Cautiously hopeful, while awaiting disruption
There's large potential for social and economic disruption ahead for years to come, with political instability to follow in the very regions providing climate leadership.
2015 proved to be the most consequential year for environmental and sustainability policies in my lifetime. It was a year of both new as well as expanded commitments ranging from publication of the Papal Encyclical, Laudato Si, promulgation of the Obama Clean Power Plan, adoption of the U.N. Sustainable Development Goals and an agreement on global climate change through the 21st Conference of the Parties of the U.N. Framework Convention on Climate Change.
As 2015 was a year of new policy commitments and frameworks, so 2016 will be a time for implementing them and delivering results. The responsibility for achieving these outcomes will be distributed across government, non-government organizations and the private sector, but it will lie chiefly with global companies whose global scale operations, value chains, innovation potential and investments most immediately lend themselves to contributing solutions to reduce global scale sustainability risks.
Factors shaping private sector performance
Several important developments are shaping the private sector’s capability and motivation to improve its environmental and sustainability performance in the future. They include:
A greater recognition that sustainability is increasingly about business transformation — encompassing business model innovation, addressing global scale risks and opportunities, and developing new collaboration strategies.
The movement towards market scale in planning sustainability-related investments and innovations: This development reflects such factors as the sweep of digitization and Big Data across the global economy, greater competitiveness of renewable energy sources and the desire for expanded market access in growing economies.
Greater internal and external alignment: Internally, the business case for sustainability continues to strengthen as chief financial officers, chief marketing officers and chief procurement officers integrate sustainability into business operations they are responsible for leading. Externally, companies are placing greater emphasis upon aligning sustainability goals across their value chains to manage business risks and enhance customer relationships.
Real or imaginary?
Are these developments for real, or do they merely represent one-off decisions, or corporate or consultant speak? Several recent examples provide some optimism that there is momentum for carrying out the 2015 policy commitments noted above. They include:
In December, the Ford Motor Company announced a $4.5 billion investment to expand electric vehicle production over the next 10 years. Not to be outdone, General Motors, in the same month, made a $500 million investment in Lyft to expand an on-demand network of self-driving vehicles, and it announced that its Chevy Bolt has achieved a charging range of 200 miles. Toyota CEO Akio Toyoda, a long-term skeptic of self-driving vehicles, announced in December a major commitment to develop them.
The 2015 National Solar Job Census reported that 208,859 people are employed by the U.S. industry, an increase of 125 percent over the past five years. Meanwhile, the U.S. coal industry employed 93,185 workers in 2014, a decline of nearly 50,000 jobs between 2008 to 2012, or well before the Obama administration’s Clean Power Plan was even proposed.
American Electric Power, one of the largest users of coal in the power generation industry, reached a settlement with the Sierra Club in December to announce that it was retiring 1.5 GW of coal-powered capacity, while committing to build 500 MW of wind and 400 MW of solar energy over the next four years. AEP made the very encouraging decision to build this new capacity in Appalachia, the region of the U.S. most affected by the decline of the coal industry. The company also recently has announced important investments for storage of solar energy.
Bigger developments underway
These individual decisions in the transportation and power generation sectors pre-sage other, larger transformations across the private sector. What are they?
The market is changing. Customers increasingly expect more sustainable products and services (at no extra cost), and companies that provide them are adjusting what they make. In a recent conversation, BASF’s North American marketing executive told me that her company no longer makes "ingredients that ends up in a bottle on a shelf."
Rather, BASF is evolving its business towards more integrated customer solutions where issues such as safety, energy efficiency, waste reduction, GHG emissions, durability and price are part of an integrated package that it sells to help solve some of the customers’ own needs.
The business model is adapting to more disruptive markets. When the Obama Clean Power Plan first was proposed in the Federal Register (the reference document for all U.S. government regulatory decisions) in the summer of 2014, I was struck by the relatively restrained reaction from the investor-owned utility sector. CEOs in this industry have not favored this proposed rule, but they pragmatically have weighed its impact against other market factors they are evaluating.
