Natural Capitalism co-author Hunter Lovins lists Green to Gold as a must read. Not only did I read and enjoy it, but through Triple Pundit I was given the opportunity to interview Dan Esty, one of the passionate authors of Green to Gold – How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage (Yale Press, 2006). The book provides an easy-to-read analysis of the challenges and opportunities that businesses face when incorporating environmental strategy. It also offers practical steps businesses can take to become more competitive in this new business climate. Mr. Esty introduces his book this way:
What sets this book apart in the marketplace is that it is written with a business perspective for business people in business language with business examples and all of that adds up to something different than what has been put out there before. Specifically, it is not an environmentalist telling businesses how to behave, but is a business perspective on bringing the environment into corporate strategy.
The following is from my interview with Dan Esty on March 6, 2007:
Tauni Swenson: What do you think about the recent articles proclaiming that global warming will create a huge market opportunity – especially for the alternative energy markets?
Dan Esty: I think that is true. When you look at the size and scope of the energy markets and believe that what we have with climate change is a disruptive impact on the energy world, what you then say is somebody is going to continue to serve these markets in a very big way. These are trillion dollar markets and they are going to have to go in a new direction and this is significant.
What we have here is a series of changes occurring that our book chronicles and helps the business community understand. One is that there are very real changes occurring in the business environment. There are three in particular that make the environment a critical issue for companies to pay attention to large and small, new economy and old, and in manufacturing and services. There are a series of drivers from nature that are changing the circumstances businesses face. The biggest of these is climate change, but also water availability and pollution, local air pollution, chemical exposure and the public’s demand for less exposure. [There are the] issues related to forests and deforestation – especially for companies that have paper intensive catalogs.
There is a whole set of constraints around nature that companies which haven’t been paying attention are suddenly facing. If you are Coca-Cola [PDF link] and your core products are soft drinks, you have to have water. If you don’t have a supply of water that is acceptable and available – and acceptable to the community – you’re in trouble. Coca-Cola has been facing that in India. If you’re The Limited and you own Victoria’s Secret and you send out millions of catalogs a year, you better have a sustainable supply of pulp and paper. And if you are perceived as not having that – and therefore are deforesting – you’ll face a backlash. And they have faced a backlash on forest ethics.
So I think there are both constraints from nature, which are impinging on companies and then, of course, the looming prospect of regulation on some sets of issues most notably carbon emissions. There is a third factor weighing in here that is a new set of environment-oriented stakeholders who are increasingly asking questions of companies. Companies that are not prepared to answer these questions are coming off badly. It is not just NGOs and environmental groups who have been asking these questions, but increasingly they are coming from banks, insurance companies and even capital markets, not to mention employees who want to work with companies with environmental ethics. Most notably customers are starting to ask these questions. With respect to Wal-Mart’s sustainability initiative, the fact that Wal-Mart is asking lots of questions of their suppliers about their waste, energy use and green house emissions is really helping to focus the minds of those suppliers. When your biggest customer starts to push you on this you can’t dodge the issue.
I’ve been working for a decade with Unilever. They are always on the best environmental performer list, but I’ve never seen the kind of intention and seriousness as over the last year when Wal-Mart CEO Lee Scott said, “Look we’re going to ask you to step up to a new set of expectations.”
I think it is that combination of drivers, and the recognition that the nature of competitive advantage has evolved. Historically, if you went to a strategy class at Harvard Business School, the logic of competitive advantage would turn on access to natural resources, access to low cost labor and access to capital. In a globalized economy those three elements are available to everyone, so it puts a premium on other ways to differentiate yourself. And it turns out that one of the ways companies can most radically outperform the competition is how they manage pollution and control natural resource issues. You have a whole set of companies who recognize that good environmental management can be a significant element of competitive distinction, a way to step ahead of the pack.
TS: When you started writing the book did you expect to see the level of change that occurred in the time you were writing it?
DE: This worked out better than I could have imagined. The book was on a trajectory to be written in two and a half years and we were about a year late. Now I look back and think how very lucky. If we had put the book out a year and a half ago it may have sunk like a stone because I am not sure the market would have been ready for the message.
I’ve given you message number one, which is that from a corporate strategy point of view the environment has emerged as critical issue that no company can afford to ignore. Those who are folding environmental thinking into their business plans are stepping ahead of the pack. The other point that I think is really coming to the floor in a big way is that the business community is no longer seeing the environment as a downside issue to manage, a cost to bear, a risk to manage. I think that until recently that is how they understood environmental issues. It is a key change in attitude that businesses now look at environmental challenges and see opportunities.
Very substantial companies, not just fringe companies, are seeing huge upside potential in being a source of solution to the climate change problem. You’ve got companies investing in being alternative energy providers, wind power providers, solar, bio-fuel providers or periphery providers to those industries. That is a giant market which will be very big in years to come. If we really switch off fossil fuels, we’re talking about a trillion dollar marketplace. That is a lot of sales for a lot of companies.
