Business strategies and climate change

By David L. Levy and Charles A. Jones
The Canada Institute of the Woodrow Wilson International Center for Scholars
Washington, DC (June 26, 2007)- Business, especially large multinational corporations (MNCs), have de facto become a key part of the fabric of global environmental governance. In their role as investors, polluters, innovators, experts, manufacturers, lobbyists, and employers, corporations are central players in environmental issues.

The recognition by governments and non-governmental organizations (NGOs) that large firms are not just polluters, but also possess the organizational, technological, and financial resources to address environmental problems, has stimulated consideration of ways to harness and direct these resources toward desirable goals. This acknowledgment of corporate potential has occurred, not entirely coincidentally, in a period of growing concern at a “governance deficit” at the international level.
Business has stepped into this breach with increasing enthusiasm. The International Chamber of Commerce (ICC), the largest multisector business association in the United States, has forcefully asserted a role as a legitimate actor in climate governance, based on societal dependence on business resources. Industry’s involvement is a critical factor in the policy deliberations relating to climate change. It is industry that will meet the growing demands of consumers for goods and services. It is industry that develops and disseminates most of the world’s technology…. It is industry, therefore, that will be called upon to implement and finance a substantial part of governments’ climate change policies (International Chamber of Commerce, 1995).
During the 1990s, much of the energy of North American business, particularly in sectors related to fossil fuels, was directed toward preventing an international regime to impose caps on emissions of greenhouse gases (GHGs). More recently, business has adopted a more and its responsibility for addressing the issue. A recent report from Ceres, a coalition of investors, firms, and environmental organizations, typifies the emerging optimistic view:
Companies at the vanguard no longer question how much it will cost to reduce greenhouse gas emissions, but how much money they can make doing it. Financial markets are starting to reward companies that are moving ahead on climate change, while those lagging behind are being assigned more risk… Shareholders and financial analysts will increasingly assign value to companies that prepare for and capitalize on business opportunities posed by climate change (Cogan, 2006).
Ceres lists five key ways in which many companies are responding more positively to climate change: they are establishing climate change task forces to integrate responses across functions, divisions, management levels, and countries; they are articulating their positions in their communications with the public and policymakers; they are disclosing climate-related risks and opportunities in financial and other documents; they are developing accounting systems for tracking emissions and projecting savings relative to a baseline; and they are incorporating climate change into strategic planning processes that affect resource allocation for research and development, production, and marketing.
High-profile corporate initiatives, such as “Beyond Petroleum” from BP and “Ecoimagination” from GE, buttress the view that business is taking climate change seriously. These initiatives generally entail substantial public relations and advertising efforts to re-brand the companies as green, particularly around climate change, combined with substantial investments in research and development for low-emission technologies and products. Corporate action appears to be diffusing rapidly. The Pew Center and The Climate Group, two organizations dedicated to promoting business action on climate change, have documented positive steps taken by numerous companies as well as the consequent financial and environmental benefits.
Several private initiatives have been established to create carbon-trading systems among participating companies. The World Bank Prototype Carbon Fund (PCF) was established in 2000 as a public-private partnership between a few national governments, including the Netherlands, Sweden, Japan, and Canada, and 26 companies, including Hydro-Québec, Daimler-Chrysler, Shell-Canada, BP-Amoco, and numerous Japanese firms. The Chicago Climate Exchange opened in October 2003 with 22 members, including American Electric Power and Ford. The members have committed to reducing emissions from North American operations by one percent a year for four years, and can engage in trading to meet those commitments.
All this corporate activity presents a significant paradox, as global GHG emissions are still accelerating and many countries are likely to miss their Kyoto targets. Some have claimed that corporate actions are primarily public relations efforts with little substance, though the detailed case studies by Pew, World Resources Institute (WRI), and other groups do substantiate real investments and organizational changes. Of course, it will take time for corporate investments to bear fruit, and some sectors will find it harder to achieve emission reductions than others; Ceres notes that climate change is still widely ignored in major industrial sectors such as coal and airline companies.
