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How Can Your Company Manage Carbon Regulations and Continue to Grow?

<p>As the economy recovers, businesses are picking up steam -- but are they moving in a way that will put them in conflict with coming environmental laws? Three strategies can help keep your company growing, and in the green.</p>

[Editor's note: This article was co-written by Jim Holway, director of the Western Lands and Communities Program, and Dennis Minano, the former chief environmental officer at General Motors]

The topics of greenhouse gases (GHG), climate change and environmentally responsible growth occupy the media and political agendas and inject uncertainty into regional economies and businesses on just what to do. Some states and leading companies have taken preemptive steps on these issues, yet others find themselves stymied without a clear vision of the future.

The fog of uncertainty around carbon and climate continues, and will remain unclear, as the 112th Congress continues and we move into another election cycle. What is clear is the need to create strategic and actionable business plans with meaningful public-private partnerships that will produce outcomes that will be good for business, society and our quality of life.

Corporations can establish growth strategies that yield business results and social and environmental benefits using the following core business strategies and tools:

1. Risk Management. Discussions on future growth and carbon in the context of sustainability are really about risk management. How do businesses reduce exposure, mitigate their impact and adapt to changing societal needs, government policies, and natural resource constraints?
2. Transitional Business Tactics. As businesses manage their risk relative to carbon in the form of GHG controls and policy initiatives, they need to also consider transitional business tactics. Businesses must concurrently define what they will do today, with an eye toward transitioning their products and processes to meet shareholder expectations for sustained growth.
3. Strategic Placement. Businesses will also need strategic placement for their products and brands, as well as a supportive supply chain -- all of which needs to be bounded by a persuasive value proposition for their customers. To stay relevant, this requires a business strategy that addresses projections of energy costs and requirements for carbon reductions, yet maintains customer loyalty by providing products and services that address their evolving needs. Strategic placement relies on product innovation, and the ability to work with stakeholders through meaningful partnerships.

This suite of strategies and tools will enable states, regional economies and businesses to recognize the contours of the climate debate and to collaboratively focus on actionable goals and to monitor progress. When coupled with meaningful public-private partnerships, these strategies will result in greater business success and advancing community and global sustainability.

Corporate Strategy & Action

The ability for corporations, governments and society to address sustainability and its associated issues requires active engaged leadership which can put a classic business strategy into place, including a vision, strategy, investment, and action. For example, the top macro-economic concerns of business currently include: consumer expectations, government policies, price pressures, credit markets and interest rates and the federal deficit.

The figure below presents how these and other strategic business value-drivers can intersect to magnify innovation and enhanced competitiveness. Carbon and climate intersect each of these concerns. As consumer demand shifts, companies need to respond with more innovative and eco-relevant product options.

figure 1

Risk Management, Government Action and Carbon Controls

When it comes, government action regarding climate will directly impact business operations and success. Specifically, the "Endangerment Finding" by the U.S. Environmental Protection Agency (EPA) concluded that six GHGs, including carbon, pose a threat to human health. The finding opens the door to additional EPA regulations that will impact a company's ability to compete and interstate-regional economies.

Further, recent EPA guidance to the states on how to incorporate CO2 control measures in the environmental permitting process is a new business factor and potentially another step in the march toward a genuine CO2 regulatory scheme.

As companies find ways to respond to shifting consumer demands and new governmental policies -- with an eye on long-term profits, they will need to balance natural resource consumption with demand for what they produce. There are already many companies moving in the direction of eco-relevant products and operations.

For example, General Electric is manufacturing more fuel-efficient locomotives; CSX is integrating renewable energy into future plans for its land holdings; and Aerojet, a firm that focuses on rocket propulsion, has deployed solar energy to better control long-term electricity costs.

These companies have selected eco-relevant products because it makes economic and environmental sense. Further, the leadership of these businesses has begun to position themselves (and their products) competitively, as they see how the regulatory and policy landscape is changing.

