Thursday, May 1, 2008

Climate Business

Harvard Business Review invited me to participate in a survey on green business, thinking I was still a senior manager of the government. In return, I was given a free copy of her Forethought Special Report: Climate Business. It is an useful report comprising twelve articles by renowned academics, covering various topics on the impact of climate change to the business environment. The articles are not very long, and are meant for fast reading. The entire report is only 16 pages long. Targeting the business community, the articles are not about the craze of environmental protection, nor the myth that it is the humankind who is destroying the planet earth.

One of the articles is co-authored by Michael Porter and Forest Reinhardt on a strategic approach to climate. Knowing Michael Porter, you would expect that he writes again on the competitive environment. The main theme of his article is the business strategies required to deal with the present competitive environment affected by climate change. On the outset, Porter states that company policy on climate change is no longer a corporate social responsibility issue; it is a business problem and should be looked at from the strategist angle rather than the philanthropist angle. Climate change creates both threats and opportunities for a business, and is a major element affecting the forces of competition. The obvious candidate is the cost of carbon emission which affects operation costs and supplier bargaining power in the form of government regulation. Besides, every firm needs to evaluate its vulnerability to climate-related effects such as regional shifts in the availability of energy and water, the reliability of infrastructures and supply chains, and the prevalence of infectious diseases. On the other hand, there are also opportunities to enhance or extend their competitive positioning by creating products, such as hybrid cars, that exploit climate-induced demand, by restructuring their industries to address climate issues, or by innovating in activities affected by climate change to produce a genuine competitive advantage. There have been many major forces in the past which dramatically reshaped the business world, such as globalization and the IT revolution. Porter considers that climate change, in its complexity and potential impact, may rival them both.

There is an article forecasting how will a warmer world look in this century. This is a pragmatic approach. The present rivalries between countries on restricting carbon emission are just political shows. Even if the targets set by the international community are met, which is unlikely, they still cannot reduce carbon emission to the level of reducing global warming. The urgent tasks at hand are actually actions required to mitigate the effect of a warmer world. The forecast presents various possible scenarios which the business sector should take into account in devising strategies.

Another target area is risk management and how to invest in global security. An article advises companies to anticipate the ways that climate change may directly affect their businesses, including supply chain breakdowns, employee migrations, and increases in diseases. In addition, they need to evaluate their risks more broadly, identifying whether the environments they operate in are susceptible to catastrophic, cascading climate-related disruption such as floods, droughts and storms. The most vulnerable will be places where the state has limited capacity to respond, the local ecosystem is fragile, urbanization is accelerating with few social services, and water supply is stretched. Companies can help these places plan for climate change and reduce their own risks by making proactive investment in tougher local air and water quality standards, and prepare themselves to help with urgent relief efforts.

In going green, one article raises a warning of backfiring on the purchase of REC (Renewable Energy Certificate). In the past two years, some companies declared going green by purchasing such certificates. Such products have been popularly marketed as carbon offset, and also promoted to the consumer market of the individuals. Some energy plants producing renewable energy in the form of wind farming and solar panels, and some forestry companies owning plantations which absorb carbon dioxide are selling certificates of such clean initiatives to fire-power companies and others. By doing so, the buyers claim that the cost they paid offset the pollution they created. Such claims are now being questioned as such certificates are considered to be merely pieces of paper documenting the generation of clean power by others. They don't cause clean electricity to be made and they are an after-thought printed up to bring in additional revenue. As such, most don't actually offset the buyer's carbon emission or reduce the amount of carbon put into the air.

If you are interested in the report, you can ask me for a copy.

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