More puzzling is the resurgence of corporate political activity in the United States against climate policy initiatives, particularly those emerging at the state level. The U.S. auto industry, despite the introduction of new hybrid models in 2006, continues to oppose raising CAFE standards or their extension to heavier vehicles, and is vigorously contesting efforts by California and New York to exert direct regulatory control over vehicular carbon emissions. Corporate lobbying has been implicated in the withdrawal by Massachusetts from a proposed Regional Greenhouse Gas Initiative (RGGI) in early 2006. The Competitive Enterprise Institute (CEI), an industry think tank began running ads in May 2006 attacking the concept of carbon dioxide as a pollutant. Another business-oriented group, the American Legislative Exchange Council (ALEC), has been developing model legislation at the state level to limit regulation of greenhouse gases (GHGs), and claims almost a third of all legislators in the country as participants.
The remainder of this article traces the history and current state of business responses to climate change and explores in more depth the paradoxical contrast between, on the one hand, a beehive of business activity on climate change, and on the other, continued business opposition to mandatory measures despite accelerating emissions. The argument advanced here is that North American business is prepared to take action consistent with a weak, fragmented, and largely voluntary carbon regime; indeed, North American business has been instrumental in constructing this regime. These actions include considerable organizational and technological preparations for a carbon-constrained future, but they envisage a long-term transition that does not immediately threaten core business activities. However, as North American policy initiatives shift to the state level, business in affected sectors is organizing to oppose regulatory initiatives likely to become models for more stringent and mandatory federal policy.
History of Corporate Responses to Climate Change
Climate change presents a profound strategic challenge to firms. Despite the considerable attention given to potential economic opportunities, the primary issue facing many sectors is the “regulatory risk” of higher costs for fuels and other inputs, and lower demand for energy-intense products. Measures to control the emissions of GHGs most directly threaten sectors that produce and depend on fossil fuels, including coal, oil, autos, and airlines. Other energy-intense sectors include cement, paper, and aluminum. Companies also face considerable competitive risk as changes in prices, technologies, and demand patterns disrupt sectors and entire supply chains.
Investments in research and development are highly risky, as low-emission technologies, such as those for renewable energy, frequently require radically new capabilities that threaten to undermine the position of existing companies and open the industries to new entrants. Moreover, the unpredictable path of technological evolution makes the task of choosing among competing technologies a treacherous business.
It is therefore not surprising that a wide range of sectors responded aggressively to the prospect of regulation of GHG emissions. During the 1990s, U.S.-based companies were particularly active in challenging climate science, pointing to the potentially high economic costs of greenhouse gas controls and lobbying government at various levels. Businesses from across the range of affected sectors formed a strong issue-specific organization, the Global Climate Coalition, to coordinate lobbying and public relations strategies. Meanwhile, U.S. energy and auto companies invested little in new technologies that could deliver short- to medium-term reductions in emissions.
European industry was far less aggressive in responding to the issue and displayed a greater readiness to invest in technologies that might reduce greenhouse gas emissions. These divergent strategies defy simple explanation, particularly in the oil industry, where companies on both sides of the Atlantic are large, integrated multinationals with similar global profiles and strategic capabilities. Studies of the oil and automobile industries have pointed to the institutional environment of these firms as important determinants of their strategic responses. Corporate strategies are driven by perceptions of economic interest that are mediated by the different cultural, political, and competitive landscapes in the United States and Europe. Expectations concerning markets, technologies, regulatory responses, consumer behavior, and competitor reactions varied among the companies according to their individual histories, the location of their headquarters, and membership in particular industry organizations. Senior managers of European companies tended to believe that climate change was a serious problem and that regulation of emissions was inevitable, but were more optimistic about the prospects for new technologies. U.S. companies, by contrast, tended to be more skeptical concerning the science, more pessimistic regarding the market potential of new technologies, and more confident of their political capacity to block regulation. Moreover, several large U.S. companies in the oil and auto industries had lost substantial amounts of money in investments in renewable energy and electric vehicles in the 1970s, and were very reluctant to repeat these experiences.