The U.S. Securities and Exchange Commission (SEC) has issued new guidance for public companies on what must be disclosed regarding the "materiality" of their impact on climate. The SEC outlined four areas that might trigger requirements for companies to disclose their vulnerability to sustainability concerns:

1) impact of legislation and regulation
2) impact of International Accords
3) indirect consequences of regulation or business trends
4) physical impacts of climate change

While this SEC guidance is focused on climate, it also addresses greater transparency and the material impact that either climate change policies or actual physical changes in our climate patterns may have on the financial performance of public companies. Climate change and carbon emissions will be closely tied to regulation, the availability and cost of raw materials, and emerging business trends.

This warrants special attention by business leadership -- especially as corporations plan their long-term corporate growth strategies. Companies such as Dow Chemical, Boeing, CSX, Home Depot and Walmart are choosing to proactively manage energy and energy supplies (including reliability and quality), to reduce carbon exposure and reduce operational costs.

The availability of capital from credit markets is another area that will be affected by climate and carbon emissions. In the past five years, public companies have been increasingly subjected to new sustainability measures and ratings, referred to as their Environmental, Social and Governance (ESG) performance.

Rating agencies, non-profit organizations and social investment funds such as Innovest, Calvert, Domini, IRRC, TIAA-CREF and KLD Analytics have been actively screening companies on everything from environmental disclosures to carbon and climate responsiveness.

It seems clear that companies with strong leadership and governance structures will be best positioned to succeed in the future marketplace by quickly assessing, analyzing, and responding to their exposure to carbon. Companies with these strengths also demonstrate an advanced capability to respond to shifting consumer demand, changes in government policies and price pressures in general.

Effective business leaders, recognize that the SEC and EPA actions on climate change as well as ongoing capital market actions need to consider:

• How emerging sustainability issues including carbon emissions, and the cost and availability of natural resources, water and energy could impact their business?
• How to disclose carbon releases related to their products, and how can they begin aligning their business on sustainability and climate issues?
• How significant is the green movement to business performance and profitability.

In sum, business leaders need to provide a clear vision for their companies and communities in the face of significant uncertainties. The figure below summarizes how many leading companies work toward aligning corporate strategy with internal-and-external facing sustainability requirements. A disciplined approach to financial management with a defined corporate strategy allows the assets of the company to better assess and address their place toward sustainability goals.

figure 2

The Dilemma: Can Sustainability and Carbon Control Co-Exist?

On one hand, there are changes that require action: SEC disclosure, shifting customer demand, emerging regulatory and financial controls. Yet, on the other, there are multiple uncertainties and challenges for determining appropriate actions including: measuring the effects on shareholder value, remaining a profitable business, documenting the effects on financial performance and standardizing decision-making frameworks on how carbon can be valued, monetized, off-set, and financially accounted for.

It is well established that corporate risk is a function of multiple variables including the marketplace, emerging issues, shifts in consumer preferences and demand, ability to access capital, and ability to retain top talent. Working through this dilemma requires understanding critical issues, managing corporate reputation and applying proactive and flexible leadership and business strategies.

Traditional elements of corporate strategy, including financial planning, innovation, advancement of technology, workforce training and retention of top talent will remain the primary "playing cards" by which many companies will keep their heads above the carbon debate, and remain focused on business growth and sustainability.

Corporations, governments and other institutions help society achieve resiliency through an open market for products and ideas, and through innovations that result in responsible growth and a respect for the limitations apparent in both the social and the natural world.

Leading by Example: Learning from Others

Companies are not standing still. The following examples show how some companies have gained competitive advantages by proactively and strategically addressing climate and carbon challenges:

• Product Innovation Intel has developed more efficient processors which can be used to reduce energy and water demand, decrease operating costs, and enhance performance of data-centers.

• Technological Advancement Suncor Energy acquired PetroCanada in 2009 and has deployed wind energy at its oil sands operations and is actively exploring carbon storage technologies and initiatives.

• Workforce Training, Leadership & Retention IBM committed to spend $60 million over three years as it initiated an employee based program named "Global Citizen's Portfolio." The goal of the IBM program is to enable IBM employees to enhance "their skills and expertise, in order to become global leaders, professionals and citizens."

