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Innovators Creating Cash from Carbon Challenges
December 13th, 2009
As it becomes more likely that companies in the U.S. will have to start paying for their carbon emissions, many of those companies will pass the cost onto their customers. There are three core areas where they could instead create stakeholder value by innovating their way to carbon reduction. By Thera N. Kalmijn and R. Paul Herman.
With an annual projected cost of a U.S. cap-and-trade system at $22 billion1 and the cost per ton of carbon likely to land near $24 per ton2, traditional business thinking could result in a game of "carbon-cost hot potato" in the value chain. Manufacturers will want to pass the cost through to retailers, and retailers will seek to increase prices for the consumer. Electricity producers will apply to regulators for higher rates for industrial, commercial and residential customers. However, the goal of cap-and-trade isn't a game of hot potato or wealth redistribution (as it might seem based on lobbying for and against); the goal is reduction of greenhouse gases that is economically efficiently ("gain" or profit) - which results in a more optimal environmental balance ("good" or human impact).
What's the most productive path? Good ole' innovation can save the day - by removing carbon from all stages of the value chain. What is the right strategy for innovating your way out of carbon-cost risk and emerging as a leader in low-carbon economy? What can you do to avoid being left holding the carbon-cost hot potato - or being forced to pass it on to your customers?
Our research of more than 500 companies, including the entire S&P 500, has found three core areas where corporate leaders create value for shareholders and for society:
- Innovative Product Portfolio: Creating new, lower-carbon products and services, resulting in higher revenue, more market share and competitive advantage.
- Increased Human Impact: Building a better world through reduced waste, pollution and inefficiency throughout operations, including production, transportation and disposal.
- Integrated Management Practices: Embedding life-cycle analysis and systems-thinking into accountability structures, decision processes and performance systems and scorecards.
INNOVATIVE PRODUCT PORTFOLIO:
Siemens, a global leader in electronics, engineering, technology, hardware and equipment has long worked in fossil fuel-based power generation, is capturing opportunities in higher customer demand for renewable energy and energy efficiency. In 2008, its Environmental Portfolio of products and services realized €19B in sales3, accounting for 25% of the company's revenue - and increased to €23B in 20094. Siemens' products create carbon savings too; from 2006 to 2008, CO2 abatement for customers increased from 24.2 million tons to 33.7 million tons (realizing an additional 39% of potential pollution). "We expect the environmental portfolio to outgrow the conventional portfolio due to higher stability and growth rates of 'green' markets, even in the financial crisis," Siemens reports.5
Putting core competencies to work to solve environmental issues is helping Siemens - and its customers - drive carbon from the value chain. Utilities like PG&E in Northern California benefit, producing some of the cleanest power in the country with a carbon intensity which is half the rate (50%) of the national average (245 tCO2-equivalent per $ million of revenue). With a goal of increasing renewables to 20% of the power mix, PG&E is adding wind and solar power. In October 2009, PG&E announced a project with Pattern Energy to build a wind farm using 44 Siemens 2.3MW wind turbines, enough to power 44,000 homes annually and reducing dependence on fossil fuel sources6.
At home, you might have a "solar shingle" on your roof which Dow is now selling to blend in with asphalt shingles, cost 10% less per equivalent energy unit than standard solar panels, and could produce up to $5 billion in revenue for Dow's top-line by 2015 and $10 billion by 2020. (Source: http://www.sustainablelifemedia.com/content/story/design/dow_designs_solar_shingle). As a company, GE's ecomagination products totaled nearly 10% of the company's revenue in 20087.
INCREASED HUMAN IMPACT:
Development of new products and processes in their Environmental Portfolio also led to operational and manufacturing efficiencies. In its OSRAM, LED lighting facility in Bavaria, Germany, processes were developed to produce required nitrogen from ambient air eliminating the need for delivery trucks (and nitrogen suppliers), and outside air and waste heat were used for cooling and air-conditioning. Savings from efficiency in manufacturing processes totaled €858,000 annually in electricity and gas8.
Logistics were also a factor at the LED facility. By shifting from road to rail transport between the manufacturing facilities in Bavaria and warehouses in Athens and Istanbul, Siemens reduced costs by 55% and CO2 emissions by 73%9 - without losing time in transportation, resulting in both "gain and good."
INTEGRATED MANAGEMENT PRACTICES:
In examining the €40 billion annual spend in its supply chain, Siemens works to reduce carbon impacts of raw materials by requiring suppliers to adhere to a code of conduct and to manage sustainability through an environmental management system that tracks and monitors key environmental metrics.
Walmart's supply chain is "likely to have an annual carbon footprint that is at least 100 times greater than … total Scope 1 and 2 emissions." (2009 Carbon Disclosure Project) Walmart's buyers now have incentives built into their individual performance scorecards that value more sustainable products for customers, as well as reduced waste and renewable energy. The Sustainability Consortium, spurred by Walmart's pioneering supplier scorecard seeking more environmental and social data, is a cross-industry initiative that integrates lifecycle analysis and systems thinking to assess a "total cost" of products for customers and society.
HIP Investor has found, in its comprehensive research covering July 2004 - June 2009, that leaders in these three areas tend to outperform financially for investors - while also benefiting society. Increased human impact, integrated management practices and innovative product portfolios can yield higher profits and human impact. You can be a leader too - in your firm and your portfolio - by adapting to the realities of the likely carbon cap-and-trade system and its goals: reducing greenhouse gases, driving innovation, and creating more gain and good.
- "CBO: Cap-And-Trade to Cost $175 Per Household", Environmental Leader, June 23, 2009
- "Carbon Risks and Opportunities in the S&P 500", TruCost, June 2009, www.trucost.com
- Siemens 2009 Response, Carbon Disclosure Project, www.cdpproject.net
- Siemens Press Release, November 10, 2009, http://w1.siemens.com/responsibility/pool/umweltschutz/pm_axx20091107e.pdf
- Siemens 2009 Response, Carbon Disclosure Project, www.cdpproject.net
- "Pattern Energy Secures Financing For California Wind Farm", Clean Tech Brief, October 9, 2009, http://cleantechbrief.com/node/974
- "Environmental protection at the company: State-of-the-art technology for an integral energy concept", http://w1.siemens.com/responsibility/en/environment/environmental_protection_company.htm
- "Siemens Corporate Social Responsibility Report 2008", page 90. http://w1.siemens.com/responsibility/report/08/pool/en/sustainability_report_2008.pdf
Thera N. Kalmijn has worked in operations process and strategies for over 20 years and is currently focusing on the issues of corporate social sustainability. Her passion is engaging corporations in profitable programs and partnerships to solve global environmental and social challenges. She is a principal at SureGround, a consultancy providing social and sustainable solutions. Previous experience includes Deloitte and the American Red Cross.
Paul invented “HIP = (Human Impact + Profit)” in 2004 to connect for-profit investments that delivered high human impact with investors seeking the same. Since then, Paul and the HIP Investor team have launched the HIP 100 Index (TM), consulted to high-net-worth investors, and advised corporate clients like Wal-Mart and NIKE. In addition, the HIP Scorecard (TM) has been published since 2007 in Fast Company.