By 2000, a convergent trend could be discerned as key firms on both sides of the Atlantic moved toward a more accommodative position that acknowledged the role of GHGs in climate change and the need for some action by governments and companies. In the oil and automobile industries, companies were beginning to invest substantial amounts in low-emission technologies, and were engaging a variety of voluntary schemes to inventory, curtail, and trade carbon emissions. No obvious dramatic scientific, technological, or regulatory developments can account for these changes, but Levy has pointed to a number of factors that produced some convergence in corporate perceptions of the climate issue and their interests. Most significantly, multinational corporations (MNCs) are located in global industries with cognitive, normative, and regulatory pressures inducing some measure of convergence.
The impact of MNCs’ countries of origin on corporate strategies is likely to diminish over time as industries become more international in scope. Given the keen awareness of interdependence, companies are likely to copy each others’ moves to prevent rivals gaining undue advantage. Industry interdependence also takes a collaborative form within industry associations and in a number of alliances and joint ventures. Executives read the same trade journals and the same studies of industry trends. The emergence of climate change as a “global issues arena” itself constitutes an institutional context that provides some convergent pressure. MNCs have little choice but to develop unified company-wide positions toward such issues, even when some subsidiaries dissent from the corporate stance. Indeed, most of the large MNCs in the automobile and oil sectors have formed internal, cross-functional “climate teams” for precisely this purpose. The senior managers responsible for climate-related strategy know each other well and meet regularly at the international negotiations and at other conferences and industry-level activities.
The shift in the position of U.S. industry can also be linked to changing competitive dynamics, strategic miscalculations, the evolution of new organizations supportive of a proactive industry role, and the diffusion of “win-win” discourse articulating the consonance of environmental and business interests. Efforts by the Global Climate Coalition (GCC) and other industry groups to challenge the science sometimes produced a damaging backlash. Environmental groups in Europe and the United States issued a number of reports that noted industry support for some climate skeptics, and attempted to frame the issue as big business using its money and power to distort the scientific debate. The growth of new organizations committed to a climate compromise further undermined the GCC’s claim to be the voice of industry on climate. Eileen Claussen, a former U.S. Assistant Secretary of State for Environmental Affairs and negotiator at the climate change negotiations, formed the Pew Center on Global Climate Change in April 1998. The Pew Center provides not only a channel of policy influence for member companies, but also a vehicle for legitimizing the new position. Other companies in sectors associated with low-carbon technologies have increasingly exerted their collective voice. The Business Council for Sustainable Energy, for example, which has affiliates in the United States and Europe, represents insulation manufacturers and the fragmented renewable energy sector. Increasingly, however, it has attracted larger companies engaged in natural gas and electronic controls, including Honeywell, Enron, and Maytag.
These organizational realignments have been accompanied by the growth of the “win-win” discourse of ecological modernization and a broader acceptance of the precautionary principle. The need to reconcile economic strategy with the case for precautionary action makes win-win language very attractive.
Ecological modernization puts its faith in the technological, organizational, and financial resources of the private sector, voluntary partnerships between government agencies and business, flexible market-based measures, and the application of environmental management techniques. The concept is reinforced by claims of significant cost savings, such as BP’s announcement in January 2003 that its success in reducing emissions by 10 percent relative to 1990 had also generated $600 million in cost savings.
The win-win paradigm is a key discursive foundation for a broad coalition of actors supporting the emerging climate compromise. A number of environmentally-oriented business associations, such as the Business Council for Sustainable Energy and the World Business Council for Sustainable Development, have adopted this language. Influential environmental NGOs in the United States, especially the World Resources Institute and Environmental Defense have initiated partnerships with business to pursue profitable opportunities for emission reductions. Governmental agencies find win-win rhetoric attractive for reducing conflict in policymaking. In the United States, the joint EPA/Department of Energy Climate Wise program describes itself as “a unique partnership that can help you turn energy efficiency and environmental performance into a corporate asset”.
On the economic level, competitive pressures and interdependence have compelled companies to respond to each other’s moves. For example, Toyota’s commercial launch of the Prius, a hybrid electric-small-gasoline engine car, in the Japanese market in 1998, took the industry somewhat by surprise. Most U.S. executives were initially dismissive of the prospects for the car in the United States, recalling that GM’s electric vehicle had generated much attention but very few orders when the car was launched in late 1995. Nevertheless, the U.S. auto companies were nervous that they might fall behind a competitor, and announced plans for their own hybrid vehicles, a number of which were launched in 2006.
