Three steps to greening your business
How to transform businesses to become more environmentally sustainable?
Modern corporations are one of the major forces contributing to environmental sustainability so the question is relevant. The tension between profits and environmental sustainability is real but it doesn’t mean that nothing can be done about it. The article begins with an introduction of the problem of environmental sustainability and how corporations contribute to that problem. Then the shifts that need to occur at the global, local scale are identified and translated into business decisions. For those environmentally conscious individuals, you may already be aware of the problem and the shifts that are needed.
Tension between environmental sustainability and earnings growth
If you’ve been in conversations about environmental sustainability, at some point the question comes up about
what role businesses should play?
If this question has been on your mind then read on. This article will present some considerations that hopefully will help inspire what questions to ask and where to get started.
The topic of sustainability is complex and there cannot be one simple response that would satisfy everyone. First, some specifics to clarify what is meant by environmental sustainability and
what is a company?
The modern concept of sustainability as it is used in business has three components — social, environment and financial. These goals are not inherently complementary and in some cases can be in competition. Some of the lessons for navigating the tensions between financial and environmental sustainability could also apply to the other tensions. Historically, “being environmentally responsible” has been limited to the 3 R’s — reduce, reuse, recycle and focus on the harm from local environmental effects such as atmospheric particulate matter, sulfur, waterway pollution or landfills. As society shifts to become more globalized both in the challenges that we face and the means we have to resolve them, so has the consciousness of environmental issues at a global scale. At that scale the objective of environmental sustainability is to operate within the safe operating limits of what the natural earth systems can allow. This is not so much a moral ambition as a statement of fact. In the long run all economic activity will stay within these planetary boundaries, which is why environmental sustainability is also a reflection of intergenerational equity and justice. There are multiple boundary limits to heed — biodiversity, water, forestation, and most critically climate change due to carbon dioxide emissions (Rockström, 2009).
Planetary boundaries
The alarming fact is that at a global scale we collectively as humans are operating year-after-year above the safe operating limits in several areas. The carbon emissions gap in particular is potentially catastrophic for future generations — sea level rise, droughts, fires, floods, heat waves — if the trend continues.
According to the Intergovernmental Panel on Climate Change (IPCC), to stay within the planetary safe limits of well below +2C of global warming from pre-industrial times, we have 30 years to reduce emission to zero and 10 years to cut them in half (IPCC, 2018). Much of the activity that generates the emissions can be traced to business activity with large concentrations in primary industries of energy, chemicals, and manufacturing. Another major source of direct emissions can also be attributed to the transportation and food sectors. Power generators in the energy sector transfer the utility from the emission to electricity consumers, both households and other companies. There are many ways of attributing and segmenting the emissions to gain an understanding of what’s driving them and how to reduce them. A simple, but useful and general framework for describing the origins of emissions and environmental depletion described by Jason Hickel is the throughput of material conversion through the economy (Hickel, 2020).
Energy and material throughput
Material throughput affects the environment in at least three ways — the first is the depletion of that resource from the environment, the second is the waste left behind that is returned to the environment and the third is the depletion and pollution including CO2 emissions associated with powering this conversion. Material and energy throughput is a useful framework for connecting environmental to business operations.
What it means to be a company
For those of us who have at one point worked in a for-profit corporation, when it comes to being more proactive either for the community or employees, you may have encountered a familiar catchphrase
This isn’t a charity
When we use the word “business” or “company” the examples that come to mind are usually corporations, more specifically, for-profit multinational corporations. Corporations have grown to dominate economic activity in terms of ownership share of the means of production, and this translates directly to their dominant share of the sources of emissions (Avi-Yonah, 2005 ; Riley, 2017). A corporation is a legal entity that is given “personhood”, legal rights as though it is a person to own property, right to privacy and other protections under the law. A corporation is bound by its constitution and governed by a board of directors. The constitution sets out the purpose, or mission and this can be anything but in practice is most often to return a profit to the shareholders on their initial investment, equity, in a for-profit business.
Operating basics of a for-profit company
The basic formula for profit that applies to all businesses is the point when revenue exceeds costs. Most of the time a business has fixed costs which do not directly contribute to business volume, and variable costs. The difference between marginal revenue and marginal costs is the operating margins and this must be positive for the business to be viable. Not only that but the business must meet a minimum business volume to break-even to cover the fixed costs. The practical implications for environmental sustainability is that all businesses have an existential need to
- Maximize business volume
- Economize, minimize operational costs
Two general methods for economizing are via substitution of labor with machines powered by an external energy source and externalizing costs, pushing costs onto something outside the scope of the entity, for example the public commons or the environment. For the case where business volume has a material component, then this model provides a direct causal link between the existential drivers for a for-profit enterprise and the drive to increase material and energy throughput.
