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The Business Strategy of Climate Change

March 19, 2009 | In a nutshell, climate change should be regarded as a market shift, one that will create winners and losers. In fact, business executives can be completely agnostic on the science of the issue and still see it as one of business concern. Professor Hoffman presents the results of several studies that look into the strategies companies are using to address this issue and attempt to integrate it into their business strategy.

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Transcript

[MUSIC PLAYING]

Andy Hoffman: Thank you, Jay. And good afternoon, everybody. I'm going to talk about climate change from a business point of view. And to set that up, I want to walk through a couple of ways that we could think about this issue to set up how we might think about it as a business issue.

We can go, for instance, to the realm of science. And here's a quote-- "Scientists make meaningless or ambiguous statements. Advocates and media translate statements into alarmist declarations. Politicians respond to alarm by feeding scientists more money. The accepted evidence is entirely consistent with there being virtually no problem at all." and this is actually Dick Lindzen at MIT-- not an insignificant character in the debate. He's been making a lot of hay on this. He calls climate change science by press release. And he's really been trying to make the rounds challenging the science.

On the other side, we have, "Global atmospheric concentrations of CO2, methane, and nitrous oxide have increased markedly" and is caused by humans. And that's the IPCC. Opposing point of views in the science-- we can get into debates over the percentages of people who agree with the left and the right. I just want to put those up as two ways of looking at this from the scientific community.

We can move to the realm of policy. "Over the past two hours, I've offered compelling evidence that catastrophic global warming is a hoax. That conclusion is supported by the painstaking work of the nation's top scientists."

This is from Senator James Inhofe on the floor of the US Senate in 2002. We have something on the other side. "The debate is over. There's no longer any debate in the scientific community. It's an Inconvenient truth." we all know who this is. This is Al Gore. Again, polar opposite views on thinking about this issue.

We can even move to the realm of religion. Global warming "is Satan's attempt to redirect the church's primary focus." I believe we must get serious to denouncing this. And this is the late Jerry Falwell. He said this in 2007.

On the other side, taken completely in context-- excuse the bad grammar-- but, "I have not been one who believed in the global warming. But I tell you they're making a convert out of me as these blistering summers." They have broken heat records and so forth. And this is Pat Robertson.

OK. Now, in business, to think about the issue of climate change-- everything I've put up there is a distraction. Everything is outside what you need to think about if you're a business executive and how to deal with this issue. I have seen some CEOs jump into the science debate. And I really look in disbelief and amazement at why are you doing this. Is this really germane to A, your expertise, and B, your best interests as a business executive?

And as a business executive, you really want to think about climate change as a market shift. You can be completely agnostic about the science of climate change and still see the business implications for how it will change the market for your goods and services as you go out there. In any market shift, there are winners and losers. And companies right now need to be thinking about, what is the form of this market shift? And what does it mean for your competitive position vis-a-vis other companies in your sector?

I put this up here. And a lot of my students don't know what this device is in the bottom left here.

[LAUGHING]

But they do know what this device is over here in the bottom right. And I asked them, have you ever heard of Olivetti, or Smith Corona, or IBM? And they all perk up. Yes, I know IBM. Well, these were three of the biggest typewriter manufacturers until the market shift. And only one of them made the transition-- IBM. Smith Corona and Olivetti are gone.

Are we talking about that big a market shift in climate change? As the price gets set for carbon, as investor and consumer markets start to shift, what will this do to the market that you're in? That's the way company executives really need to think about this. Leave the science aside. Debate the science if you wish, but the real question is, what does it do to your competitive position? That's really the way that you need to think about it.

Now some companies have developed capacities to watch the science. Swiss Re has climatologists on staff. They're looking at this issue as an important implication for their investment portfolio and their insurance instruments. And they feel that getting ahead on this-- DuPont as well. DuPont is looking at this and said, we've seen this one before. It was called CFCs. It was called ozone depletion. It wiped out a market for one of our products and we need to innovate to get ahead of it.

So watching the science is not necessarily a bad strategy. Believing in the science is not a bad strategy. But recognizing the market implications is where you need to be when you think about this as a business issue. Now, when you think about it as a market shift, there are two questions that emerge. And I hear them a lot. And I want to go through them and why they're the wrong ones.