In the oil industry, Exxon’s recalcitrant position can perhaps be explained in terms of idiosyncratic firm-specific factors. A highly-regarded internal scientist has played a leading role in the company’s climate strategy, the company’s tightly centralized structure has allowed for few dissenting voices, and its strong financial position provides little pressure for change. Texaco, by contrast, felt compelled to reevaluate its strategy as oil prices fell below $15 a barrel at the end of the 1990s. Recently, however, even Exxon appears to be softening its stance.
Table 1: Top Ten Firms in Corporate Governance, Rated by Ceres.
* BP, Oil and Gas, United Kingdom: 90
* DuPont, Chemicals, United States: 85
* Royal Dutch Shel, Oil and Gas, Netherlands: 79
* Alcan, Metals, Canada: 77
* Alcoa, Metals, United States: 74
* AEP, Electric Power, United States: 73
* Cinergy, Electric Power, United States: 73
* Statoil, Oil and Gas, Norway: 72
* Bayer, Chemicals, Germany: 71
* Nippon, Steel Metals, Japan: 67
Among the many indicators of corporate response are reports by outside organizations that rate firms or document their achievements. Three of these are analyzed here: reports by the environmental group Ceres, The Climate Group, and the Pew Center on Global Climate Change’s Business Environmental Leadership Council (BELC). These reports have different criteria for inclusion and evaluation, but overlap in coverage helps to provide a reasonable indicator of corporate responses. Cogan profiled 100 of the largest firms in 10 carbon-intense industries from energy, industrial, and transportation sectors. All firms have significant U.S. operations, but are headquartered in various countries, except for the electric power industry, which includes U.S. firms only. Cogan assessed corporate governance on climate change based on board oversight, management execution, public disclosure, emissions accounting, and strategic planning. The companies were scored with a 100-point checklist, with a mean score of 48.5.
The Climate Group describes the achievements of 74 companies that have made measurable progress on greenhouse gas (GHG) emissions or other climate-related action and have benefited financially from doing so. The data is derived mostly from the companies themselves, and inclusion is based on cooperation. The Pew Center’s Business Environmental Leadership Council (BELC) is a membership organization. Membership requires a commitment to supporting climate change science and the responsibility of the business community to take action. Their website lists company profiles, goals and achievements. Joining the Pew Center is a response strategy that was originally an action in opposition to the anti-Kyoto Global Climate Coalition.
Table 2: Bottom Twelve Firms in Corporate Governance, Rated by Ceres.
* UAL, Airline, United States: 3
* Williams, Oil and Gas, United States: 3
* ConAgra, Food, United States: 4
* Bunge, Food, United States: 5
* Foundation, Coal, United States: 5
* Southwest, Airline, United States: 6
* Murphy, Oil and Gas, United States: 6
* Phelps, Dodge Metals, United States: 6
* Arch, Coal, United States: 8
* AMR, Airline, United States: 9
* PepsiCo, Food, United States: 9
* El Paso, Oil and Gas, United States: 9
The Ceres rankings point to the relatively poor performance of North American companies. Note that the emphasis here is on management and reporting rather than emissions. The “top ten” list includes four companies from North America, five from Europe, and one from Japan (Table 1). North American firms are somewhat underrepresented among the best performers, and all the bottom twelve companies are from the United States (Table 2).
Ceres also found significant differences between industries. In general, chemicals, electric power, and automotive firms have the highest scores; air transport, food, coal, and oil the lowest; and industrial equipment, metals, and forest products in the middle. However, the differences between firms within industries are much greater than the differences between industries: the oil industry contains both the highest and lowest scores.
In the oil industry, four European companies (BP, Royal Dutch Shell, Statoil, and Total) all rank well above their North American counterparts in climate governance. BP, Total, and Shell have documented real reductions in carbon emissions and both BP and Shell are members of the BELC. In contrast, among U.S. oil companies, only Chevron ranks above average on the Ceres report, only Sunoco is a member of the Pew group, and no U.S. oil firm appears in The Climate Group study. Similarly, the London-based coal and minerals company Rio Tinto scores above average on Ceres and is a member of the BELC, while no U.S. coal producer has any positive indicators in terms of corporate response to climate change.
