Are North American Automakers Ready for a New Paradigm?

The state of the North American auto industry has become an internationally relevant crisis that few of us can ignore. Of course, many of us will say ‘they had it coming’, and we environmentalists will secretly welcome the prospect of an end to business models and marketing responsible for spewing forth parking lots full of SUVs.. however, this won’t be a walk in the park for anyone. The North American economy in general is highly dependent on the Auto industry, and in many local economies its significance is much greater. The secondary effects of a downturn in this sector are likely to branch out to all areas of the economy. Some hard-core environmentalists may argue that for the environment this is not necessarily a bad thing, as consumption is reduced, so is the impact associated with it. However, for environmental market transformation, this is not great news. As economies falter, prices for energy fall, reducing incentives to conserve and drive markets for new, more efficient products.

Clearly some kind of bailout is necessary to avert the economic and social crisis that could befall North American automakers, but will it be enough to get them on track? Can the same leadership that got them into their current position be trusted to bring them out of it? How effectively will a strategic change be implemented across the vast, unionized, and capital intensive operations of the auto sector? The road ahead for these companies is a path full of obstacles. The global economy is one, however even with a strong economic outlook the writing is on the wall for Chrysler et al. Chinese automaker BYD just announced its first hybrid, a plug-in hybrid that effectively leapfrogs the incumbent competition, and offering a 100km range on batteries alone, and a price of roughly $22,000. This is still expensive for the Chinese market, but looks pretty good compared to the alternatives here in N.A. If this company is able to access the full potential of its export market, it stands to do very well. Warren Buffet seems to think so, as he’s currently invested in 10% of the company.

One notable difference between BYM and the struggling North American automakers is that it began life as a battery company- it makes 30% of the world’s cell phone batteries, which gives it an edge on a critical component for plug-in hybrids. For this reason it is far better suited to changing the technological paradigm of personal transportation than its competition. Auto manufacturers are steeped in the history and culture of the internal combustion engine. Envisioning the automobile of the future as an intelligent, electro-mechanical appliance as opposed to an integral link in the petroleum economy will be far easier for companies who possess the capacity for innovation, and for re-imagining the cultural relationship between cars and people.

LCA is the answer, but who bears responsibility?

Lately there have been some interesting headlines. “Hybrids less sustainable than Hummers” was the general gist of a CNW report analyzing so-called ‘dust to dust’ emissions impacts from manufacture and use, a full life-cycle analysis (LCA) if you will. Are there some tenuous assumptions at the root of this? Probably. Is there any truth to it? Yes. This is a prime example of why life-cycle analysis is important- buying a car because it is more efficient to use ignores the environmental costs that the consumer doesn’t see- when there is no requirement for companies to build these costs into the products, there is no incentive to avoid them. In the end, auto makers care more about selling cars, while the market must demand efficiency. However, the use of LCA to justify the ‘green superiority’ of current technology over emerging technology is misleading. The truth is, nobody who buys a hummer or a hybrid is doing the environment a favour- both require enormous energy and raw materials to produce, and require fossil fuels to operate. However, whereas hybrids can reduce ongoing fuel use, especially as energy for production can increasingly be sourced from cleaner alternatives (such as renewables), conventional gas-guzzler technology marries consumers to a future of increased fossil fuel dependence. Hybrid technology is at the beginning of its cycle- meaning it is more costly to produce (financially and environmentally) at this point in time, but as adoption grows and efficiencies from scale can be acheived, these costs will be expected to decrease. Choosing a hybrid therefore means being part of the vanguard of market transformation, as opposed to being part of the resistance to it.

The same analysis applies to the debate on local vs. imported foods. Fuel use in transportation is not the only environmental impact of food production, and evaluating food with this metric alone ignores the fact that some places are simply better for growing more food at a lower cost (both financial and environmental). Agriculture and specialization are social advances that allowed us to produce more, using less energy than our hunter-gatherer ancestors. That being said, a lack of inclusion of environmental costs throughout food production and supply chains means that consumers are once again left without any clear indication of what is the more ’sustainable’ choice.