In many jurisdictions shareholder corporations are bound by law to act on their fiduciary duty to prioritize making a financial return to the shareholder. While this mandate to generate a return to shareholders may not seem so restrictive, in practice that becomes a constraint on the types of activities that can have viable business models. Some products and services which are good to do, provide real economic value for society do not have viable business models to legally appropriate, or return a profit back to shareholders via legal contracts such as financial transactions. One way of explaining this is by classifying goods and services by their degree of “rivalry” (use by one person depletes the use opportunity by another) of and “excludability” (ease of restricting use of the resource). Only private goods — those that are both rival and excludable have consistently viable profitable business models. The other models — clubs, commons and public goods often there is not a cost-effective means of appropriating the rents from the use of that service back to the service provider.
Environmental conservation, and many social services such as childcare, education, healthcare are either partial or complete public goods and therefore difficult for viable business models to service. Thus, the restriction of the requirement to return a profit to shareholders sets limits on the range of choices that a for-profit corporation has to act in the interest of environmental sustainability. So given this tension what can be done?
Changes that need to occur
When it comes to taking action on reducing emissions it’s helpful to have a good understanding of the large scale changes that need to occur and how your business fits into these shifts. Two great resources to start to familiarise with the large scale changes needed are the McKinsey cost abatement curve and project Drawdown (McKinsey, 2009 ; Project Drawdown).
The big picture
The McKinsey emissions cost abatement curve is a useful resource which organizes emissions reduction projects in terms of their relative costs in $/ton CO2 abated and the total global scale of abatement potential (McKinsey, 2009). Project Drawdown has similar resources. A rational strategy is to start from the left-hand side of the curve with those projects that have an intrinsic payoff model and work towards the right towards those that are a net cost. The changes that need to occur are to switch the energy supply to cleaner, low emissions alternatives such as nuclear, wind, solar and fossil fuels with carbon capture and storage (CCS), decarbonizing industrial emissions such as cement, steel, sustainable agriculture, afforestation, soil regeneration, energy efficiency and electrification of transportation. Any energy or material efficiency improvements are also projects that reduce emissions.
Singapore’s 5 shifts
The decarbonization shifts for Singapore were identified in an earlier report “A Green New Deal for Singapore” (Hickem, 2020) and adapted to the specific challenges for Singapore. The full scope of a just transition includes more than these shifts which only address direct territorial emissions decarbonization.
- Downsize the throughput scale of the petrochemicals industry
- Add CCS facilities to decarbonize emissions from manufacturing and power generation
- Tap into and invest in clean energy in Southeast Asia region via ASEAN Power Grid
- Phase out the internal combustion engine from road transportation
- Upgrade building energy efficiency to the best-in-class standards
The business perspective
So how can a for-profit enterprise fit what they are currently doing into these shifts in the absence of strong government incentives to internalize the externalities, such as a meaningful price on carbon emissions?
Currently the carbon tax rate in Singapore is too low S$5/ton to incentivize much of the projects on the right-hand side of the McKinsey abatement cost curve.
You can consider organizing the types of changes to make in order of the level of commitment. The first level is “do what you can” by reallocating the profit sharing between the four major stakeholder groups of the business — the shareholders, executives, employees and the community. In this case the community is a stand-in for the environmental costs. Usually but not always there is some allowable rents that the shareholders are willing to forgo to the other stakeholder groups. This is the concept of “stakeholder capitalism” and the B-corp movement. The next level of commitment is to look at new business models that have better alignment of environmental objectives with the business product or service volume. To go even further to the root cause of the tension, the DNA of the company can be reformed either by constitutional amendment or by moving capital into alternative legal forms such as a co-op or non-profit corporation.
- Profit sharing : Do what you can afford
- New business model
- Alternative legal form to the for-profit corporation
Do what you can afford
The first place to start is a life cycle, baseline assessment of your business carbon footprint to understand the scale of the cost. You should look not only at your direct emissions but also your indirect footprint purchased from your suppliers, transportation costs and for finance and service based organizations the footprint of your customer portfolio who you are indirectly contributing.
- Offsets
- Operating costs — energy, material efficiency
- Procurement from sustainable, low footprint suppliers
- Product life cycle design
- Locally sourced supply chains
- Service customers and partner with organizations who share your environmental cause
Once you have a first pass estimate of that footprint you can use the prevailing social cost of carbon (S$40–80/ton) and reflect this cost of business onto your annual financial statements so that your shareholders have a full picture of the true business costs. Shareholders are asking for this transparency of executives even without any intrinsic environmental motivation from a purely risk management perspective in anticipation of future policy or activist risks which may impose these costs on the business in one way or another.