Today, many of these CEOs, in private conversations, are saying, "We already have a road map for complying with the [Clean Power Plan]."
There are several reasons for this pragmatism: The prohibitive costs and risks of continued use of coal as an electricity source; major private and public institutional customers whose sustainability goals motivate them to seek reduced carbon footprints in their electricity sourcing; and the accelerating debate over the very definition of a utility. in a market beginning to be transformed by new competitors, technologies, business risks and costs.
Faced with these more transformational and disruptive challenges, the question of complying with the Clean Power Plan is a much more straightforward proposition — especially given the flexibility embedded within the rule, the lower cost of natural gas and increasingly competitive renewable energy supplies.
Self-sufficiency is not an option: No single company or institution can solve its own, or the world’s, sustainability challenges by itself. A company cannot develop and market its products in India as it does in Indiana, nor do consumers in China behave like those in Chicago. Businesses, cities and other organizations are also evolving a much more detailed understanding of how global megatrends are affecting plans for facility expansion, infrastructure maintenance, or sourcing and pricing.
Ironically, just at the time that global companies have been welcomed into the process for developing the COP21 agreement or the U.N. Sustainable Development Goals, their executive leadership teams are recognizing their own limitations in acting unilaterally. This is a good outcome because it’s stimulating companies towards collaboration and a realization that business success has to be coupled with social progress.
More disruptions, short and long-term
While 2015 witnessed these and other advancements, it’s important to recall that it was also a year of greater EU financial instability, continued mass murder in Syria that created millions of refugees in the Middle East and beyond, ISIS terrorism, decline of China’s economic growth, rollercoaster stock markets, murder from assault weapons and xenophobia around the world (in the form of Donald Trump and political campaigners in other nations). As sustainability initiatives occupy a more central place in the deliberations of global policymakers, they also risk being caught in the vortex of multiple crises.
2016 is likely to be equally disruptive with both positive and negative developments. On the plus side, the traditional link between the need for high fossil fuel prices to advance the growth of renewable energy technologies has been severed. Early indications this year are that plummeting oil and gas prices are not affecting solar and wind investments. Also very encouraging is the more activist stance of an expanding number of CEOs in sustainability advocacy through the We Mean Business coalition and other initiatives. Their participation in the COP21 process provided important political support for policymakers.
Looking forward, this cautious optimism likely will intersect with some very cloudy near and longer-term horizons. With critical elections looming in the U.S. and France and other nations within the next year, we’ve already seen candidates advancing campaign proposals based on cultural alienation and economic nationalism.
A United Kingdom referendum, Brexit, on whether to remain within the EU may occur as early as this summer, and rejectionists have mobilized considerable popular support to reject continued participation. If successful, Britain’s withdraw may destabilize the EU’s capability to follow through on its sustainability commitments as other nations seek to defund or water down climate change and other goals.
Poland’s recent election provides a good example of how an increasingly influential Eastern European nation can reverse course on a number of issues, including climate change, in a matter of months.
In today’s uncertain political climate, the odds have increased that accelerated political disruption could deliver control of national governments to parties skeptical of climate change and sustainability, thereby undermining the global policy consensus reached last year.
Even if these scenarios do not achieve fruition, there is a growing need for national and international policymakers to invest their political capital to prevent such outcomes. In addition, many unresolved 2015 crises (including Syria's civil war, refugees, terrorism, job creation) certainly will challenge the capability of existing governments to act as problem solvers. As a result, policymakers’ ability to stay focused on implementing COP21 provisions will be significantly tested.
More fundamentally, economic thought leaders such as Paul Krugman and Robert Gordon are suggesting that the main impact of the IT revolution already has occurred. Absent more significant productivity increases, our future, in Krugman’s words:
is all too likely to be marked by stagnant living standards … because the effects of slowing technological progress will be reinforced by a set of 'headwinds': rising inequality, a plateau in education levels, an aging population and more.
Assuming these assertions are even partially correct, there will remain a large potential for social and economic disruption for years to come, with concomitant political instability to follow, especially in Europe and the U.S. — the very regions providing essential political and business leadership to implement climate change and other agreements.