Getting Ahead of the Curve: Corporate Strategies That Address Climate Change

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Read what the
Harvard Business Review
has to say about the Report (pdf).

Getting Ahead of the Curve: Corporate Strategies That Address Climate Change

Prepared for the Pew Center on Global Climate Change
October 2006

By:
Andrew J. Hoffman, The University of Michigan

This report serves as a "how to" guide for corporate decision makers as they navigate rapidly-changing global markets. The report presents an in-depth look at the development and implementation of corporate strategies that take into account climate-related risks and opportunities.

Download the Entire Report (2MB pdf)
Download the Executive Summary (pdf)
View presentations from the October 18, 2006, Corporate Strategies Workshop

The report is comprised of two main sections:

1. The Synthesis Report lays out a step-by-step approach for incorporating climate change into corporate strategies and is based on results from a 100-question survey completed by 31 companies, six in-depth case studies, outside literature on corporate strategy, and input from the Pew Center's Business Environmental Leadership Council (BELC).

Synthesis Report (1.5MB pdf)

2. The Case Studies section features an in-depth look at the strategy-making process of these six companies:

Cinergy (now Duke Energy) (pdf)
Swiss Re (pdf)
DuPont (pdf)
Alcoa (pdf)
The Shell Group (pdf)
Whirlpool Corporation (pdf)

Foreword

Eileen Claussen, President, <?xml:namespace prefix = st1 />Pew Center on Global Climate Change

There is a growing consensus among corporate leaders that taking action on climate change is a responsible business decision. From market shifts to regulatory constraints, climate change poses real risks and opportunities that companies must begin planning for today, or risk losing ground to their more forward-thinking competitors. Prudent steps taken now to address climate change can improve a company’s competitive position relative to its peers and earn it a seat at the table to influence climate policy. With more and more action at the state level and increasing scientific clarity, it is time for businesses to craft corporate strategies that address climate change.

In this Pew Center report, author Andrew Hoffman of the University of Michigan has developed a “how to” manual for companies interested in developing effective climate strategies. One of the clearest conclusions is that businesses need to engage actively with government in the development of climate policy. After years of inaction, momentum is growing at the federal level to pass mandatory climate legislation. Nearly all the companies surveyed in this report believe that federal legislation is imminent, and 84 percent of those believe federal standards will take effect before 2015. With a number of new climate bills forthcoming, it is clear that Congress has entered the design phase for legislation. Now is the ideal time for the corporate sector to engage constructively with lawmakers to ensure that sensible policy is developed to reduce greenhouse gas emissions at the lowest possible cost.

And constructive engagement is tightly linked with another compelling theme of this report: the shift of companies’ focus to creating climate-related market opportunities. Companies with a strong history of reducing emissions are shifting their focus from risk management to exploring new business platforms. They understand better than their peers that new markets will be created and existing ones will change. There will be winners and losers. The shape of climate legislation will be the strongest factor in determining how the market rewards innovators of climate-friendly products and services, as well as how it punishes laggards. More than ever, integrating climate issues into corporate strategy is a necessary aspect of managing risk and seizing competitive advantage.

The Pew Center would like to thank Mike Lenox, Forest Reinhardt, and Paul Tebo for their comments on an earlier draft of the report; Alcoa, Cinergy (now Duke Energy), DuPont, the Shell Group, Swiss Re, and Whirlpool for agreeing to be profiled for the case studies in the report; all the companies that completed the Corporate Strategies Survey; and the many member companies of our Business Environmental Leadership Council that provided comments and guidance throughout the research process.

 

Exexutive Summary

This report compiles the experience and best practices of large corporations that have developed and implemented strategies to address climate change. Based on a 31-company survey, six in-depth case studies, a review of the literature, and experience gained by the Pew Center in working with companies in its Business Environmental Leadership Council (BELC), the report describes the development and implementation of climate-related strategies. It is primarily a “how to” manual for other companies interested in developing similar strategies. But the report will also be of value to investors and analysts in evaluating the effectiveness of company strategies for managing climate risk and capturing climate-related competitive advantage. Finally, it will offer policymakers insight into corporate views on greenhouse gas (GHG) regulation, government assistance for technology advancement, and other policy issues. Although the report focuses primarily on U.S.-based multinationals, it considers the global context of climate change and related market transformation.

