Winners and Losers

by Andrew Hoffman and John Woody

This essay appeared as “Winners and losers in a carbon-constrained world” in HBRGreen.org, February 19 to March 5, 2008

We live in a fossil fuel-based economy. Any alteration in the cost of those resources–both as sources of energy and as raw materials–will alter the competitive dynamics of nearly all sectors of the economy. Without a doubt, significant changes are on the horizon. Most observers believe that new regulations will soon create a market price for carbon. That fact alone will affect energy pricing and availability, creating a ripple effect throughout global value chains. And as in any market shift, there will be both risks and rewards, winners and losers. Certain industries, sectors, and companies will feel the impact more than others, but none will remain untouched.

Businesspeople need not have a personal view on the science and they don’t have to resort to calls to “do the right thing.” There are true strategic reasons to reduce greenhouse gas emissions. Scanning the business horizon for opportunities to protect assets, improve the bottom line, and enhance top-line innovation is precisely what companies are expected to do, and shareholders demand no less. Since regulation is part of the business environment, any company that can foresee business opportunities in the formation of environmental legislation is practicing what is expected of their managers–it is called capitalism.

And that is how you should be thinking about climate change. The question to ask is whether your company has an economic opportunity to be green vis-à-vis your competitors; then you must ask how and when you can take advantage of that opportunity. In fact, such a line of reasoning, and the corporate response it creates, is the best possible way to find a solution to the climate change issue.

If you want to be a winner in a carbon-capped world, you and your management team must do a careful analysis of your company’s position on climate change and develop a strategy to create opportunities. The ultimate goal of any good business strategy is to create a measure of control over your future business environment. Consider examining the following three steps as you prepare to develop a climate strategy.

1. Know your carbon exposure. Create an emissions inventory and assess your carbon footprint; then you can ask how potential changes in policy and market price will affect the positioning of your products and services in the months ahead and in the long term.

2. Take action. Once you know your footprint, reduce it. Then assess your business opportunities in doing so.

3. Influence the policy-development process. Policies will set the rules of the game and change the competitive landscape, favoring certain actions, companies, and industries. But to gain a seat at the table, you must first take credible action and develop legitimate expertise to bring to bear.

In the end, you don’t need to study photos of receding glaciers or pore over the latest scientific reports to know that climate change is already happening. Just look at your marketplace, your competitors, and your boardroom. Some companies are adapting out of near-term operational necessity, others are acting to mitigate long-term strategic vulnerabilities, and the most forward-thinking are devising ways to profit from clean energy and efficient technology.

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