regulatory environment in which they operate encourages such rethinking. By and large, it's still relatively easy for managers to think of climate change as a long-term issue that they can react to in due course.

Why are we so far from realising the kind of accelerated transformational change in the business world that climate change demands? In my experience over the last two years working with corporate leaders on the challenge of climate change, I've come to believe that the root cause of any delay is not a lack of will or ambition. Instead, the real culprit is that potential solutions only go part of the way to delivering the change required.

Peter Senge calls it a "necessary revolution", claiming that what's most needed is the shedding of industrial age beliefs and the birth of a total transformation in how businesses operate. Regulation, markets, technical innovation, organisational change, process innovation and behavioural change are all part of that transformation. However, change in only one or two of these areas will not bring about the transformation required in an acceptable time frame. That leaves us searching for a new model for changing business, one that builds on what we know while also allowing us to wrestle with what we don't know. We need a change model that allocates responsibilities for change wisely and fosters endeavour and velocity rather than verbosity and inertia.

Technical innovation

Giant space mirrors, iron particles planted in the sea, simulated volcanoes: these are just some of the technological solutions being proposed to combat climate change. Heralded by some and dismissed by others as signs of desperation, they are at the extreme edge of the belief that climate change can be curbed through technical innovation. Wind farms have been growing by over 25 per cent annually for the last few years; along with biofuels, solar power, wave energy and other ideas, wind farms have made alternative energy a very attractive sector, especially for venture capitalists. If, by 2030, we could meet 70 per cent of worldwide energy demand from low-carbon fuels, we actually might be able to meet the carbon reduction targets advocated by the most ardent climate change enthusiasts.

But there are a lot of assumptions tucked away inside that forecast. For example, it assumes hydro-power generation (and especially nuclear energy) will not encounter the kind of public hostility they have faced in many countries in the past. What's more, it's not at all clear how we can magically produce enough qualified engineers and skilled workers to meet the rise in demand for such avant-garde technologies. It also assumes that we will develop carbon capture and sequestration technologies and other facets of a new wave of "clean coal" power stations - technologies that promise a lot but are, for the most part, still being tested. Some recent estimates suggest that, without significant reductions in total energy use, the world will need to build the equivalent of a one gigawatt nuclear power station every day between now and 2030 to meet renewable energy demand.

Pacala & Socolow did the world a huge service when they published their "stabilisation wedges" research in 2004 (see Figure 1). These showed the rates of energy growth that would be possible by 2050 if existing technologies for a low carbon economy were introduced and scaled up. Each wedge is what a particular type of technology or behavioural change could deliver. For instance, more efficient vehicles could account for one wedge, wind turbines for another, and nuclear power a third. The wedges show that we don't need entirely new technologies to make progress in stabilising carbon emissions. But they also show the amount of effort and investment that will be required: for instance, to build a new power distribution infrastructure or to expand photovoltaic cells, the required sums are significant. In brief, technology alone is not enough to deal with the full scope of the problem of climate change; other changes, such as combating deforestation or changing agricultural practices, are also important. Thus, we must not only think about technical innovation but also other concomitant factors.


Regulation

Climate change policy and regulation address some of the shortfalls of technical solutions and can be applied to create a favourable environment to encourage technical innovation. The 2008 UK Climate Change Act commits the country to reducing emissions by 80 per cent by 2050. The EU's climate change package will influence member states' policies on emissions cuts, renewables and energy efficiency. Federal climate change regulation is increasingly seen as inevitable in the US, and several individual states have enacted laws. Mexico is the first emerging market to set binding targets in this regard.

But enacting national legislation is a slow process, especially when diverse interest groups have opposing views. Moreover, it can be hampered by an "I will only if they will" mentality as countries wait to see what their global neighbours are prepared to sign up to. To say the least, regulatory change is slow coming. Nowhere is this more apparent than in the pursuit of a new international agreement to succeed the Kyoto Protocol, whose impact is slated for review in 2012. The 2008 conference of parties to the UN's Framework Convention on Climate Change did not make progress on carbon capture and storage, nuclear power or deforestation. There is a role for an international process, but regional agreements (for example, between EU, NAFTA or ASEAN members) may prove a more effective way of setting targets and strategies; and smaller groupings (such as the business-scientist-government collaboration via the Copenhagen Climate Council) could be better forums for tackling the details of climate change policy.