The metals and mining industry clusters into three groups, but not purely along home country lines. The aluminum industry is dominated by North American firms. Alcan in Canada and Alcoa in the United States both rate highly in climate leadership, participate in the Business Environmental Leadership Council, and have documented large reductions in GHG emissions below 1990 levels. Three overseas steel firms, Nippon of Japan, BHP Billington in Australia, and Anglo American in the United Kingdom, have above average Ceres scores; and the U.S. steel industry plus Mittal Steel of the Netherlands have very low Ceres scores. The good performance of aluminum manufacturers can be explained, in part, by the high energy intensity of the traditional process, which presents more opportunities for reducing GHG emissions and for cost savings.
The automotive industry also groups into three clusters, largely on the basis of nationality. Japan-based Toyota and Honda rate well, according to Ceres, and have large emission reductions documented by The Climate Group; U.S.-based Ford and General Motors are above average according to Ceres, and GM has modest achievements in the Climate Group report; the German manufacturers Daimler, Volkswagen, and BMW all have below average Ceres scores. In contrast with these indicators, it is noteworthy that the European Union has much more stringent fuel-efficiency standards than either the United States or Canada, and European manufacturers as a group use advanced diesel technology and lighter cars to achieve substantial efficiency improvements.
Several companies and sectors have ambiguous indicators. For example, Japanese auto manufacturer Nissan has a corporate governance score below the German manufacturers the lowest-rated automaker by Ceres. Yet it has documented reductions in GHG emissions that place the company on par with the highly-ranked Toyota and Honda. Among industrial equipment manufacturers, large U.S. and European firms (Swiss ABB, GE, and UTC in the United States) are noted for their corporate governance, but poorly-ranked Caterpillar has documented greater GHG reductions than UTC, while ABB and GE do not appear in The Climate Group report. These inconsistencies point to the difficulty in assessing and comparing corporate responses to climate change.
Probing the Paradox
While North American companies increasingly realize that climate change is a long-term issue to which they will need to develop market and technological responses, in the short term they face a weak and fragmented regime that offers only modest economic incentives for strong action. The emerging international climate regime comprises a relatively loose system of international governance involving significant contestation as well as collaboration among states, firms, non-governmental organizations (NGOs) and multilateral institutions. Within this system, states act as economic agents concerned about their competitiveness, while firms are important political actors with significant policy influence. The fragmentation and flexibility of the current governance system has facilitated its evolution but is also a fundamental source of weakness.
The specific mechanisms and targets agreed by the parties to the Kyoto Protocol helped to bring reluctant countries on board and accommodate industry opposition. The main elements of the Protocol include mandatory-but-modest emission targets, which are substantially weakened by broad and flexible mechanisms for implementation and weak enforcement. The inclusion of carbon sinks introduces considerable uncertainty and room for creative accounting, and the ability to buy carbon credits in international emission trading schemes enables countries of the former Soviet Union to sell large amounts of “hot air” credits. The Clean Development Mechanism and Joint Implementation further reduce the burden of adjustment.
Many argue that Kyoto is fast becoming irrelevant, and that the more significant regime structures are growing organically from the initiatives of NGOs, companies, and authorities at multiple levels. More than half the states in the United States are addressing climate change in some manner; many are drafting climate change action plans and enacting renewable portfolio standards, which require a growing percentage of electricity generation to be from renewable sources. Eight northeastern states are implementing an ambitious regional carbon cap-and-trade system for power generators. California’s legislature in 2002 began the process of regulating carbon emissions from automobiles; New York and nine other states have announced their intention to follow suit. The European Trading Scheme (ETS), a carbon cap-and-trade system, commenced operation in January 2005 and covers the power, iron, steel, glass, cement, ceramic, pulp, and paper industries.