The report describes eight specific steps clustered into three stages that describe the various components of a climate-related strategy. Table ES1 summarizes these steps, which include assessing emissions and exposure to climate-related risks, gauging risks and opportunities, evaluating action options, setting goals and targets, developing financial mechanisms, engaging the organization, formulating policy strategy, and managing external relationships. The report is organized along the framework presented in the table, though it must be emphasized that individual companies do not necessarily follow the steps shown in a linear fashion.

Lessons learned at each step of the strategy development process are presented throughout the report. Taken together, four overarching themes emerge from the survey results and case studies. The first is the importance of strategic timing. Some companies acknowledge the dangers of starting too early on climate action, while others highlight the risks of starting too late. Despite continuing uncertainty, there is general consensus among the companies in this report that recent changes in the level of external awareness about climate risks, state government action, momentum toward stronger federal policy, and consumer demand for cleaner and more efficient products make it imperative to act now. Well-timed strategies can prepare companies for eventual regulation and create flexibility for longer-range strategic options.

A second theme is the importance of establishing an appropriate level of commitment. While the companies in this report are leaders in their industries, some caution against getting too far ahead of the competition. For many companies, uncertain demands from government, the marketplace, and the financial community—coupled with limited hard data and models to guide aggressive action—make it challenging to support extensive expenditures on GHG reductions. Therefore, many companies justify early action on other grounds: the managerial imperative to undertake low-risk initiatives that produce immediate or near-term cost benefits; their fiduciary obligation to address risks from climate change and from related regulations, particularly to the extent these could affect future asset values and market positioning; and socially and ethically responsible business values—that is “doing the right thing.”

Corporate Strategies Table Strategies Development
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A third theme for many companies is the need to influence policy development. Any policy that regulates GHG emissions will certainly constitute a major market shift, setting new “rules of the game” and changing the competitive landscape. Companies in this report feel they cannot leave the ultimate form of such regulations to chance. All policies are not equal; they will, by their nature, favor certain actions, companies, and industries. Early action is seen as a way for companies to gain credibility and leverage participation in the process of policy development, and thereby have a measure of control over their future business environment.

A fourth and final theme is the importance of creating business opportunities. Companies with a history of climate-related activity are trying to shift their strategies from a focus on risk management and bottom-line protection to instead emphasize business opportunities and top-line enhancements. Firms that incorporate climate change into their core business strategies will be in the best position to take advantage of emerging opportunities and gain competitive advantage in a changing market environment. Sustainable climate strategies cannot be an add-on to business as usual; they must be integrated with a company’s core business activities.

In the end, it is the consensus of the companies in this report that climate change is driving a major transition—one that will both alter existing markets and create new ones. As in any such transition, there are risks and opportunities, and there will be winners and losers. In this context, a growing number of companies believe that inaction is no longer a viable option. All companies will be affected to varying degrees, and all have a managerial and fiduciary obligation at least to assess their business exposure to decide whether action is prudent.

About the Author

Andrew J. Hoffman
Holcim Professor of Sustainable Enterprise
University of Michigan

Dr. Hoffman is the Holcim (US) Professor of Sustainable Enterprise at the University of Michigan; a position that holds joint appointments at the Stephen M. Ross School of Business and the School of Natural Resources & Environment. Within this role, Professor Hoffman also serves as Faculty Co-Director of Michigan’s dual-degree (MS/MBA) program of the Frederick A. and Barbara M. Erb Institute for Global Sustainable Enterprise. Professor Hoffman’s research deals with the nature and dynamics of change within institutional and cultural systems. He applies that research towards understanding the cultural and managerial implications of environmental protection and sustainability for industry. He has published over fifty articles/book chapters and four books.

Prior to joining the faculty at the University of Michigan, Professor Hoffman was an associate professor of organizational behavior at the Boston University School of Management, a visiting professor at the Kellogg School of Management and Reykjavik University and a senior fellow with the Meridian Institute. Prior to academics, he worked for the US Environmental Protection Agency (Region 1), Metcalf & Eddy Environmental Consultants, T&T Construction & Design and the Amoco Corporation.