The first one-- how much will it cost? This will cost money. Estimates from McKinsey, from the Stern Report, from others, put the number somewhere around 1% of GDP. Now first of all, that's an interesting number because we can't measure global GDP within 1% anyway. But it is real numbers. This is real money. But again, the question is, how much does it cost you? How does it affect your competitive positioning? How does it affect the other companies in your sector?

There's an expression-- the cost you face the most in business is the one you have to incur and your competitor does not. And that's what you need to be looking at in this. Are you a utility that's very invested in coal? In nuclear? In natural gas? How is this going to change your positioning in the market. These are the kinds of important questions you need to ask, not just the absolute-- how much will it cost?

The second question-- does it pay to be green? This is a question that-- it drives me nuts. It's a nonsensical question. It's the exact same thing as asking does it pay to innovate. And it's not a yes or no question. It depends on who does it, when they do it, how they do it. In the face of a market shift on climate change, you have to innovate. How are you going to innovate? When are you going to innovate? Are you the best one to innovate into this new space? These are the kind of questions you want to ask. So move away from this, does it pay to be green-- the question makes no sense. And really start to think about this in brass tacks as a business issue.

What I want to present to you is the results of some work I've done looking at companies-- here's a list right here-- that have made voluntary reductions on greenhouse gas emissions, absent of federal mandate. And the questions are simple. Why in the world are you doing this? And how are you doing it?

And you'll see they're mostly big blue chip companies. But I've found that the small to medium sized companies find this report very valuable, because these kinds of companies can make mistakes, learn from them. And the smaller companies can learn from those mistakes not to make the same mistakes themselves. And we also did case studies of six companies. Duke Energy-- at the time it was Synergy. Duke merged with them, which means they bought them. Shell, Whirlpool, DuPont, Alcoa, and in the bottom right, Swiss Re.

So let me go through these results and then I'll wrap it up with the overall conclusion of how we think about this in a business school, and how we think about this as a strategic issue. The first question we ask is why are you doing this? Why are you making these reductions? It really broke out into three areas. Number one-- increase profits. Number two-- anticipate pending regulation. And number three-- improved reputation.

And I really like the way this dropped out because I hear a lot of companies saying, we're reducing greenhouse gas emissions because it's the right thing to do. And when you hear that, you should roll your eyes and say, OK.

That's all well and good, but what's the business case? Because you have to imagine a senior executive going to his or her division managers and saying, we're going to start to anticipate climate regulation. We're going to start to think about this as a strategic issue. You better make the case on a business level, or they are not going to allow you to alter the profit and loss statements for their individual divisions. There has to be a business case. And it usually starts in the profit realm.

In the profit realm, we found it fell into four categories. Number one-- uncertainty in energy costs. If there is-- one thing that companies hate more than the Kyoto Protocol, it's uncertainty. Insurance companies don't mind trends that go like this. They hate trends that go like this. And this last price spike we had on energy really caused a lot of companies a lot of concern. None of them expect the price of energy to stay down. As this recession starts to move beyond, the price of energy-- they anticipate it coming back up. And efforts to get a better control on that is something they see as enhancing profits.

The second is growing interest within the investor sector. This chart right here is net sales of green funds in Europe. But we can also see it growing in terms of the investor capital worlds. There's a lot of interest. There's a fair question, at least before this recession, where there's a bit of a lull right now, whether there's too much money, chasing too few opportunities. It's a fair question to ask. But the fact remains that there is profit potential out there.

When Kleiner Perkins starts to invest their investment capital dollars in green tech firms-- and I hate the word green tech. I don't like green jobs. I don't like green building. I don't like the word green thrown into this-- just a quick aside-- my own editorial comment.

But for many people it's like waving a red flag in front of a bull. A lot of conservatives hear green and they hear liberal left leaning cause. And instead, what we're thinking about is in innovating in the face of a market shift. There are surveys that have been done where they ask business executives and consumers, do you want to green building? No. Do you want a smart building? Yes. Do you want a hyper efficient building? Yes. Do you want a green building? Absolutely not. I don't want any of that liberal left leaning stuff.

In the evangelical community, they don't call themselves environmentalists. Those who are engaged in the issue of climate change, they're caring creationists. The phraseology, the terminology is very important for thinking this through. When you label something green tech or green jobs, it does become a little problematic.