Beyond climate change there is recognition that there are opportunites for being solution providers for water problems – both pollution and supply issues. There are opportunities across sectors of environmental concerns. That is why there are businesses, such as GE, who are selling off their core past businesses such as plastics and going into this new arena because they see environmental goods and services to be high-margin businesses.
It is not just GE, but also http://siemens.comSiemens in Germany and a host of companies around the world, which have defined themselves as responding to this environmental issues set. The recognition that the environment can be an opportunity has transformed attitudes in a major way.
All of this dovetails with a change in our core model of how environmental progress takes place. We’re no longer relying, as we have for most of the last 40 years, on command and control regulation, at least not to the same extent. That is critical because under the command and control model the government not only sets the standard, but also is responsible for technology development and innovation. My study of the environmental historical progress over the last 50 years has come from innovation and technology breakthroughs. A small amount of it comes from behavioral change. If you care about progress, about 90% of environmental progress is from environmental innovation – new technologies and new products. Therefore, figuring out how to create incentives to maximize innovation, maximize technology development and creativity is critical. That is increasingly the role of government: not to do the innovation, not to be the R&D arm, but to create incentives that get the private sector to carry the heavy lifting. I think what’s exciting is that the private sector is now stepping up in a very big way. Tens of billions of dollars was spent last year in venture capital money going to the clean tech market. All of that brings new energy, creativity drive. The private sector is much better at technology development than the government. People are rewarded on the ground success, not how much money they spent. People are incentivized for cutting losses, being creative, having good ideas and implementing them. When one investment doesn’t seem to be working, the private sector is very tough-minded about cutting funding for the area that isn’t working, and then redirecting it. Governments tend to get stuck. They do the same thing year after year even if it does not produce good results.
TS: Some have argued that green is becoming trendy. Do you see it becoming systemic? Is green-washing a first step towards authentic action?
DE: It is true that the environment has become trendy as a focus for business attention. It could be a passing fad, but I don’t think that is the case. I think there is a long-term logic to making the environment part of corporate strategy. It is increasingly evident. Frankly, companies that fail to get this message put themselves at competitive risk. I think there are some companies who see this emergence of a trend towards environmental thinking and think that they can be simple. They do things that are green in symbolism but not in substance. That is the sort of green-washing approach. I think that is unmasked easily in this day and age and fundamentally unsuccessful as a strategy.
You see companies like Ford. To his credit, former CEO Bill Ford saw environmental issues as significant. Bill Ford was an interesting case. He had the environment in mind as a critical issue but couldn’t get his company to be strategic about it. They rebuilt the River Rouge factory and brought in Bill McDonough, the green architect. They put in natural lighting, natural ventilation and even a green roof. But if you’re an automobile company, your strategic environmental issue is not the conditions of your factory, it is your cars. In this Ford was totally un-strategic. They seemed to think environment was a non-issue. Now they have been cut out with a consuming public that is very focused on fuel efficiency, wants less polluting cars that spew less CO2 out the back end. Toyota, in contrast, very much saw these issues as central to their design of the car for the 21st century. They now have the Prius, the front-running hybrid. A whole series of technology breakthroughs have been implemented across their fleet including light-weighting vehicles, which use of carbon fiber, improved efficiency to reduce waste, and a whole host of technology improvements. All are incorporated in the Prius, and also in other parts of their fleet. It turns out that it is not a successful strategy to talk green but fail to act. Bill Ford promised to deliver by 2006 250,000 hybrids a year. He fell down on that promise and had ads run in the newspaper picturing him as Pinnochio – someone who promises but doesn’t deliver. Now his green commitments look more like green-washing than green substance. It is too bad because I don’t doubt that he was genuinely interested in making the environment part of the Ford’s thinking, but he failed to embed the issue in the culture of the company and failed to evolve beyond green talk to green action.
TS: How do leaders lead and implement systemic change?
DE: That is a key point. Really making a company serious about environmental strategy requires leadership from the top. We found almost no examples where companies were successful in folding the environment into strategy that didn’t have leadership from the CEO, Chairman or someone at that level. Second, it is clear that companies have to start by understanding their own issue set. That is why we provide a tool in the book for companies to analyze their own set of concerns. For example, the AUDIO analysis [Aspects, Upstream, Downstream, Issues, Opportunities] is useful for companies. This tool helps them to understand the aspects of the environment that affect them, and to look upstream and downstream, then to reexamine the list of concerns with an understanding of the issues that need to be managed, concerns that have to be addressed, as well as the opportunities that need to be identified.
Where is the potential to make these issues a point of differentiation? Which allows you to set yourself apart in the marketplace? First, we think careful understanding of the company’s issues and even the industry’s ecological footprint are critical. Second, we think mapping is very important. Who are you talking to when you do environmental work? Is it your customers, the community you work in, your employees? Probably it is all of the above. Understanding who you’re speaking to and how you speak them turns out to be very critical. Third, we think that a company can be systematic in how it brings the environment into the business planning process.