It turns out a big reason for CNW’s low scoring of hybrids in terms of environmental impact stems from the quantities of nickel used in their batteries. Much of this comes from our very own Sudbury, Ontario, and the operations there have not had a stellar record in terms of the environment (though they are improving). So how can Toyota minimize the impacts of the nickel that goes into their batteries? The choices, including buying nickel somewhere else, or switching technologies (future hybrids will almost certainly use lithium batteries, for capacity reasons) may not make economic sense- and we can’t expect companies to operate against prevailing economics. If Inco or Falconbridge on the other hand had to factor environmental costs into their prices, then there would be an economic incentive both for them, and their customers, to seek less polluting alternatives. Unfortunately, leveraging a local tax or fee against a commodity will necessarily harm export revenues- few governments would be willing to take this on as a policy project.

On the other side of the coin, would increasing the costs of such commodities mean that technologies such as hybrids wouldn’t get developed? Well, let’s not forget that steel, petroleum and other more conventional raw materials all have associated costs too- a comprehensive integration of environmental impacts into all raw materials would drive us to use less of everything- maybe we’d forget about the hybrids vs. hummers debate and be riding bicycles more.

LCA is important in evaluating the overall impacts of the products we buy and use, but asking consumers to make choices where the economic realities don’t reflect the environmental realities doesn’t make sense. It all comes down to creating economic instruments that reflect the existing externalities associated with industrial activity. While there is opportunity for voluntary action by companies, what consumers need are standards and assurances of transparency, without having to do all their homework themselves. We clearly need policies to put this in place- unfortunately this will probably degenerate into finger pointing over who bears the responsibility for what costs, and how much each industry and sector must pay.

Governments have to start thinking strategically- like some of the best-in-class companies who are taking the lead on environmental issues, and creating the infrastructure needed to transform themselves. Think of BP, DuPont or Shell as companies that have taken on the responsibility to transform themselves towards sustainability. This requires the destruction of traditional sources of value, but in the end will enable the creation of new ones which are better positioned for the future. In particular, Canada cannot let itself become complacent in an environment of rising commodity prices. The resource sector is booming, but we are already seeing a rapid erosion of domestic ownership in resource companies. While our natural endowment in resources is largely responsible for our strong economic position now, if we don’t invest in innovative sectors such as clean technology, we risk compromising future competitiveness.

Towards a Sustainable Model for Mining Companies

The announcement last week about the Clinton-Guistra Sustainable Growth Initiative got me thinking again about a recurring subject of interest- how to meet the challenge of sustainability in the mining and resource sector. The Clinton-Giustra Sustainable Growth Initiative, a plan to bring together mining companies to provide funds for sustainable third-world development is significant not just in that it has drawn partners such as Newmont and Teck Cominco, who have made commitments to contribute to the initiative, and that Mr. Guistra has pledged $100M plus half his income from the resource sector for the rest of his life towards the endeavor, but that it may be another step in shifting the model for mining enterprises towards adopting sustainable development as a core business objective.

A year-and-a-half ago, I was given an assignment as part of my MBA coursework on defining a sustainability strategy for a company in a challenging sector: Gold Mining. As a resource-based and extractive industry, mining is inherently damaging to the natural environment. Gold, while a key component in electronics, fillings etc., is almost completely driven by the market for gold jewelry, either for investment or cultural/decorative purposes. Furthermore, key areas in gold mining today are places such as South Africa, South America, Indonesia- places which have both endemic socio-economic problems, and where the largely European and North American controlled mining companies do not have a great record in terms of upholding human rights.

It was in looking at one of the most notorious players- Freeport-McMoran, where I got the idea for the solution. F-M was widely criticized in the late 90’s early 00’s for their role in supporting Indonesia’s government under Suharto. The Suharto regime has been recognized for its corruption, and the stories of crimes committed by this government against its people throughout its history of militarism and autocracy are egregious. Essentially, F-M was playing the game that mining companies play in order to operate in areas such as Indonesia- you buy your way in. F-M was giving piles of cash to the government for ’security services’ and other things- as well as making Suharto a ‘partner’ in the endeavor through a loan to purchase shares- which was subsequently forgiven.

While F-M’s operations in Indonesia, one of the most important areas in the world for copper and gold, do not exactly paint a rosy picture even today, things have improved. Suharto is out, and standards of living are increasing. F-M has realized that simply funneling cash into a corrupt government is not a recipe for sustainable business- rather putting this money to work to create infrastructure, education, health care, environmental management capacity, as well as creating local economic development through providing business loans, can align both corporate and sustainable development goals.

