The EcoInnovator

Jeff Hittner shares his insights on current trends in sustainability and what’s in store for him and CEF going forward.

Q:
Welcome to CEF, Jeff. What convinced you to make the jump from leading IBM Global Business Services’ Corporate Social Responsibility Consulting practice?

Jeff Hittner:
My five years at IBM gave me an invaluable education in business sustainability issues—both the opportunities and the challenges for companies. And I’ve had the opportunity to work with many organizations that have earned the right to be called sustainability leaders. I saw CEF as a unique chance for me to apply what I’ve learned to help speed up the process of corporate sustainability innovation and help scale successful business solutions to environmental challenges.

Q:
What are some of the things you’re most looking forward to working on?

Jeff Hittner:
As is the case with politics, sustainability is bringing together some very strange bedfellows—sometimes even the staunchest of competitors—to drive corporate sustainability success. I am excited to play an honest broker role in helping to facilitate these kinds of opportunities and relationships.

Q:
Can you talk a little bit more about these collaborations?

Jeff Hittner:
Absolutely. There are many great examples out there already. The Beverage Industry Environmental Roundtable—a collaboration of more than a dozen companies including Coca-Cola, Diageo, Nestle, Anheuser-Busch InBev and PepsiCo—are working together to collect and share data and best practices related to water conservation and resource protection. They’ve established a common framework for information exchange on water stewardship, reduction and reuse.

In the electronics industry, the Electronics Industry Citizenship Coalition (EICC) was created so that companies like IBM, HP and others could create a consistent mechanism to exchange resources and programs that improve labor practices. It used to be that a contract manufacturer in China or South America would find it incredibly inefficient to comply with varying codes of conduct coming from several different customers at the same time. Now, assessment tools, educational resources, and audit results are available to all association members, who span four tiers of the supply chain. This degree of openness enables competitors to actually harmonize their approaches to creating an ethical supply chain.

Q:
In your previous role at IBM, what were some of the biggest areas of focus for your clients in sustainability?

Jeff Hittner:
Many companies are finding that their biggest sustainability impacts and issues come from their supply chain—so they’re focusing in increasingly sophisticated ways on specific areas of their supply chains. Client interest in sustainable procurement strategy and logistics strategy has grown, as has a focus on weeding out environmental inefficiencies in the manufacturing process.

We’ve also seen a lot of new interest from the public sector side. Major cities and small towns alike are looking at their financial situation and asking themselves “Can we qualify for stimulus money to create green efficiencies in our community?” They see an opportunity to reduce operating costs – while simultaneously winning grants for improving their municipalities.

Q:
And is there a role for business to play here?

Jeff Hittner:
Definitely. Plenty of companies are developing services to support these city sustainability goals. An early focus has been on reducing the energy and carbon footprint of buildings, but it’s much broader as well. There’s a lot of inefficiencies because systems and infrastructure are outdated and don’t communicate with each other. Companies that can integrate data on everything from vehicle maintenance, to water and energy supply, traffic, office HVAC and lighting systems, etc can find better ways to reduce costs, environmental impact and improve performance.

Q:
And did you find gaps in any areas that you expected businesses to have a better handle on?

Jeff Hittner:
Without a doubt, the biggest surprise was the lack of deep knowledge around customers’ sustainability expectations—a major gap in several companies. We had done several surveys of business executives globally and found that in 2008 only 24% understood their customers’ sustainability concerns well. This past year that number increased to 35%.

Q:
So businesses are moving forward with new products and services around sustainability and they don’t know what’s important to their customers on this topic?

Jeff Hittner:
Precisely. It’s similar to those Wild West, early days of the Internet. Companies would call up to request consulting services for help developing a corporate website. We’d ask them “Do you know what your customers want from you on the web?” The resounding answer would be “No, we just know we want a website, and fast!”

Q:
So sustainability is still in the Wild West stage then?

Jeff Hittner:
I would say corporate sustainability is still in a momentum building stage. There are definitely corporations and leaders that have been focused on it for decades. For example, IBM has had an environmental policy in place since 1971 and Japan’s oldest corporations date back nearly 1500 years thanks to a cultural ethos that always considered harmony with society and the environment essential to strategy.

