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04/23/2010

Developing Business Models to Address Climate Change


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The writing is on the wall. The economic order that treats the consequences of manmade carbon emissions as an external cost of doing business is about to suffer an abrupt demise.

The scientific community is nearing consensus on the need to reduce carbon and other atmospheric greenhouse gases by about 80% relative to 2000 levels before the year 2050, if a global climate catastrophe is to be avoided. Policy and market makers around the world are responding with an array of cap-and-trade systems, clean-energy subsidies, and fossil-fuel taxes that will eventually embed a carbon price into the operating margins and cost of capital of practically every company on earth. The skyrocketing price of fossil fuels is only adding momentum to this unstoppable decarbonization trend.

According to UNEP (United Nations Environment Programme), more than $148 billion was invested in renewable energy in 2007, up 60% from 2006. UNEP’s executive director, Achim Steiner, is predicting a continued “green-energy gold rush” into alternative-energy investments that will transform how we power our future. But the energy sector is just the beginning for the green revolution.

Leading companies across all sectors stand to gain tremendous value. “Early adopters” of sustainable practices will reengineer themselves from the top down for the post-carbon world. “Early adapters” to climate change and high energy prices are gambling that the world will fail to avoid crisis.

Early adopters are not only moving away from fossil fuels toward clean power sources to run their businesses. They’re reevaluating every aspect of their product and services life cycles and supply chains to cut waste and drive energy efficiency.

Investors can identify early adopters thanks to an initiative called the CDP (Carbon Disclosure Project). The CDP is a group of 385 institutional investors with $57 trillion in assets under management. It works with the world’s largest global corporations to set rigorous, measurable standards for reporting carbon emissions and climate-change strategies. Its annual Climate Disclosure Leaders Index ranks companies in terms of the quality of their climate disclosures; and its newest benchmark, the Climate Leaders Matrix, introduced in 2007, ranks companies both on their disclosures and on their actual efforts to reduce their carbon footprints.

Even the most optimistic greenhouse-gas forecasts are extreme, predicting flooding, rising oceans, drought, and climbing temperatures; and governments are beginning to prepare and invest accordingly. The Netherlands, for example, recently announced that it will be spending $144 billion in the 21st century to strengthen dike systems and coastal dunes.

Out of this worldview come the early adapters. Unlike early adopters, these companies don’t focus primarily on mitigating climate change and energy prices. Instead, they help society adapt to damage that they see as inevitable. Early adapter companies that will profit from disaster preparation include those that shore up infrastructure, including dikes and levees; those that retrofit old buildings and design new ones to withstand flooding; and those that improve recycling of gray water in anticipation of water shortages.

Clean-energy enthusiasts sometimes forget that fossil fuels are more efficient and less costly than most of the clean alternatives. We can expect high energy prices throughout the foreseeable future, as we transition to wind, solar, and other technologies.

The American Council for an Energy-Efficient Economy maintains that efficiency can help stabilize energy prices as clean tech lags behind growth in energy demand. Energy efficiency has recently been dubbed the “first fuel” in recognition of the critical role it can play as an energy “substitute.” Companies offering energy-efficient products and services and demand-side solutions to high costs—Energy Star appliances, smart meters, or green building materials—are poised to reap substantial rewards in the post-carbon marketplace.

Whatever the winning business models of our carbon-constrained future look like, we can count on one thing: they will forge an ever-stronger connection between value creation and environmental impact. Indeed, we’re building the bridge between value investing and values investing right now.

–Susan Arterian Chang writes on sustainable investing and the new economy and recently launched a new website, the Impact Investor.

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