I realized through examining this shift that the model for the future is not through looking at mining companies as producing and selling ore, but as providing development services. Essentially, mining companies are leveraging their own capital and knowledge to transform part of a region’s natural capital (in the form of mineral ore) into liquid capital (cash). The goal of such an exercise should be to use this injection of capital to be a catalyst in transforming a third-world subsistence economy to a sustainable developed economy by establishing an economic platform that can support multi-sector and value-added industries. It is therefore incumbent on mining companies to make significant commitments to local communities in return for their license to operate.

The challenge, of course, is how to make this happen in a way that truly serves all stakeholders. Mining companies are often seen as pseudo-empires, and in the case of F-M, have the legacy of colonialism to thank for their license to operate, not a clear mandate from the local public. What type of policies and structures will enable maximum accountability? Joint ownership, profit sharing with local communities? What should be the role of government and NGOs in overseeing this process?

In terms of government oversight, the South-African government has been proactive in encouraging this type of relationship- enforcing minimum domestic ownership levels as well as employment and management quotas for black citizens. However, relying on government to provide regulation which ensures responsible business practices is the pitfall that Freeport-McMoran ran into. Mining companies themselves have to perceive sustainable development as strategically aligned with profit and the economic sustainability of their own enterprises, but do they have the capability to be accountable for those goals to all stakeholders?

Clinton, Guistra, and others are banking on the partnership formula between companies and NGOs as a solution to this problem.  An NGO such as the Clinton Foundation can ensure credibility and some degree of accountability and oversight. The multilateral nature of the initiative establishes a benchmark for sustainable practices and reduces the potential for individual interests clouding the objectives of the whole. While it may be optimistic to think that this could represent a strategic shift for resource companies around the globe, it could signal the beginning of a new mindset that could allow further evolution of sustainable strategy in this sector.

Dion’s Environmental Bull (Market)

I have to admit that hearing a political leader talking about market-based mechanisms for reducing carbon emissions in a way that makes sense gets me.. right.. there.. I start to get all teary and dream of the possibility that this country (or any country for that matter) might actually elect someone who can do something which is truly for the good of their people and the planet.

A lot of people are talking about the environment these days. What I think is significant is that it is finally gaining recognition not simply as an issue, but as THE issue. For anyone who understands the requirements of sustainability, not just in environmental terms, but in economic and social ones as well, it is apparent that this has been left off the agenda too long, and now needs top billing.

But is Stephane Dion going too far by saying “Canada can get rich by going green“? This has been an argument which most economics-savvy environmentalists have brought out when faced with the problematic issue of international competitiveness in light of uneven the adoption of the Kyoto accord and similar policies.

The basis for carbon trading is not “taxing” anybody, and it is not “selling” clean air. It is simply this: If we build in cost to polluting industries, we can use the same market mechanism to reward industries who are pollute less, thereby steering behaviours and consumer purchasing power towards more environmental benign products, technologies and activities. Indeed, as long as this is managed well in the short term, this could be manageable- maintaining a reasonable standard of living, while reducing emissions.

Kyoto attempted to organize this on an international scale, and threw in provisions for developing nations. This has been termed by many as “unfair” and has provided a lot of fodder for debate, though it is probably more of a red herring. The real issue, especially for Canada is the United States. With over 80% of our trade with the US, an uneven policy which increases the cost of Canadian manufacturing relative to the US threatens to greatly imbalance trade and foreign investment.

Dion’s argument, and the one that many of the ‘natural capitalism’ ilk use, is that in order to be competitive, we need to innovate, and to innovate you have to encourage technology development. Thus the creation of a carbon cap-and-trade system would place high economic value on technologies which reduce emissions. By taking an aggressive stand on reducing emissions, Canada could also become a world leader in developing environmentally friendly technologies.

I’ve found that when the issue of ‘technology’ is discussed, it often detracts from the issue of changing behaviours- which I believe is arguably more important. However, this is why the issue of economic cost is often overstated- without cost, there will be no change in behaviours towards cost avoidance. No matter how badly we want to have the best of both worlds, we have to recognize that environmental degradation and our culture of high resource use goes hand in hand.