• Global Reach and Impact through Collaboration Dow Chemical Company (and Gazprom Marketing and Trading Limited) signed a Memorandum of Understanding (MOU) in 2009 to develop and implement GHG reduction projects on a global basis.

• Increased Competitiveness It is not just the Fortune 500 companies taking action. In some instances, smaller suppliers have remained competitive in the past 18months during the global recession by (1) better managing business risk; (2) repositioning themselves strategically, and (3) conducting transitional planning. For example, New York- based HARBEC Plastics, a leading manufacturer of high-tolerance machined components and quality injection-molded parts has reduced its energy consumption through efficiency measures while also incorporating on-site renewable and distributed power generation to shield itself from energy price volatility.

These examples demonstrate that small and large corporations are able to gain a competitive advantage by incorporating challenges like the climate debate into their core business strategy.

With product, technological and human resource advancements being made in transportation, energy, building materials and systems, defense and agriculture, the outcome in the next decade will be more resilient companies that have a renewed license to grow and achieve larger profits with a more adaptable workforce and more efficient use of natural resources.

The Convergence of Sustainability, Innovation & Partnerships

There is both art and science in crafting corporate policies and innovation toward carbon concerns. Similar to producing a fine wine, climate realists are fusing old and new approaches as they seek the recipe for the right climate mitigation and adaptation strategy -- a recipe that includes efficiency, conservation, resilience, and innovation. For the scientist, the most cost-effective options for carbon reductions are achieved through conservation, efficiency, and substitution of resources.

However, the job is too big for any individual company or government entity to take on unto itself. The challenges facing the U.S. and global economy are diverse and complex, including: energy security, sustainable utilization of natural resources, retention of a viable manufacturing base, creating and retaining an educated workforce, addressing social needs on healthcare, social security and housing. In many ways, all of these challenges also ring true in the carbon debate.

First, at a regional, national and global scale, achieving the necessary vision, strategy, investment and action will require collaboration and some level of political consensus; Second, a strategic and multi-stakeholder focus on innovation and meaningful partnerships has proven to be a successful path forward; Third, business leaders have an essential role in helping their communities address carbon issues and policies.

Innovation University: Taking Action on Societal Needs

In the past three years, American colleges and universities have begun to transform themselves on how knowledge and innovation related to climate and sustainability is generated, retained and disseminated. More than any time in history, there is a growing awareness that we may be consuming natural resources at rates that outpace the ability of natural systems to refresh them.

American colleges and universities are now using their intellectual capacity and buying power to demonstrate how to we can grow our economy and our quality of life while reducing per-capita consumption of natural resources.

For example, since it was founded in 2006, more than 620 college and university presidents have signed on with the "American College and University Presidents' Climate Commitment (ACUPCC), agreeing to reduce GHG emission within a reasonable time frame.

The Rochester Institute of Technology (RIT) in Rochester, NY, is one of many leading colleges and universities where the notion of sustainability is gaining ground. RIT President Bill Destler has signed the ACUPCC, and, RIT has launched the Golisano Institute for Sustainability (GIS)—an interdisciplinary academic and research institution that offers a PhD in Sustainability with emphasis on sustainable production.

In addition, in 2009, RIT launched a "Clean Energy Incubator" in partnership with the university's business incubator, Venture Creations, their Center for Integrated Manufacturing Studies (CIMS) and resources from the New York State Energy Research and Development Authority (NYSERDA). The public-private "Clean Energy Incubator" seeks to accelerate the development of early-stage clean and renewable energy technologies and enterprises.

The RIT incubator is now working with dozens of clean and renewable energy entrepreneurs and established firms on developing business plans, assessing market opportunities, testing and validating technology, creating product prototypes and deploying technology. Our universities will likely be the place for the ultimate fusion of competing perspectives -- how new technology is being vetted and business potential is being evaluated simultaneously in opening up opportunities for research, student innovation and education and commercialization.

Forging Meaningful Partnerships to Address Growth and Sustainability

The Western an idyllic and dramatic backdrop for discussions on climate change and sustainability. Everything seems bigger in the West, the rivers, the landscapes, the mountains, the fortunes and perhaps, the challenges of responsibly managing growth and change.