But be that as it may, my next point is green tech sector. There is movement in this area. There are opportunities to be had. And then finally growing consumer demandd-- consumers are paying attention to these issues. I got this from a gentleman at Whirlpool. In the 1980s, energy efficiency was number 10, 11, and 12 in consumer priorities. In the last four or five years, it came up as number three behind cost and performance. And we believe these concerns will continue to grow.

Now Whirlpool is looking at the market shift of climate change as an opportunity. Whirlpool makes some of the most energy efficient appliances on the market. And they think that this will create a competitive advantage if the price of energy goes up. You can go down to Lowe's right now. You can buy the baseline washer for $500. You can buy their top of the line energy and water efficient washer for $1,200. That's a $700 price differential and most people balk. But most people don't run a net present value calculation.

And in Michigan where I live, with the average family of four, you'll get that money back and 4.8 years. You'll get that $700 back in 4.8 years. If you go to Southern California, you'll get that money back in 1.2 years. And this is a no brainer. Consumers aren't picking up on this yet, but they're starting to. And they anticipate that if the price of energy goes up, those payback periods will get shorter. It will drive more consumers to their product. They're looking at it as a market opportunity. And Consumer demand is there.

The second area is pending government regulation. We asked the people in the survey, do you think regulation is coming? 100% said yes-- no surprise. We asked when, and here's the numbers the way they worked out. This was before Obama was President. I would expect that if you did this survey today, those bars would move up-- expecting regulation to come sooner. But even absent federal mandates-- they are looking at this situation saying, that's already in play. And in fact, it looks awfully reminiscent of what happened in the 1960s.

In the 1960s, every state was starting to develop its own set of regulations. And industry came forward and said, enough. Don't give us 50 different standards, give us one. And out of that came the EPA. Take a look at what's happening on climate change right now. The US Climate Action Partnership has formed. Other companies, other trade associations are coming forward saying, OK. We need some kind of regulation. We need some kind of certainty. Don't give us 50 different standards. Give us one climate standard.

So with this support and endorsement of industry, we're starting to see this push. I do think it's interesting that that doesn't come without detractors. Two years ago, when the US Climate Action Partnership first-- and this is a consortium with big blue chips-- PG&E, BP-- there were all acronyms. I don't know why. But when they first called for regulation on greenhouse gas emissions, the Wall Street Journal ran an editorial. It was a very scathing editorial.

It called them the Jolly Green Giants. And it said, don't believe a word they say. They don't care about the environment. They're just trying to create regulations that favor them and disadvantage their competitors. And it's like, wow. Stop the presses. The Wall Street Journal has suddenly realized that companies lobby Washington for regulations that give them a favorable place in the marketplace. That's what they're doing. That's what they're seeing coming. And they're trying to get a seat at the table to influence what that policy will be.

But even without that, at least 40 different states in the country right now have some form of climate regulation, whether it's a carbon reduction goal, a climate registry, a renewable portfolio standard, ethanol standards-- it's happening at the state level. The event that made that most clear for me was when Tony Blair came to the United States and he flew right over Washington and went straight to Sacramento to talk to Arnold Schwarzenegger about climate change.

And even beyond the state level, mayors around the country are setting climate reduction goals. Universities are doing it. The issue is in play and there's momentum building. And it's creating support for action at the federal level. We'll see how it plays out. But it's already going.

The final area is enhancing corporate reputation. After everything else happens, then there are some reputational benefits to be had by corporations. And even this has economic benefit if you talk to Jeffrey Immelt, the CEO of GE, he freely admits that their Eco Imagination program has done amazing things for their ability to recruit the best and brightest. You go back in 1997, John Brown-- Sir John Brown-- CEO of BP, first executive to acknowledge that climate change was real. The internal conversations that happened before that speech were driven around the idea that at that time, no one wanted to go work in the oil industry. It just wasn't an attractive industry.

There was a survey of the American public in 1996. And 85% of the American public agreed with the statement the oil industry has no right to exist. It's hard to recruit in that kind of an environment. And they looked at that shift as a way to draw people in. Patagonia-- a company that really puts its values way out in front. The CEO loves to boast that for every opening of Patagonia, they have 3,000 applicants. They get to cherry pick and that has tremendous economic benefits. And then if you walk out the door, it's very hard to get back in. Retention rates are very high. And they're saying that this connection between the values of the company and the recruitment pool is very important.