Nevertheless, I support Dion’s argument. Here is why: International competitiveness is no longer merely an issue of resources- while Canada has benefited greatly from its resources in the past, it has failed to build economic power worldwide. Increasingly, Canadian resource companies are becoming foreign owned, while manufacturers are being threatened by rivals from less developed economies (think Bombardier vs. Embraer). Behind the US, the worlds largest economies are Japan, Germany, the UK, and France. These are not resource rich countries by any means. I would even venture that the economic competitiveness of these countries has something to do with their history of resource scarcity. Japan, has perhaps the lowest natural resources per capita (and while human resources are definitely significant, I think the point still stands), and is poised to take over the US as the world’s automotive manufacturing juggernaut (now if only we could just stop driving the things, we’d all be better off). All these countries faced serious economic and social catastrophe within the last century. Perhaps our worry about our ‘delicate’ economic position is causing us to forego valuable opportunities for development of competitive capacity in areas which are increasingly driving today’s’ more globalized economies: technology and innovation.

In my mind, sustainability is not a choice. Eventually, governments will be forced to reduce resource consumption, either compelled by environmental or economic considerations. If computers and the internet have been the innovation driving economic growth in areas such as silicon valley and south-east Asia, who will capitalize on the potential world markets for efficiency and environmental innovation? Dion’s environmental plan is also the most ambitious and bold economic strategy plan that perhaps the country has ever seen. We have reason to scrutinize such statements very carefully, but we also have reason to listen up.

It’s about risk, stupid

Jon Anda, in a recent article in the Financial Times, proves that climate change action isn’t just for environmentalists anymore. A legislated carbon cap-and-trade system is in my mind the no-brainer of the decade.. I have yet to see an argument convincing enough to persuade me otherwise. While it seems that by now each side should have exhausted their ammunition firing back and forth over the wasted ruins of Kyoto, the fires of debate seem to be able to continuously rage on the issue of carbon trading. One of the reasons for this is that it seems is that nobody is really arguing about the same thing. Debates on action to curb emissions blur into a debate on climate change science. Discussion of mechanisms are defeated because of uncertainties about targets. Mr. Anda’s important contribution to this debate is to put the argument for in terms of financial logic. He makes two very important points- one is that carbon trading arguments should have nothing to do with the argument over the validity of global warming science- If anyone has seen the recent climate change action ads with the train, this is like debating whether or not the train is real, or a fictional construct of your imagination, instead of just stepping out of the way. The other point is that the logic for acting to reduce emissions is not based on certainty of the outcome, it is based on the certainty of risk. Arguments for action have been far too easy to refute by simply demanding proof that such action would in fact achieve its objectives, or that inaction is certain to incur costs. The argument therefore becomes very similar to that employed for hedging. Of course, even after Bay St. is has convinced itself of this idea, the government is likely to maintain its current strategy of inaction. All these arguments do nothing to address the real source of change resistance- interests vested in high-emissions capital. It nevertheless seems perfectly obvious to me that of all the alternatives, employing market mechanisms to assign costs to emissions is the fairest way to go about reducing them. But then again maybe this is why the opposition exists.

Tata & The Constructed Limits of Social Enterprise

Tata has been in the news recently with its announced acquisition of Corus steel, making it a major global player in the industry. For anyone interested in social enterprise and social responsibility you should definitely take a look at this company. Also, for those who have the time, here is a reflection piece I wrote for a class a week ago.

The Constructed Limits of Social Enterprise

By David Anders

“If the doors of perception were cleansed everything would appear to man as it is, infinite. For man has closed himself up, till he sees all things thru chinks of his cavern.”

- William Blake

The emergence of the concept of “social enterprise” in the curriculum of management studies and in business literature has been perceived as a relatively recent event by much of the business community. However the social utility of business and trade is an essential element of the earliest arguments for market liberalization. In the present dialogue on the social role of business, two different philosophies prevail. One argument, popularly stated by Milton Freidman in 1970, stresses that “there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game”[1]. This statement is more or less aligned with the prevailing view of traditional western businesses and free-market economists. An alternative view, less celebrated in most business circles, is that all businesses should exist to provide a form of social benefit, and are reliant on an implicit social license to operate. Predominantly associated with NGOs, social activists, and grassroots social enterprises, this argument was criticized by Friedman as “pure and unadulterated socialism”. Groups at different ends of the political spectrum have traditionally been quite divergent on this issue, and as a result, most debates on economic policy and the role of business in society cannot escape political associations. More recently, some convergence between the two camps can be seen to be emerging. Entrepreneurial corporations are recognizing the potential for socially minded enterprises formed at a grassroots level, often in a way that emphasizes cooperation and partnerships, bringing NGOs into the fold as business support structures. NGOs and grassroots organizations are recognizing the potential for profit-based models instead of relying on traditional practices of philanthropy. Nevertheless, few would claim that the interests of today’s powerful corporate entities are fully reconciled with the objective of social enterprise to “maintain or improve social conditions in a way that goes beyond financial benefits”[2]. There exists profound skepticism among business leaders and economists about the potential for the impact of social enterprise carried out by traditional businesses, as well as from the point of view of social activists, who perceive the business models of large companies as remaining fundamentally exploitative.