From that baseline there are a few actions to consider ordered here by commitment level. The easiest is to pay for all or a portion of this footprint via purchased offsets. This can help to align profit interests with environmental objectives since any marginal improvement in footprint that can be done below the social cost of carbon now has a material impact on the bottom line. The next place to look is the emissions under the direct control of the business such as energy and material efficiency improvements and then to start working outwards to suppliers, supply chain and then to product design and the customer base.
New business models
Doing what you can for some businesses may not be enough for the scale and speed of the shifts that will be required. Once the options have been exhausted in “doing what you can” the next level is to look at alternative business models which are more in line with environmental sustainability goals. The common logic of each of the strategies is to decouple the business volume with material and energy throughput. Given the dilemma of appropriation, rival-excludable goods, it is an open question whether this strategy can be scaled economy-wide or not. Some such as Jason Hickel argue using theoretical and empirical evidence that it is not likely to occur in the time window we have left to act in the absence of government intervention (Hickel, 2020 Less is More). Nevertheless, there may be limited niche opportunities.
- Material and energy efficiency
- Service needs instead of wants
- Quality, durability vs planned obsolescence for material goods
- Shift from ownership → service
- Platform or subscription vs transfer of custody
- Service the transition
One easy to understand switch is to base the profit model on energy and material efficiency improvement instead of volume. This is the case when your customer base has some saturation characteristic, either by physical geography constraints such as a utility company, or that the product or service has some per-customer saturation. This is the case for needs like food, shelter. Another strategy relevant for capital goods suppliers is to market your products for value, rather than convenience to incentivise longer shelf life, durability and disincentive moral hazardous practices such as planned obsolescence. Complementary business models that favor durability are shifting from ownership to service, or subscription models.
An example is a ride-hailing service. The customer needs to get from point A to B, but instead of supplying the customer with their own car (ownership) the business supplies the transportation service and owns and operates the vehicle on the customer’s behalf. The former business model aligns material throughput with business volume, whereas the later model business volume is aligned with usage, mileage. In the later model, the service provider has an incentive for longer lasting, durable capital goods. Going even deeper you can probe why the customer wanted to go from A to B in the first place and deliver that service directly. This is the logic of the delivery services business model which can open up even more creativity to search for sustainable logistics solutions such as cyclists delivery riders.
Servicing the transition is another strategy to align your business volume growth with positive environmental change. Changes are happening internationally in finance and governments which will create new demand to implement the transitions and move across the abatement curve. Servicing the transition can occur at multiple levels, either directly by offering decarbonization services, targeting decarbonization companies as your customer base so that as they grow, you grow. You can also service the NGOs, activists and change makers who are working to mobilize action in business and in government.
Addressing the problem at the root cause
You may end up going through the list of “doing what you can’’ and find that your business still has a large residual carbon footprint which cannot be offset from any free rents that are not already allocated to the other business stakeholders. You might also find that after brainstorming there are no other viable business models that are compelling enough to your business stakeholders vs the status quo. If you reach that point, don’t lose hope. Many of us are coming to this conclusion and when that happens there is still a third option — to address the problem at its root cause.
References
Avi-Yonah, 2005 The Cyclical Transformations of the Corporate Form: A Historical Perspective on Corporate Social Responsibility
https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1041&context=articles
Hickel, 2020 A response to McAfee : No, the Environmental Kuznets Curve won’t save us
https://www.jasonhickel.org/blog/2020/10/9/response-to-mcafee
Hickel, 2020 Less is more : How Degrowth will save the world
Hickem, 2020 A Green New Deal for Singapore
https://taylor-hickem.medium.com/a-green-new-deal-for-singapore-5602ee5bb69b
Intergovernmental Panel on Climate Change (IPCC), 2018 Special report on global warming of 1.5 C
https://report.ipcc.ch/sr15/pdf/sr15_spm_final.pdf
McKinsey & Company. 2009. Impact of the Financial Crisis on Carbon Economics: Version 2.1 of the Global Greenhouse Gas Abatement Cost Curve
https://www.mckinsey.com/~/media/mckinsey/dotcom/client_service/Sustainability/cost%20curve%20PDFs/ImpactFinancialCrisisCarbonEconomicsGHGcostcurveV21.ashx
Project Drawdown
https://www.drawdown.org/
Rockström, Johan Nature 2009 A safe operating space for humanity
https://www.nature.com/articles/461472a
Riley, the Guardian 2017 Just 100 companies responsible for 71% of global emissions, study says
https://www.theguardian.com/sustainable-business/2017/jul/10/100-fossil-fuel-companies-investors-responsible-71-global-emissions-cdp-study-climate-change