So why take action falling into these areas? In the end-- and this isn't my words. This is the Conference Board's-- saying businesses that ignore the debate over climate change do so at their peril. And companies that are trying to ignore that this is happening around them really will find themselves at the short end of the stick on this one.

The next question was how to take action. And we found four general themes that I'll go through and then I can get to some more specifics. In these four, I could take the word climate change out of this entirely. This is just business strategy. But let me walk through them.

Number one-- ensure strategic timing. If you anticipate a market shift coming, you have to jump at the right time-- not too soon, not too late. One of the companies in the report, Swiss Re, actually jumped too soon. They started to develop instruments around business interruption insurance, directors and offices insurance, and natural catastrophe insurance predicated on climate change. They didn't anticipate the wheels coming off the train around Kyoto with the Bush administration. And these markets didn't materialize. They moved too soon. But a lot of these companies are looking now and saying, it's not a question of whether, but when. And for a lot of them, the time is now. In the word of Pat Atkins at Alcoa, "It just takes time to educate 130,000 people." And if you're going to wait for regulation to be set to move on this issue, you're already behind the eight ball.

And you really want to take-- these companies-- take advantage of this vacuum in federal regulation as an opportunity to change your corporation, get ready for this market shift on your timetable, rather than letting the federal government set it for you. And that's an opportunity that you have right now.

The second point was once you decide when to jump, how far do you jump? So there are companies in the report that are saying they'll do a 3% reduction in CO2 emissions. Some that will do 70% reduction in emissions. Some will do it by 2010. Some will do it by 2020. You really have to think carefully about what's within your scope. How far are you going to go to try and deal with this issue? And you really need to pay attention to market signals.

From David Bresch at Swiss Re, "You should always remain one step ahead of the competition. But if you're two steps ahead, you lose the crowd. The idea is for you to be the leader of the pack and everyone pulling in the same direction." And I like the metaphor-- one step ahead, not two. It really blows out the water this notion that one company is going to be the leader and everyone's going to follow that company. That's not the way this works. You want to think about it instead of like a wave. And you want to try and be on the crest of that wave, not getting too far down into the trough but not to falling too far back. So you really need to be attuned to the market signals that are out there and moving with them, rather than thinking that you alone will lead them.

The third is influence policy development. I could tell you we will have a cap and trade system tomorrow, and I've told you nothing. There are so many variables at play. Will we do direct emissions or indirect emissions? Will it be upstream or downstream? Will we have sectoral standards or economy wide? What would be the baseline here? What would be the targets?

The big question that a lot of people are asking-- and I'm focusing on cap and trade. Politically, that seems the most likely option, even though a debate has started to emerge around taxes. I think taxes are a little problematic. I think it's a four letter word in our culture today, and a cap and trade seems more likely. But the issue of allocation of those initial permits is an issue of great debate. Do you give them away? Do you auction them. When you start to think about a federal government needing money for a stimulus package, auctioning looks awfully attractive. Yet when you use the word auctioning, a lot of people are saying, well, that's a de facto tax. How do we play this out?

Again, tremendous debate within Washington of what the form of this policy will be. And there's an old adage from Oklahoma that applies to this situation of the need to have a seat at the policy table. And that is that in Oklahoma, they used to say, if you're not at the table, you're on the menu. And I think it was centered around the issue of gossip. But on this one, if you are not at the table, influencing what that policy will be, and your competitor is, your competitor is going to find an outcome that they're going to find much more palatable.

Even Exxon Mobile has rolled on this issue. They're really not fighting the science anymore. Now they're trying to engage the debate of what the form of the policy will be. That's how important it is to have a seat at the table. But to have to see the table, you need to take action first. You have to have some credibility. David Home from Shell just puts it simply, "To validly have a seat at the table, you have to bring experience. You can't take a seat just because you're interested."

And that puts more pressure on the first one-- when to jump. Jump now. You need to start to take action so you can have credibility at the policy table. In fact, it's debatable whether the time has passed to really trying to develop that credibility to go into Washington.

And then the final area is create business opportunity. A lot of companies are starting on the left-- that this is risk management. There's a problem coming. We need to get control of it. But you really need to move over in the right business opportunity. Energy costs are so ubiquitous through the company that if you don't fit this in with the strategy of the company, then you're going to really have trouble making this makes sense on an economic level.

