‘Greening’ of Business Is More Than Just a Fad

Posted November 16, 2007 at 3:32pm

It has become both fashionable and accepted as sound business practice for companies to be perceived as “going green.” However, as more and more companies announce their intentions to adopt “green” strategies, there is increasing speculation over the longevity of these “greening trends” and scrutiny about the actual environmental benefit derived from these actions.

Indeed, many companies have been accused of “green washing” — claiming to have implemented progressive environmental policies while on balance acting in environmentally unfriendly ways. Some onlookers dismiss the entire “greening of business” trend as a passing response to the wholly unreliable vector of public opinion.

While a certain degree of skepticism is warranted, the underlying trends that are driving businesses to consider their environmental footprint are real, welcomed and likely to persist well into the future.

Behind all the talk about the greening of business, larger questions remain. What does “going green” in the corporate world really mean? Are there tangible, financial benefits for companies to get out ahead of the green curve? Finally, is this “green trend” merely a passing phase, or a requisite strategy for corporate survival in a world where higher energy prices, growing energy consumption and carbon constraints are increasingly likely?

The Push Toward Green

While enlightened corporate governance should not be discounted, much of the greening trend currently under way has been driven either by government regulation, business opportunity — e.g., companies’ recognition of an emerging public demand for environmentally friendly products or niche markets of environmentally conscious consumers — or a combination of both.

By moving ahead in the process, companies that have been early adopters of “green branding” have been able to shape the trend to their favor. Toyota, for example, with the release of the revolutionary Prius hybrid, has been able to reap both profitable gains and public favor as a company identified with clean energy innovation.

In an attempt to reap similar benefits, other auto companies have followed suit, with ad campaigns about fuel-efficient fleets and alternative fuel options, but are more often than not seen as latecomers to the game. Despite the success of some companies, green-branding is a double-edged sword.

Because there are very little data or standardized metrics upon which to judge the “greenness” of corporate efforts, some companies have experienced public backlash when their efforts to be green were revealed as superficial or judged to be ineffective.

In the case of the auto industry, the selective highlighting of higher-mileage vehicles and cleaner fuels is weighted against contradictory evidence showing increased sales of non-hybrid large trucks and sport utility vehicles, and the less desirable environmental footprint of some alternative fuels.

Similarly, many companies that have sought to improve their green image by purchasing renewable energy credits suffer from scrutiny over the actual effectiveness of RECs as a mechanism for spurring more clean electricity generation.

A more tangible and potentially long-term driver for the greening of business is concern over climate change. As consensus on the causes and effects of climate change builds, the concept of environmental stewardship gains more and more adherents across a range of industries.

Companies are increasingly inclined to consider the impacts of climate change when making investment decisions, either to mitigate the business risks associated with the potential impacts of climate change (e.g., floods, droughts, changing weather patterns, etc.) or the long-term costs associated with greenhouse gas emissions, but the practice still varies from company to company.

Some companies have found commercial opportunities associated with the increased popularity of green products and practices. Others have taken advantage of cost savings associated with energy efficiency gains.

Yet, in some cases, the uncertainty regarding the long-term costs associated with carbon dioxide emissions has frozen investment decisions altogether and is particularly true of energy-intensive industries. According to the September 2007 report of the Carbon Disclosure Project, of the 383 Financial Times 500 companies that responded to their climate change survey, 82 percent consider climate change to present commercial opportunities for both existing and new products and services, while 79 percent consider climate change to present commercial risks.

However, the same report noted that climate change was not yet fully integrated into the leadership structure of even the companies with arguably the most to lose from emissions targets. According to the report, “only 64 percent of responding carbon-intensive companies have allocated board-level or upper management responsibility for climate change.” In total, 198 firms in total were deemed carbon-intensive.

Policymakers also are playing a key role in creating markets for green technologies and energy sources. According to research conducted by the United Nations Environment Programme, investment in renewable energy and energy efficiency grew 43 percent from 2005 to nearly $70.9 billion in 2006. Investment is expected to grow to $85 billion in 2007.

The UNEP study concluded these investment trends are long-term in nature (despite volatility in certain segments of the market) because of the overall liquidity, size and diversity of capital in the market. The UNEP also concluded that investment still is very much driven by policy (taxes, incentives and regulations), but the likelihood of sustained investment over the long-term looks strong.#

Indeed, within the United States, companies are calling for nationwide government policies to provide greater certainty over the future price for carbon in no small part to stem the flow of contradictory or competing laws and regulations adopted at state and local levels.

Many power-generation companies, chemical and manufacturing companies, as well as major oil and gas companies, have either individually or collectively banded together to call for emissions-reduction policy on a national scale.

Most notably, the U.S. Climate Action Partnership, announced in early 2007, set out six key principles that its members wish to see as part of U.S. greenhouse gas mitigation legislation in an effort to provide them with greater investment certainty for the future. Many companies are taking action today in anticipation of future climate-related policies, while countless others still are waiting for concrete signs of sustained policy in this direction.

The Longevity of Green

The greening of business is, in reality, part of the larger corporate social responsibility movement in which executives recognize that the creation of long-term shareholder value depends upon a corporation’s ability to respond to the increasing demands of society. As the context in which companies operate continues to change, businesses undoubtedly will strive to adapt and innovate in order to survive and succeed. Constructive and thoughtful government policy can facilitate that transition as markets and regulation, an uneasy marriage, will both be needed to achieve a truly sustainable future.

Frank Verrastro is the Energy Program director at the Center for Strategic and International Studies. Sarah Ladislaw is the CSIS Energy and National Security Program fellow, and Jennifer Bovair is research associate for the CSIS Energy and National Security Program.