Reducing Greenhouse Gas Emissions Pays Off for Many U.S. Companies
Despite America's abstention from the Kyoto Protocol, some U.S. companies are gaining competitive advantage by instituting voluntary emission-reduction programs that advance their own strategic objectives.
ANN ARBOR, Mich.—Global efforts to control greenhouse gas (GHG) emissions represent a major market transition that will create winners and losers among companies, depending on their ability to identify and capture economic opportunities in being "green" vis-à-vis their competitors, says University of Michigan professor Andrew Hoffman.
Firms, he argues, must stop viewing controls on GHG emissions as a strictly environmental issue driven by regulatory or social pressures and instead regard them as a strategic business issue driven by market pressures.
"As international requirements under the Kyoto Protocol emerge and the U.S. continues to sit on the sidelines, it is wise business strategy to use this period to reflect on whether your company can benefit from a voluntary GHG-reduction program that meshes with your strategic objectives," said Hoffman, associate professor of management and organizations at the Ross School of Business and associate professor in the School of Natural Resources & Environment. "This issue pits those with an interest in resisting and delaying GHG reductions against those who believe it's just a matter of time until mandatory controls are instituted and will try to capitalize on them."
The Kyoto Protocol was ratified in 2004 by Russia—the 126th country to agree to participate in GHG-emission control—and went into effect in early 2005. American policymakers withdrew their support for the treaty, citing the lack of participation by developing countries and arguing that the costs of compliance would damage the U.S. economy. Their decision muddied the future market environment and created great uncertainty for American businesses.
Instead of biding their time, however, some U.S. companies have taken advantage of the lack of a mandatory U.S. emission-reduction plan to set targets at their own pace and in ways that fit with their own strategic objectives. To date, more than 60 corporations with net revenues of roughly $1.5 trillion have set reduction targets, and hundreds more are considering such steps. The reasons for these proactive measures, Hoffman says, are decidedly strategic.
"Companies want to prepare for the long term, in the event GHG-emission reductions become mandatory," he said. "At the same time, they want to reap near-term economic and strategic benefits, should that future not emerge or be delayed. Many forward-thinking U.S. companies have decided it is in their best interests to hedge their strategic bets, preparing for either scenario."
In his article, "Climate Change Strategy: The Business Logic Behind Voluntary Greenhouse Gas Reductions," which appeared in the spring 2005 issue of California Management Review, Hoffman outlines seven approaches companies have taken in their efforts to realize strategic benefits through voluntary GHG reductions.
For example, utilities such as Cinergy and Ontario Power Generation have made operational improvements resulting in lower emissions, reduced energy waste and greatly increased cost savings. BP and Shell, which have considerable internal emissions-trading experience, have gained competitive advantage by influencing the design of government-mandated regulatory programs in favor of their own company operations.
"Greenhouse gas reductions can become an opportunity to reduce financial risks," said Hoffman, citing research by the Coalition for Environmentally Responsible Economies, which estimates $7.4 trillion of corporate assets are potentially threatened by climate change. Swiss Re projects global warming could cost $300 billion annually by 2050 in weather damage, pollution, industrial and agricultural losses, and other expenses.
Firms that adopt voluntary GHG controls also have an opportunity to enhance their corporate reputations with voters, investors, communities and consumers, as well as to create new products and markets, he says. DuPont, for example, wants to generate 25 percent of its revenues from renewable resources by 2010. The company hopes to divest its large, oil-based textiles and interior units and instead manufacture clothes from biomaterial sources, such as Sorona, a new stretchable fabric made from corn.
"Realizing the strategic benefits in GHG reductions requires a change in the structure and culture of the organization," Hoffman said. "Companies must engage workers as partners in identifying and enacting strategies for reducing their GHG emissions. The adoption of these strategies can improve company morale, increase retention rates, lower recruiting and training costs and attract higher caliber applicants."
The bottom line, Hoffman concludes, is that U.S. managers must find answers to some tough questions about the benefits and risks their firms face as GHG regulations become more widespread on the local, national and international level.
"The future is uncertain both in terms of U.S. involvement in Kyoto and the strategic implications of GHG reductions," he said. "It is time for more sophisticated strategic thinking in a GHG market of pollution, credits, capital and abatement technology."
Hoffman, who is also the U-M's Holcim (U.S.) Professor of Sustainable Enterprise, currently is working under a grant from the Pew Center on Global Climate Change to study best practices among companies that have adopted strategies to address climate change. He is conducting case studies of six large corporations and surveying 50 additional firms.
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