I think the best analogy I can think of when thinking about this, of not being an add on, is the area of green buildings. I can take a building and I can hyper insulate the walls, put in top of the line windows. I haven't reaped the benefits if I go to the next step and, OK, I'm now going to downsize the boiler, lower my energy costs, and really reap the benefits of a holistic look at the green building. The same is true with this topic here as well. You really need to think about holistically, about the company and how it fits with the business strategy.

It's been very interesting to watch in this financial crisis right now-- there's a good deal of companies saying, times are tough. But we're not jettisoning the sustainability initiatives that we're on. Others are saying, times are tough. It's gone. The difference between those two companies is the first group are the companies that connected to their strategy. The second group are companies that traditionally are usually connected with the area of social responsibility, which goes in times of financial crisis. And I really want to make that point, that this is not about social responsibility.

I, in the business school classroom, do not teach corporate social responsibility. If I do that, what I'm doing is telling my students, go to your other classes. Learn how to maximize NPV, ROI, ROA. Then you come into my class. I'm going to teach you a different value set on how to run your company. That's not going to work. You really need to find ways to think about environmental issues as they fit with business strategy.

Think about water right no if you're a company like Coca-Cola or Anheuser-Busch or Nestle and you're not looking at water as a strategic issue, you're about to run into a massive brick wall. It is becoming a strategic issue, just as climate change is.

In the end-- this comes from the VP and Chief Sustainability Officer at DuPont, "We need to understand measure and assess market opportunities. How do you know and communicate which products will be successful in a greenhouse gas constrained world? The company that answers these questions will successfully be the winner." That's what we're talking about here. It's about a market shift, anticipating the market shift, shifting at the right time in the right way in order to yield the benefits. OK?

In the report-- I'm going to rip through this fairly quickly-- but we broke the strategy of the companies-- the steps that companies developed in terms of developing this tragedy on climate change into three stages and eight steps. I personally hate stepped models-- the idea that you have to go one to two to three to four. That's not the way things really work in a business setting. Some go one then five, then three, then two and jump around. Some of them do them concurrently. Some of them become less important in one company or another. But I've found that this has been very helpful for communicating in a company.

These are the different categories of issues we need to think about. Let me just walk through them really quickly. Number one in developing a climate strategy is, where are your emissions coming from and in what magnitude?

How much? The regulations will cover six greenhouse gas emissions. Do you have a sense within your operations of what your exposure is, your emission levels are?

We found that all the companies measure direct emissions-- those that come from the actual facilities. This building right now is creating some direct emissions. And then most measure indirect emissions, but they all measure them in different ways-- great ambiguity around the indirect emissions-- purchased electricity, business travel, use fades of your product when it leaves your factory. All these factors come in and companies right now should be taking a look, and just considering the suite of direct and indirect, so they can anticipate when regulations come-- how vulnerable they are. Are they depending on which kind of regulatory form emerges?

They use absolute or index measures. We found that companies did was they report out absolute measures. We have x number of tons of CO2 by year y. Internally, they use index measures. We'll reduce x number of tons of CO2 per unit of product, per unit of revenue, in order to weigh-- to balance the goals within inside the company.

You can measure actual emissions or you can use fuel based calculations. We used this much number two heating oil. This is how much CO2 it produces. And then finally, if any of you are high tech-- information technology gurus, there's a market about to emerge or is emerging for computer systems to track this. The companies we talked to were not happy about their expert systems for tracking their CO2 emissions, aggregating them, analyzing them, and feeding them back in some kind of form. Ideally it connects with their financial management systems in a way that they can take action on them. And so a lot of the companies are trying to figure that out.

And once you assess your missions profile, you're not done. Then you have to figure out, OK, what does this mean for your goods and services vis-a-vis your competitor? And so benchmarking starts to come in. You need to understand what's going, what's happening to your competitors out there, and starting to think about this. We did ask two questions in this survey, that I just wanted to see what the comparison was. We put it in different places in the survey, and we found two very different answers, which was kind of fun.