While the momentum of this fragmented multi-faceted regime is clearly gathering pace, there is not yet a firm regulatory or economic incentive for firms to adopt radical changes in their strategies. Initial trades on the Chicago Climate Exchange have been priced very cheaply, at just under $1 per ton of carbon dioxide, suggesting that the cap is not very stringent. The RGGI program in the northeastern United States will most likely include a safety valve designed to prevent the price of carbon credits from exceeding $10 a ton, which is insufficient to drive substantial innovation or efficiency measures. Unlike the ETS, RGGI only covers the power sector and has modest emission reduction goals, consisting of stabilization in the 2009 to 2015 period, and annual cuts of 2.5 percent thereafter. In Europe, carbon prices have fallen to around $15 per ton after spiking in 2005.
The efforts of European oil companies exemplify the paradox of substantial climate-related activity with little fundamental change. BP and Shell have each committed to invest more than $1 billion in renewable energy, and have been particularly active in promoting their efforts in the media. Nevertheless, these new businesses are minuscule in comparison with their core oil and gas operations, which continue to grow. Oil multinational corporations (MNCs) on both sides of the Atlantic have converged on the view that constraints on carbon are not likely to present a serious threat. Oil production is expected to peak around 2020 to 2030, with a slow subsequent decline; at higher prices, vast reserves of oil shale and deeper ocean sources become viable. All the oil companies are well diversified into natural gas, the demand for which is booming-primarily for power generation, while renewables are not expected to pose a major threat before mid-century due to cost and infrastructure limitations. Oil is used primarily for transportation, with no commercially feasible substitutes on the horizon, and any improvements in fuel efficiency are more than offset by growth in vehicle sales and miles traveled, particularly in developing countries. Biofuels such as ethanol from corn can slowly be incorporated into existing infrastructure and business models. Air transportation is also growing rapidly, and in any event is not covered by Kyoto.
Much of the corporate activity on climate change is stimulated by the perception of long-term market opportunities in new high-margin, low-emission products and technologies, as well as cost savings from lower energy use. The development of markets for trading carbon credits presents a further stimulus. Several groups, such as the Investor Network on Climate Risk and The Climate Group, have played an important role recently in highlighting the financial risks and opportunities facing various sectors and encourage companies to assess and manage these risks rather than ignore them. A more proactive stance is likely to provide companies with some protection against litigation and damage to their reputation and litigation, as well as more influence in shaping the detailed mechanisms of climate-governance systems, such as allocation and trading of carbon credits.
Some substantial business opportunities clearly do exist. The rapid growth of markets for renewable and clean energy, and for energy efficiency, is one example. Global markets for wind, solar photovoltaic (PV), and fuel cell power are growing at an annual rate of approximately 20 percent, and are forecast to reach $115 billion by 2015, from a 2005 base of only $24 billion. Markets for associated electronics, materials, construction, and services will also experience rapid growth. The global market for energy efficiency products, currently estimated at $115 billion, is projected to grow to over $150 billion by the end of this decade. These markets, however, present substantial market and technological risks, and many of the small firms active in these areas are currently in a precarious financial position. In other sectors, the incentives for action are even less clear. In the insurance industry, for example, despite rising insured losses that many attribute to climate change, major North American firms are reluctant to take action on the issue due to a tradition of conservatism, relying on the federal government for disaster relief, and the lack of clear financial benefits from action.
When the United States first agreed to a binding international agreement in Geneva in July 1996, it provided an explicit assurance that industry interests would be integrated into the climate regime. Chief negotiator Tim Wirth promised that the United States would pursue “market-based solutions that are flexible and cost-effective,” and that “meeting this challenge requires that the genius of the private sector be brought to bear on the challenge of developing the technologies that are necessary to ensure our long-term environmental and economic prosperity”. The emergent regime is sufficiently weak and flexible that it does indeed accommodate most business concerns about short-term disruption to markets, and many firms appear willing to engage in substantial organizational and technological efforts to work toward a long-term carbon-constrained future. their bets by investing in long-term alternatives while acting to preserve the value of their technological and market assets in the short to medium term. Simultaneously, however, the locus of regulatory activity is moving to the state level in the United States, and when these policy initiatives threaten to impose more stringent caps on emissions and to create a model for national regulation, business is reverting to its oppositional stance of the 1990s. It remains to be seen whether the current skirmishes are the beginning of round two of the climate wars.
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