The Tata Group stands alone as a conglomerate founded on the principle of social enterprise, and as a leader in the development of social responsibility practices. This example appears to offer evidence that a seemingly western business model can create sustainable social value. However, the success of Tata goes beyond developing and institutionalizing social metrics such as the human development index (HDI). Tata’s social conscience exists as an inherent part of its strategy, and is seen not only as a footnote in their annual report (as is the case for many traditional companies), but throughout their operations and their culture. The culture of giving and volunteerism in Tata’s organization has roots that are deeper than visionary leadership and innovative policies. Western companies may argue that Tata’s success is attributable to its business model being uniquely suited to its environment. The surplus of labour, lack of social services, high degrees of corruption and income disparity in India may explain the relative need for social enterprise, but these factors do not adequately explain Tata’s success in both the social and economic arenas. Rather, this has much more to do with the cultural perception, an element perennially overlooked by economists. The culture of Tata as an organization, and its constituencies stems from both the history, and endemic conditions, of India. A unique example is the culture formed around the concept of social enterprise, in the form of the Swadeshi movement, which was a direct response to the economic exploitation of India under colonial rule. The colonial conditions in India were intimately related to the political and economic objectives of not only Britain, but of the British East India Company, which controlled most of Britain’s colonial interests[3]. The establishment and fortification of domestic industry, catalyzed by the Swadeshi movement, allowed India to challenge both the economic influence of the EIC, and the political power of Britain. The Swadeshi movement did more than create an impetus for domestic economic development. It enabled a shift in perception and values that aligned all aspects of economic activity on the basis of nationalistic and humanitarian interests. The emphasis on serving the domestic needs through domestic productivity has a great deal in common with political and philosophical views that predominated in the east. In many western corporations, however, the colonial model of expansion and exploitation of resources is still alive and well.

The business ventures that emerged from Jamsetji Tata’s vision of social enterprise were supplied with legitimacy in their social utility, something that western businesses today have come to lack. They faced the predominant view, still held today that this model would not be economically viable given its environment. 170 years after the creation of Tata, we can see that this perception was flawed. The spirit of the company’s beginnings appears to be very much present in the present day initiatives of Tata, but the company’s position as a growing multinational threatens to blur the positioning of this organization between an inwards-facing eastern philosophy, and an outwards-facing western one. The question of how the company, with values that are distinct from many of the more traditional western counterparts will adapt to growth is the same question facing western multinationals on the road to sustainability. In both cases, there is a required shift in cultural perception not only within business leaders and employees, but in the minds of customers and other stakeholders. Without this, social performance and growth will remain a tradeoff, serving two separate and irreconcilable ideologies. A unified ideology must combine western ideas such as the creation of economic efficiency through competition and open markets as an essential condition for social wellbeing, and eastern imperatives such as social wellbeing as a basis for business strategy, not simply a result of it. It can be argued that Tata’s success this far is in realizing this balance.

The question, as it relates to the western business world is whether today’s multinational companies can be supported by a business model that creates sustainable social value, or is consolidation of global economic power in such companies irreconcilable with the need to address fundamental social issues such as income and resource disparity on a global level? The need to resolve this question can be seen if we consider the ramifications of social objectives in business, and the global economic trends that will shape the next century if international enterprise. The momentum of economic growth in regions such as India and China imply a future position of increased economic leverage in international trade. This realization has already caused significant consternation among western industries and has in some cases, produced a resurgence in economic nationalism. Those who are more sympathetic to the plight of developing nations see the role of international development as one of elevating the standards of living in poorer nations. However, the reality that a global civilization enjoying a western standard of consumption is beyond the carrying capacity of our environment is naively forgotten, or conveniently dismissed. Most people see no conflict in wanting to eradicate poverty, and wanting to better themselves in the process. This echoes the often expressed objective of sustainable business as it is conventionally considered in the west, even by the more progressive standards. Therefore, there is also no connection between the patterns of consumption that feed most established western businesses, and the underlying social problems that social enterprise initiatives attempt to address. So long as companies are measured on a financial bottom line, there is no incentive for them to change this. The shift of western priorities away from individualism and financial agglomeration towards a system of values that promotes the importance of community and the intrinsic rewards of giving back requires a revolution in culture. The implication is inevitable dramatic change in the western way of life, whether it is accepted voluntarily, or involuntarily.