Going forward, the pursuit and sustainment of broad-based and meaningful public-private partnerships will be necessary for addressing the west's sustainable development challenges and goals.

A leading example is the Sonoran Institute, a nonprofit organization advancing new partnership based approaches to these challenges. Founded in 1990 and headquartered in Tucson, Arizona, the Institute's work is focused on engaging business, government, civic and academic leaders to address some of the most pressing challenges and changes impacting the natural environment and communities of the InterMountain West.

Key challenges include: urban and rural population growth, management of public lands and iconic natural landscapes, increasing energy infrastructure and use as well as a largely untapped potential for renewable energy generation, drought and climate change, shifts in laws and policy, and the rapidly changing state and metropolitan economies.

Taking a community-based approach toward its mission, the Institute emphasizes collaboration, civil dialogue, sound information, local knowledge, practical solutions and big-picture thinking.

The Sonoran Institute and the Lincoln Institute of Land Policy established the Western Lands and Communities (WLC) Joint Venture in 2003 to pursue projects focused on shaping growth, sustaining cities, protecting resources, and empowering communities in the Intermountain West. Current WLC initiatives include; land use planning for climate change, developing community visioning and planning tools, research on development entitlements, and other factors shaping urban form and management of state owned trust lands.

The WLC is collaborating with a diverse group of public and private entities to create a vision and plan for the development of a new sustainable desert community called Superstition Vistas. Superstition Vistas is a proposed desert community of up to 1 million people on 275 square miles of Arizona State Trust Land on the edge of the Phoenix, AZ metropolitan area. Work on Superstition Vistas is leading to new concepts for: developing low carbon and low water using communities, creating incentives to spur high-end economic development and investment in infrastructure to guide smart growth, shaping growth throughout the emerging urban mega-region, and motivating reform efforts necessary to maximize the revenue from development on State Trust Land to benefit public education.

Responding in like to the call for businesses to take on leadership roles related to climate and sustainability, there is also much that local government and community officials can do to aid mitigation and adaption for climate change. The West has been shaped by dramatic fluctuations in its water and energy resources, land use patterns, economy, and a climate known for its extremes.

In the decades ahead, the hydrology of the region will likely become even drier, leading to drought, heat waves, diminished mountain snowpack, earlier snowmelt, catastrophic wildfires, and disruptions to natural processes and wildlife habitat. Faced with the challenge of both adapting to these impacts, and contributing to mitigation through the reduction of GHG emissions, planners in western communities will need to identify politically acceptable actions for their communities.

Establishing meaningful partnerships is a key element for success, as the Sonoran Institute and Lincoln Institute of Land Policy have found. By leveraging the capabilities, resources and assets of one another toward shared goals, partners can find strength in numbers to address complex, regional sustainable development challenges.

Promise for the Future

Given the harsh dialogue and continued concern about the health of the global economy, it's easy to be discouraged by the uncertainty. But, U. S. business and civic leaders must be resilient. As climate has changed over scores of centuries and no matter what our effect has been on climate change, it will be the resiliency, innovation and the capability of our businesses and other organizations to deal with the ambiguity that will serve as guides for the solutions discovered. It is what we do well albeit with bruises along the way.

Sustainability requires that we all recognize the linkages that exist between our environment, economy and society and across different regions and different sectors of our economy and society. Business and civic leaders can identify and support pragmatic leaders who recognize the inevitability of the challenges we all face. We must demand that these leaders work across party divides, span disciplinary perspectives, and link economic interests to reach consensus and invest in our future.

As we look beyond the global recession, it is important to remember that there is no substitute for thoughtful leaders and people who are empowered and united with purpose and resolve.

By actively employing risk management, business tactics and strategic placement strategies, corporations, universities, governments and civic organizations can begin to focus anew on the nuts-and-bolts relationship between carbon, growth and sustainability. Innovation using new technology and how people can collaborate and establish meaningful partnerships are effective and vitally important tools for addressing complex challenges associated with future business growth and prosperity.

Photo CC-licensed by rahims.

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