[In the book] we really look at a series of “Eco-plays” where you think of how the environment may be a plan of attack in the competitive business you’re in. Some of it involves reducing costs and being eco-efficient: squeezing out unnecessary consumption of energy and other input materials, reducing risk, and finding ways to give a green element to your products or services so customers looking for green will prefer your offering. Another option is to move into a market space where you can offer something new in the way of a product or service that doesn’t have competition. Make it so attractive that the buyer won’t look elsewhere. The Prius is a great example of that. When a customer goes to the Toyota dealership to buy a Prius and can’t get one because there is a wait, they don’t drive down the street to the Ford dealership. They wait, sometimes 4-6 months. In effect, the Prius is a product that doesn’t have competition, at least with a select group of customers.
Finally, there is a whole set of opportunities around building an environmental dimension into brand and image. A certain set of customers increasingly want to see green in the products they buy. Companies that are able to fold environmental dimensions into their products or services are benefiting. For instance, Marks and Spencer in Britain is going green in a big way, committing to being carbon neutral. Now why are they doing that when they are going to bear some costs? They believe that their customers are so focused on the environment that they will be more allegiant to M&S in knowing that the company is focusing on the environment. They must have gotten it right because within a week http://www.tesco.com/greenclubcardpoints/Tesco, one of their big competitors, upped the ante by committing not just to carbon neutrality, but also to carbon labeling the 70,000 products sold in Tesco supermarkets. That is a staggering commitment to helping create a market for environmentally preferable goods.
One other thing is really important and that is having really good matrices and indicators to track performance. Companies need to ensure whether or not they’re making progress on the ground in real ways that are empirical, not just guessing. Second, incentivizing good environmental performance is important. It depends on the company culture how you incentivize. Some fold it into compensation, some performance evaluation and pay reviews, and some provide CEO prizes or awards. Making environmental performance part of what is considered critical for success in the company turns out to be very important, as well.
TS: What are the top 3 traits of the CEO’s you interviewed?
DE: First, there is one critical thing that we can say with some clarity and that is that the CEOs who are successful have broadened their vision of how the payoff will come for folding the environment into their strategy. In part that is a question of understanding that the payoff will come in a longer time horizon than traditional investments. Second, companies are looking up and down the value chain for opportunities to use the environment as a way to add value, recognizing that if they are addressing an issue that is in the hands of the supplier, there has to be a conversation about how to divide up the game. Similarly, if companies are doing something as a benefit to the customer, they have to figure out if they can charge the customer for the added value. Recognizing that companies should look across the value chain and production process with a vision of Extended Producer Responsibility is critical. The forward thinking CEO who is succeeding on this issue recognizes that some of the payoff for environmental attention comes in intangibles, which can be critical to business success. Third, smart CEOs are not fooled into thinking that the only logic for environment is in cases where there is a tangible payoff. There are lots of people who recognize that if you build a company that is cool to work for because you build environmental values into the corporate culture, getting that top tier talent to come work for you instead of the competition can be very critical to success in the marketplace. There is a whole series of other intangibles that smart CEOs watch for and see the environment as an opportunity to advance.
TS: What kind of knowledge would benefit MBA students and business leaders? What kind of skills can MBAs work on developing to get an edge in this business climate?
DE: I think the environment is increasingly an issue that anyone who aspires to leadership in the business world has to feel comfortable with and have the skills to address. MBAs should be looking for and taking courses where environment is talked about as a strategy issue. For those who want to get their teeth into this by running their own business or looking at strategy or environmental finance, then they should look into taking courses beyond the business classes and take environmental courses in science or related engineering courses. They should really try to get into the technology developments, issues around energy and alternative energy.
From a business point of view, what is critical for those who want to have an edge around the environment as an issue set is to recognize that there is a zone of substantive knowledge that is helpful to master: understanding what climate change is, where greenhouse gasses come from and how they can be addressed, understanding the policy developments that are unfolding in that arena, and understanding the energy challenges that every company is facing and what might be done about them. Beyond the substantive knowledge is a set of process skills. Success in addressing environmental issues means that you have to be very broad gauged in how you do your thinking. You have to deal with not only employees and those within the company in these issues, but also with a whole set of outside stakeholders including NGOs, communities and local political leaders, and environmental groups. Increasingly, you have to be able to speak thoughtfully about the environment to capital markets and stock market analysts.
TS: Anything else you think our readers should know about Green to Gold?
DE: Green to Gold is not only a story about how companies are stepping up to the environmental challenge, but also a story about a revolution and how environmental progress is being made. I think it’s enormously exciting to see the shift of action from the backs of government onto the private sector. I cannot think of a more exciting career to step into than being part of this revolution and really helping the private sectors step up to this challenge of producing breakthrough technologies which will help give us an energy future that is very different from the past. Such a future will respond to the challenges of providing safe drinking water to countries all around the world and will help ensure that we have technologies to get pollution out of our waterways and air so that we have a world that is both prosperous and environmentally vibrant for generations to come.
Tauni is currently earning her MBA at Presidio School of Management. She is particularly interested in working with small to large companies to reduce their environmental impact.