Tata provides a hopeful model of how other companies might reinvent themselves, but the viability of this model is dependent on the acceptance of social betterment as a legitimate purpose for business. A particular system of values allows Tata to succeed economically as a social enterprise, and this system is not so easy to replicate. The stakeholders of business must also reinvent their system of values if sustainable models are to proliferate. However, these values are firmly entrenched in western assumptions and cultural traditions. Despite the ‘export’ of western economics to the developing world, there has been little importing of the supportive values that make social enterprise successful in these areas. In seeking a healthy and sustainable society, western nations share with the developing nations of the world the fact that we still have a long way to go.

 

 

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[1] Friedman, Milton, “The Social Responsibility of Business is to Increase its Profits”, The New York Times Magazine, September 13, 1970.

[2] Dees, Gregory J. and Backman, Elaine, Social Enterprise: Private Initiatives for the Common Good, Harvard Business School, November 30, 1994.

[3] Sachs, Jeffrey D., The End of Poverty: Economic Possibilities for our Time, Penguin Press, 2005.

Article of the Week

This is a little old, but I just came across it today. If you’re like me and love a good CSR dust-up, you should check this article out on Reason Online – CEO’s of Whole Foods and Cypress Semiconducter square off with each other and Milton Friedman.

My Scoring of the bout:

Mackey: 2

Friedman: 1

Rodgers: 0

Between the Lines: Recognizing the middle ground in the SRI debate

Socially Responsible Investing (SRI), championed by specialized research firms such as Innovest, has been promoted as not only fulfillng an ethical and moral role of contributing to sustainable business practices, but also as a way to realize financial returns above those of more traditional market indices. However, there are many on both sides of the socio-policical spectrum who criticize SRI efforts to date, using a variety of arguments, ranging from the fiduciary irresponsibility of decision making based on SRI concerns to the criticism of screening techniques that may be too ‘porous’ (for example letting extractive industries, tobacco companies through). Bleeding Greens will point to companies in an SRI portfolio and point out that few if any represent truly progressive sustainable business models- more often than not they consist of large, successful firms pursuing what are viewed as ‘incremental’ sustainability measures (A look at the JSF and DJSI brings up players such as RBC, BCE, Alcan, Rogers, CNR, RIM, for example). Few financial analysts would consider these selections poor choices in the view of traditional financial analysis, but few environmentalists would jump to defend their contribution to our global sustainability. So is there any real value here, or does SRI amount to greenwashing in the investment market?

The debate can easily rage on, but progress is often not achieved without compromise. Maybe a better way of putting it besides “who is right, and who is wrong”, is “Is there a middle ground that can be found? An agreed on role for SRI that satisfies financial and environmental interests?” For one thing, while most performance indicators of SRI indexes and funds have pointed to increased returns over more mainstream indices, these either rely on backwards analyses (using the flawed reasoning that past performance is an indication of the future), or the tracking of performance since inception, which is often only a few years at most- not necessarily long enough to adequately gauge risk. These claims need to be taken with the same grain of salt as other investment screening tools. SRI theorists argue that at any rate, sustainable practices are in indication of good management practices, such as efficient management of operations, stakeholder engagement etc. Most people on either end of the spectrum are able to give this assertion the benefit of the doubt, but what about the environmental/social performance of these firms? Analyses of these criteria is mostly based on companies’ claims and initiatives. There is not an extensive auditing establishment for these factors as there is for financial criteria. Until we can establish such measures, it will be difficult for SRI to acheive wide recognition for its contribution to sustainability.