The vast majority of the companies-- 93-- considered climate related risks when making general investment decisions. This is a strategic issue. But then we asked them, is climate change material under the corporate disclosure requirements of Sarbanes-Oxley, which means it's strategic. And only 26% said yes. This is a very hot issue. I am guessing that on that second question, the person filling out the survey went down to General Counsel and said, how am I supposed to answer this question? And the general counsel through them out of the office and said, you will ask that question no. It's a very, very hot question. But once there is climate regulation, it is very likely that this will become material under Sarbanes-Oxley. And this whole game is going to change. The magnitude, the importance of this issue is about to shift.

Then, what do you do about it? What are the options out there for reducing your emissions? You want to search first for low hanging fruit. And a lot of opportunities out there are very simple, starting with buildings. Swiss Re is reducing their emissions. Swiss Re is an insurance company. Their emissions just come from office buildings. But the guy who was in charge of it said, you know, if you've never focused on energy efficiency before, achieving a 30% reduction is simple. You just never look at it. Do you need to light your building up like a Christmas tree at night? Does the temperature inside have to be set at 72 degrees? Are motion sensors an option? All these ways-- I mean, let's face it. The way we build buildings, particularly in this country, is tremendously energy wasteful. And the energy codes are really not as high as they could be in this country. And so the opportunities in making buildings more efficient are very easy.

But it can even go beyond that. The beer company in Canada discovered that a lot of their truck drivers are still operating under the belief that-- and it used to be this way-- that when you ran a diesel truck, before shutting it down for the night, you had to let it idle for 10 minutes to settle down. You don't need to do this anymore. But they found the drivers were doing it. And they had to re-educate them to shut the thing off. And the greenhouse gas emission reductions and the energy savings were there.

And so there is a lot of low hanging fruit out there. The companies that haven't thought about this stuff can start to think about.

And then once you're done with that, a lot of them describe silver bullet opportunities-- simple action steps that made massive reductions in greenhouse gas emissions. At Alcoa, when they make aluminum-- aluminum is basically embedded energy. If you hold a block of aluminum in your hand, you're holding about 25% energy. It's extremely energy intensive to make a aluminum. And their whole business model is chasing cheap energy around the world.

They're building a smelter in Iceland. And think about it. They're going to mine bauxite, and other parts of the world are going to put it in a ship. They're going to bring it to Iceland. They're going to turn it into aluminum and bring it back into the world market. That is how important energy is to their markets.

And the way you make aluminum-- I took a tour of their smelter-- is you have a bath of the alumina oxide. You shoot massive amounts of electricity into it and aluminum falls out. In your house, you have a bust car about the size of your thumb. At the smelter, you have a bus bar about this big. In fact, when it was going, I took a step within about 10 feet of it. Someone grabbed the back of my shirt and just yanked me back because if you get within like two or three feet of it, it can arc. That's how much electricity is shooting through there.

Now, as the concentration of alumina oxide reduces, as the aluminum falls out, the resistance of the mix goes up. And you have something called the anode effect, which is basically sparks flying everywhere. And that's how they know to put more alumina oxide in. Paul O'Neil, the CEO, looked at this and said, this is insane. And the engineer said no, it's the best way we've been doing it because we've been doing it this way for 20 years. When you hear that, you've got a problem.

And so he pushed them. He said there's got to be a better way to do this. And in the anode effect, it throws off PCFs, a major greenhouse gas emission. So he pushed them for better ways to monitor the concentration of alumina oxide in the mix. And they reduce anode effect and they reduced the emission PFCs and they get better control of their process.

That sounds awfully win-win, and win-wins are rare. But there are silver bullets out there. These opportunities-- Jim Rogers at Duke Energy says we shouldn't be looking for silver bullets, we should be looking for silver buckshot. But the point remains the same-- are there targeted opportunities? Shell is trying to reduce the flaring of gases at the refineries. You drive by a refinery, you see that flame going off like the Wizard of Oz. That's effectively a release valve, a pressure release valve, at a refinery.

And if you work at a refinery and that flare goes off-- if it turns out-- you start running because there's a backup in the system. And something's going to blow. Something's going to give. But what it effectively is, is a pipe with a spark plug, just flaming it. Are there ways to catch that gas? A dirty gas-- but are there ways to catch it, filter it, put it back into boilers. They're starting to look at that and try and capture the energy that it was originally throwing away.