Markets

Frustration at the slow pace of government - plus, for some, an ideological distrust of regulatory solutions - has encouraged many to look to market-based solutions to address key aspects of the climate change conundrum. The most famous are the emissions trading schemes (ETS) sanctioned under the Kyoto Protocol, up and running in Europe and getting considerable attention around the world. They turn carbon into a commodity that can be traded; and while mostly associated with industry emissions, voluntary trading markets such as the Chicago Climate Exchange also deal in credits from forest conservation and other products not recognised under Kyoto. Though far from trouble-free, the progress of Europe's ETS has encouraged countries such as Japan and Australia to consider similar schemes. It has also spurred interest in other market-based innovations, such as investing in forest conservation to earn carbon credits, and helped strengthen the position of those free-market economists who would rather see government apply as light a hand as possible in tackling climate change. This is controversial in itself. Can markets put a fair value on facets of the natural world jeopardised by climate change? Doubts about the ability of business to assess by itself its impact on Africa's subsistence farmers, for example, are firing various policy debates. Corporate-led initiatives are part of the solution; but, here again, this is not a full and complete way to address the challenges of climate change. Executives such as Shell's Jeroen van der Veer and 140 global business leaders from companies as diverse as eBay, Swiss Re and Shanghai Electric who signed the 2008 Poznan Communiqué on Climate Change have all expressed doubts about what market solutions alone can deliver.

Strategy and behaviour

Even if we assume that some mix of new public policies, market initiatives and innovation will incentivise businesses to accelerate the rate of transformation, can they execute their desires? One stumbling block might be the attitude of the investment community; investors may not be willing to tolerate the costs connected to corporate change designed to help the environment. Many have already expressed doubts about whether financial markets can provide sufficient "patient capital" to fund the long-term investments in infrastructure, technology and construction that tackling climate change demands.

But supposing the apparent contradiction between investor short-termism and the long-term solutions that climate change implies is not a problem, what are the implications of climate change for strategy and organisational behaviour? Systems change theories (such as those of Kurt Lewin or John Kotter) emphasise the gradual nature of lasting change if it is to be properly embedded within an organisation. Sense-making models of change such as those building on the work of Karl Weick emphasise the role of the individual leader. And sustainability thinkers such as John Elkington and Jeffrey Hollender have put great store on the role of the CEO as champion. Will any of these be fully relevant to the company that sets as an overarching goal a commitment to address climate change?

Some of the most significant organisational changes in companies (such as those achieved at Wholefoods or Marks & Spencer) have happened because of individuals and teams inside the company. Even when there is a clear change strategy with full senior management support, the well-known problems of embedding strategy into operations (and making it stick) are, if anything, even more difficult in the climate change context, not least because of the need to change quickly and to do so without too much trial and error.

Put simply, climate change defies important conventions of organisational change. Convention says that change should be gradual and not rushed, but climate change requires quite rapid yet thoughtful and effective transformation. Convention says transformational change is most likely once there is a sense of crisis; but if we wait for the real signs of crisis to hit before responding, then companies risk having to deal with unprecedented uncertainty jeopardising shareholder value, jobs and production. All this raises questions about whether any current concepts about organisational strategy and behaviour are fit for the purpose of changing the climate, whether they can be adapted or whether we need new theories.

Readiness for a big leap

Pacala & Socolow published their stabilisation wedges to show that action on climate change was possible now, that we didn't have to wait until there were perfect technologies. In pointing out the shortcomings of regulatory approaches, technology, markets or management theory, I am not advocating that we do nothing except wait for the best. After all, the perfect mousetrap would probably only work on the perfect mouse.

On the contrary, the perfect solution may never arrive; and, if it does, it's likely to be too late. Instead we should be making the best of what we have. But there are two things needed to achieve some sense of significant progress. First, we need to acknowledge that no single discipline has the silver bullet. There are significant shortcomings in all of the perspectives I've outlined above; and to that list I could have added consumer behaviour, finance, economics and other factors as well - all of which are holding back a whole-hearted effort to make our environment better for business and for everyone else. Second, we need to properly understand the parameters of possibility tied to any single approach; in other words, when it comes to technology, policy changes or whatever, we need to think seriously about the strengths and limitations of each. Based on that, we can identify and prioritise the gaps: gaps in both theory and practice. At present, I observe individuals putting all their efforts into promoting the strength of each approach while showing great reluctance to dwell on inherent weaknesses. Only by having a realistic sense of what can and cannot be achieved by following any single path will we be able to judge what change factors will have the most impact - and who's best positioned to start the change process and the supporting roles that others can constructively play.

Climate change is not like any other threat the business world has faced, for no other challenge confronting business in the past was tied to the core well-being of the planet.  When it comes to climate change, the decision managers face is not whether to change - the less change we initiate now will necessitate much greater change later on. Instead, managers must decide soon when, how and at what rate their businesses need to change. Whatever choices they make, business will never be the same. We can take joy in the fact that we have some possible answers to the problem of climate change. The bigger task now is to find the right questions to put at the heart of our future decisions.

Listen to Michael's podcast

Resources

McKinsey & Company, "The carbon productivity challenge: Curbing climate change and sustaining economic growth", http://www.mckinsey.com/mgi/publications/Carbon_Productivity/index.asp, June 2008.

S. Pacala and R. Socolow, "Stabilization wedges: solving the climate problem for the next 50 years with current technologies", Science 305, no. 5686, August 13, 2004.

Michael Blowfield (mblowfield@london.edu) is a Teaching Fellow at London Business School.

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