While it is quite easy to point to individual firms in an SRI portfolio and remind us that being less unsustainable is not the same thing as being sustainable, SRI proponents will point to the fact that these companies are merely the best on a comparative basis. This point is important, because one of the barriers to adopting sustainable practices seems to be the tendency to view its goals as idealistic, unattainable, and naive. But while sustainability invokes the idea that we can live in a state of harmony with each other and our environment, sustainability goals must be viewed in terms of what we need to do now in order improve our chances of getting there. While we need leaders both in private and public sector to look beyond incremental measures, we must also recognize that the state of the world as it is now was not built up instantly- it was an incremental process. Evolution is a process of incremental changes, sometimes accelerated by singular dramatic events. What we need are some singular dramatic events (for example, legislating a market-based approach to reducing emissions), and be willing to let the process of rewarding those with an advantage in sustainability while punishing those without. SRI is one way to do this, and should be seen as such, nothing more, and nothing less. In the context of the sustainability endgame, where all measures of the triple-bottom line are truly reconciled, SRI will be a meaningless concept- rather, this scenario envisions a world in which, for businesses, positive social and environmental feedback is a condition of financial viability, and only creation of value in all these areas results in the preservation and growth of firm and equity value.

For those seeking a more informative and meatier discussion of SRI, check out this blog.

Carbon Trading & the Entrepreneurial Spirit

A group of US States have agreed to implement a carbon trading systems despite opposition of such from the federal government. Now Australian states are heading in the same direction by contemplating opening a carbon market, despite outright opposition from prime minister John Howard, who argues that such a system would impact Australia’s coal industry. It would seem that many do not agree with this analysis; that such systems would represent an undue burden to industry. On the contrary, many companies perceive the opportunity to develop a competitive advantage.

Those who argue against carbon trading don’t appear to be able to offer up an alternative that would be as effective in reducing emissions. They make the arguments that such a scheme would impact industries and consumers, mostly through the added cost of energy. The problem with this is that no course of action besides “doing bugger all” will result in zero added cost in the short run (and even that strategy will incur high hidden future costs).Everyone acknowledges that something should be done to reduce pollution- no politician would succeed today on a platform calling for “more fossil fuel combustion! continued liberation of toxins into the air!” (though we have seen at the federal level in Canada and the US a policy of inaction that is basically supporting just that). The alternatives generally touted are technology, and, well, er.. technology. The public seems to be painfully aware of the oil & gas dependence that exists, therefore other energy technologies such as nuclear and “clean” coal are usually discussed. But the added cost argument falls flat given the costs of all the alternatives- clean coal technology reprepsents a costlier technology to implement- adding cost to energy producers and therefore consumers. I have yet to see a profitable private nuclear power producer. In fact, any new “technology” is likely to increase costs to industry in the short term as it is adopted.

Why no talk about technologies such as solar, wind, geothermal, tidal and other energy sources which are not only clean, but renewable? Simply, because these technologies do not yet have an established industrial base with which to influence policy. Conservative politicians who decry carbon-trading as unfair should take a dose of their own erstwhile free-market rhetoric, and the public should be asking itself whose interests these policy makers are really serving.

Long ago, economists realized that a free market is most efficient in terms of allowing the greatest value to be exchanged through trade. This shouldn’t be confused with equitable distribution, and doesn’t necessarily mean that all things should be distributed by way of a free market (basic services and public goods come to mind). But carbon IS a commodity- regardless of the price, the basic utility is the same, and the more you burn the more you can produce, ergo the more you can sell, and the better off you are.To enable a free market, you must have a sufficient quantity of players on both sides. This produces competition, which is essential to technical innovation. If “technology” is going to help us reduce our emissions, how do the carbon trading opponents suppose it is going to be developed? Dr. Hugh Saddler of the Australian company Energy Strategies, recently expressed his views with respect to the Australian government’s opposition:

“It’s really a cynical planning, picking-winners approach. It’s more akin to what used to happen in the old Soviet Union. Instead of letting the market decide which technologies are the best ones, letting consumers decide because they have a price signal, or letting different generators decide they might build a different type of power station, he actually seems to be saying, we’re going to choose the technologies and we’re going to put public money into them, not let the market decide, we’re going to decide as politicians. And then they are going to be the technologies which reduce emissions.

“We need to change the ways we use energy and the sources of energy towards lower emission energy sources and that’s not going to happen in a market economy unless you give all the economic agents a price signal, and a trading scheme is the first step towards giving just that price signal.

Perusing the members of the currently operating Chicago Climate Exchange yields a number of industry leaders such as Dupont, IBM, Ford, etc. who are participating in the trading system through voluntary emissions reductions. Is it all image? or are these companies deriving an advantage from such initiatives? The voluntary state of the carbon market means prices are much lower than with legislated limits. The environmental pages of the companies’ websites make no mention of carbon trading, so PR doesn’t seem to be an objective. Simply put, these are the companies who have the expertise and the means to find innovative ways to reduce emissions and become more efficient. Getting paid for the credits generated is icing on the cake.