You have opportunities for on system and off system opportunities. This is just about offsetting. Tricky area right now-- Al Gore found that out when the energy bill in his house was made public. And he said, don't worry. I'm offsetting. And people said, no. That's not going to work. And a lot of people look at offsetting like buying [? indulges ?] for the Catholic church. I did see a cartoon of a man on his knees saying, forgive me Father for I have emitted CO2. And he says, go in peace, my son. Your sins are offset.

This does play out. It's tricky territory, but the markets are starting to be clarified. The quality of the offsets are getting better. But really, if you're going to take this seriously, you want to make the reductions in the plant, and then start to think about offsets.

The third area is setting goals and targets. How far do you want to go? And a lot of companies just looked around the business units, got advice, figured out how far to go. But the idea of creating a very challenging goal is important. If you make a really easy goal-- we all know this-- if I create a course syllabus and the demands of the course are low, the effort the students put into the course are going to be equally low.

If I make the grading requires challenging, I'm going to get much more out of the students. The same is true in a company. If you really want to challenge people to innovate, you really need the threat and the strength of a challenging goal. But you want to make a goal-- whichever one makes your company go, whatever fits. You can talk about energy efficiency targets. You can talk about greenhouse gas reduction targets. You can talk about sourcing of alternative energy sources-- whatever targets really motivate the people in your company, that's what you want to connect them to.

Once you've developed your strategy, to make things happen inside a company, you have to put a dollar sign on it. You have to connect it to the financial mechanisms within the company. And so what we found, a lot of companies were using internal pricing mechanisms. They might have a special fund for projects that reduce greenhouse gas emissions. They may lower the hurdle rate for projects that do this. Or some companies are creating shadow prices for carbon, that they would tack on to projects to alter the economic predictions and get the company to focus on it.

And some said, we're not going to give any price supports. It is going to sink or swim on its own. It's going to be competitive before we're going to do this. You can measure the cost in a number of ways. You can do absolute cost on the left, financial turn on the right. But that number in the middle-- that is the number every company should know. What is your cost per ton producing CO2?

Because if there is a cap and trade system, whatever price it's at, you want to know, am I going to be a buyer or a seller of CO2? And that number will tell you that. So right here-- 828 in 2004, 1249 in 2005. What will be the price of CO2? There are some bills out there that have proposed a price cap of $7. They're going to be buying.

EU has got upsized $20. They'll be selling. You'd much rather be on the selling side than the buying side. So that number becomes very important to figure out how you're going to fare in a climate change regime.

We had a number of companies that tried internal trading-- didn't work, end of the story. External trading-- didn't work either, but was great for educating the company and holding the companies some external standards. The primary external trading program is the Chicago Climate Exchange. We found companies were jumping into.

And then in the end, what you want to do is figure out how you gain the knowledge in order to figure out which projects are going to stand on their own and which ones need certain price supports. It was interesting. One person described it-- you want to lay out all the options on the table. So I can do motion sensors in your hallways. I'll get that money back in about eight months. I could put solar cells on my building in Michigan. I'll never get that money ever again.

Somewhere in the middle are all your options. And just as every fruit ripens at its own time, which ones are you going to do at the right time? A smart company is going to know the suite of options before them and be ready to jump when the time is right.

You want to engage the organization. You want to get people behind this. This is a major shift and you really want to get people involved. And so we saw all kinds of stuff going on. Google will give you-- they used to. I don't think they do this anymore, given the financial crisis. But they used to give you $10,000 towards a hybrid car. One company will buy-- if want to buy a bicycle, they'll buy you a bicycle. Alcoa buys you a tree and tells you to go plant it to learn the intergenerational aspects of this. Whatever works to motivate your employees. But you really want to get people involved on this.

And you want to make it fit. So when you go-- Whirlpool, interestingly-- we talked to them at length. And they never talked about climate change. They talked about energy efficiency, because they've been talking about energy efficiency for 20 years. And the guy said, look, we've got a train moving on efficiency. We'd just start confusing things if we tried to move a new train.

And you really want to think about that in your company. What is going to motivate people's action. If I go into Procter and Gamble, they are motivated by consumer demand. You better connect this to consumer marketing surveys. If I go into Intel, they're all about wafer stars per week. They're all about operational efficiency. You better connect it to that. If I go into 3M, they're all about innovation. You better connect it to what kinds of products we're going to be developing in the next five to 10 years. You've got to make it fit the company. This is so important.