But these companies can also gamble- small companies with innovative solutions but high risk exposure are being hurt as they wait in the wings for certainty about the future of emissions regulations. In Canada’s own burgeoning carbon market, the Montreal Climate Exchange (MCeX) has put off launch until after the Federal government unveils its plan (another potential player, the Canadian Climate Exchange (CCE) based in Winnipeg, has been MIA for over a year, and presumed dead).

This stands as just another sign that the world’s “business friendly” conservative governments are doing a disservice to the pursuit of efficient economics- they are seemingly more swayed by the self-interest of the status quo than by the need to encourage innovation and entrepreneurship in a dynamic marketplace.

The corporate and government leaders who recognize that strategy must look ahead and not backwards have begun to take the initiative. With the help of a little entrepreneurial spirit, hopefully in the future the label “green” will stand for both environmental and economic performance.

Wal-Mart as Sustainability Champion?

Back in April, I noticed an article in the Globe and Mail about Wal-Mart stores beginning to practice eco-efficiency, using less packaging, and even installing wind turbines outside stores. At the time, this seemed like a step in the right direction, but too early to tell whether this was the beginning of a sustainable strategy at Wal-Mart, or simply an attempt to improve their image while appealing to niche-market “green” consumers. At any rate, It would appear that Wal-Mart CEO Lee Scott had learned to talk the talk:

“It is good for business- because it creates efficiencies. It is good for our customers – because we invest the savings aback into low prices. But perhaps most importantly- it is good for the environment and for future generations.”

A recent article in Fortune magazine once again featured Wal-Mart in a sustainability showcase, and evidenced that Wal-Mart is taking this stuff seriously after all. For one thing, the goals and commitments are outlined more clearly:

“In a speech broadcast to all of Wal-Mart’s facilities last November, Scott set several ambitious goals: Increase the efficiency of its vehicle fleet by 25% over the next three years, and double efficiency in ten years. Eliminate 30% of the energy used in stores. Reduce solid waste from U.S. stores by 25% in three years.

Wal-Mart says it will invest $500 million in sustainability projects, and the company has done a lot more than draw up targets. It has quickly become, for instance, the biggest seller of organic milk and the biggest buyer of organic cotton in the world. It is working with suppliers to figure out ways to cut down on packaging and energy costs. It has opened two “green” supercenters.”

Comitted move towards sustainability? Or massive greenwashing campaign? Can Wal-Mart really become sustainable? Many people would say no, or at least not without a complete overhaul of its entire business model. As commented in the Fortune article, many see Wal-Mart as “in a race to pave the planet and turn it into a giant emporium of cheap goods built on the back of cheap labor”.

Whenever I’m asked for an example of a company on the leading edge of sustainability strategy, I tend to gravitate towards examples of large, well known companies- DuPont, BP, GE etc. – standards business school case-study stock. Large companies who adopt more intensified environmental management, or realign strategy in terms of sustainability are often compelled to do so by ‘crisis’ events (eg. Shell in Nigeria). These are events where a polished PR campaign is not good enough. People need to see that the company has changed, and is doing something, and the company knows that the penalties for not changing direction are dire.

It makes sense that large companies should adopt these strategies first- they have more resources, and represent a larger potential source for changing behaviours. But can these companies really go far beyond compliance? Can they establish themselves as true leaders in changing behaviours for the better, and helping mold our society into one capable of sustainable development? (The question of whether that is even their responsibility is a topic for another entry)

Does a sustainable future have a place for large companies? It would seem that all the advantages of a large company- the economies of scale, larger buying power, greater distribution network, are all things that result in negative externalities under present business models. For example, the scale and buying power favours the sourcing of the cheapest labour and materials worldwide. The influence of these companies on governments presents problematic human rights issues in many areas. Distribution networks provide cheaper ways for companies to move our goods across the planet before reaching the end user- to environmental detriment.

I am inclined to favour almost any action over inaction at this point- we are still on the uphill slope of the sustainable practice adoption curve- and to some degree we need to see changes in large companies to get the momentum we need to carry over consumer behaviour. However, I am also inclined to believe that a sustainable society must operate more locally, something that is at odds with the procurement and distribution practices of larger companies.

I look forward to your comments.