There are so many programs that have been out there, generally started by GE for some reason-- Total Quality Management, Six Sigma, that a lot of companies take and just jam into their organizations. And they don't work TQM for a while was called Totalled Quality Management for what it did to the companies that they tried to jam it into. You can't do that. You have to make it fit. You have to make it adjust.

In the words of one executive, on a scale of 1 to 10, senior leadership was an 11. If your CEO is not behind it, you're not going anywhere. You've got to get the senior leadership on board. We asked them a very provocative question-- a fun question. Which departments in your company were change initiators, change implementers, and then most importantly, change resisters?

The initiators were environmental health and safety or the CEO suite. The major resisters-- marketing and accounting. Marketing in particular, a lot of them said, whenever we try and do this stuff, marketing just comes forward and says, we're going to lose-- any change, we're going to lose consumers. You're going to switch from a brown to white bag? You're going to lose consumers. You're going to switch to a white bag? No. You're going to lose consumers. They just would resist any kind of change.

And in any kind of change program, once you decide what you're going to do, you should be asking next who is for it and who's against it. And how am I going to get those who are against it to be on the side for it? So identifying in your organization who is for it and who's against it-- who can make things happen and who can't. On a college campus, students make things go. At Michigan, students make things go.

We, three years ago, announced we're going to build a new building. Faculty came forward to the deans office and said we'd really like this to be LEED certified. The deans said no way. We went to the students and said, you want a green building? Petition and push. And they created a survey. They created a petition. And the dean said, oh OK. The students want it? We'll do it.

The law school-- I shouldn't be airing my dirty laundry like this, but it's important. The law school announced a new building. Faculty pushed for LEED. They said no. Students pushed for LEED. They said no. The students were smart enough to realize-- they went back and they found the last five years-- every new law school building in the country was LEED certified. You want to keep up with the Joneses? Go LEED. The dean said you got me. OK, we'll go LEED. You've got to figure out what the opposition is and overcome it.

Formulate a policy strategy-- I think I talked about this already. But which initiatives are important to you? In the words of Jim Rogers, I really like this quote-- "Getting involved in the policy game is to avoid stroke of the pen risk.

The risk of a regulator or congressman signing a law can change the value of our assets overnight. If there's a high probability there will be regulation, you try to position yourself to influence the outcome." it's that simple. Get a seat at the policy table. If you can't do it as an individual company, do it through a paid association.

A lot of NGOs have developed consortium of companies trying to influence policy development. There are many ways into this. A second question is, which table though? Federal government? Internationally negotiations?

Different state level negotiations? You have to think carefully. There are limited resources in getting involved in this. But you want to think carefully, where do I want to have a seat at the table?

In the end though, in terms of market shift, the technologies will merge when CO2 has a price signal. And that price signal will be regulation. That is the linchpin to this of really pushing it and making it go. And then finally, engaging external relations-- you can develop the best strategy in the world, but you really need to try as best you can to have a sense of what's going on out there.

One of the avenues for doing this are non-governmental organizations. And a lot of companies are still looking at NGOs like they're all earth first-- that they're all just rock throwing, tree hugging, dirty eating druids. And that was not my quote. That is a quote from a senior executive, that I will not use any names-- was told he was going to meet with an NGO. He said I'm not meeting with those tree hugging, dirt eating druids. And they see things that way.

I saw a presentation by a senior executive at a major paper products company. And he started the talk by taking a trunk of tree and slamming it on the table. And it was a tree that had been spiked. Are you all familiar with what a spiking is? Spiking, you take-- some radical environmental groups will do this. You take a big metal spike and you drive it into select trees in the forest. And you bury the head. And then you tell the forestry company that the forest is spiked. Now you don't know where they are. And if a logger hits it with a chainsaw, it will snap the chain and the chain can come around and really do some serious damage to the loggers. So it scares people out of cutting trees.

But he saw this and said all environmentalists are tree spikers. And that's just not the case. Environmental NGOs are actively involved in the policy development process. They are actively involved in changing a consumer base. Your investors, even your pastor-- they have their tentacles everywhere. They are cues. They are the canaries in the coalmine. They can see the market shifts that are coming. They can help you anticipate them. They can be a great asset if you understand which ones to engage with and how best to engage it.

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