But if you look at the issue of standards, for example, there’s still a lot of confusion and competition. A survey last year by the Carbon Disclosure Project identified 34 different ways to calculate carbon emissions among the Financial Times 500 companies. You’ve got “direct trade” and “fair trade,” the Forest Stewardship Council and the Sustainable Forest Initiative, standards that focus only on product use versus those that cover product lifecycle, and so on.

And in terms of sustainability data collection and information flows, we’re seeing just the tip of the iceberg in terms of what’s needed. More companies are realizing that to make optimal, strategic business decisions that incorporate sustainability they’ll need better data from operations, suppliers, business partners, customers, even external non-profit organizations and natural eco-systems themselves.

Q:
Are we seeing progress in this area of data collection?

Jeff Hittner:
New tools and services are also fast emerging to help collect information. Digitized sensors can gather and transmit information about real-world conditions instantaneously. A company called Pachube, for example, lets organizations freely share and monitor real-time environmental data across a global network of shared sensors. Look at where this is heading… with sensors being installed on buses and buildings to measure pollution. In Paris, a prototype watch is being worn by citizens to transmit anonymous ozone and noise pollution through their cell phones with data being shown freely on maps on the web.

Q:
Getting back to CEF, how do you see the organization’s mission evolving going forward?

Jeff Hittner:
In the short term, the focus is on creating our most successful, high caliber annual meeting yet. But as for the mission, I don’t think that’s going to change too dramatically. We are driven 100% by our members and their needs. We want to continue to focus on bringing them together in an environment where they feel comfortable sharing their concerns, their successes and their frustrations. Where new ideas and innovations are incubated. Where new relationships and collaborations are forged. I think in the future you’re going to see us develop several more avenues to facilitate exchanges between the members.

Q:
Thank you, Jeff.

Innovation plays a key role in the success  of all company initiatives - including environmental stewardship.

“I believe in being an innovator” – Walt Disney  

The passing of Roy E. Disney in December 2009 led me to thinking about the legacy of his uncle, Walt Disney. Walter Elias Disney (along with his brother) formed what ultimately became the Walt Disney Company, which created the first animated short film with a synchronized soundtrack of music, dialogue and sound effects in 1928’s “Steamboat Willie,” produced the first full-length animated feature, “Snow White and the Seven Dwarfs,” created a multiplane camera used in such films as “Pinocchio,” “Fantasia” and “Peter Pan,” re-conceived theme park design in Disneyland, and developed audio-animatronics with the “Great Moments with Mr. Lincoln” attraction at the 1964 New York World’s Fair, among other innovative, imaginative creations. So, it’s clear that he did believe in being an innovator.

But, what is innovation? Merriam-Webster defines innovation as “the introduction of something new” or “a new idea, method, or device.” We can also use another Walt Disney quote to illustrate innovation: “I do not like to repeat successes; I like to go on to other things.”

Both the definition and the quote are pretty broad in scope, which is probably why innovation is such a powerful force in enduring. It is also necessary in all aspects of a business – product development, operations, customer service, to name a few.

Innovation is also important in environmental stewardship or sustainability. That is why it is one of the four building blocks for Practical Environmentalism. In fact, there was an excellent article in the September 2009 edition of the Harvard Business Review, entitled “Why Sustainability Is Now the Key Driver of Innovation,” by Ram Nidumolu, C.K. Prahalad, and M.R. Rangaswami. I am pleased that they highlighted some of FedEx’s environmental innovations, including efficiency programs, the FedEx Office Print Online service and our FedEx Solutions consulting services. However, these are only examples that the authors used to recognize the value environmental stewardship can play, rather than simply being a cost to the organization. A key takeaway is that innovation is necessary - critical, in fact.

So, it’s certain to me that innovation is a powerful ingredient at enduring or sustaining in business, including environmental stewardship. It is also powerful in general since everyone can innovate. In fact, it’s most effective when team members in an organization look for opportunities to innovate and better those areas that they oversee and know best.

Think about it – Walt Disney didn’t create the innovations listed above. He visualized, challenged, questioned and, ultimately, empowered his team to create and perfect them. I agree with Walt Disney’s two quotes above. Here’s one from him with which I disagree, however: “I only hope that we don’t lose sight of one thing - that it was all started by a mouse.” The company’s success wasn’t started by a mouse, but by the innovative spirit of Walt Disney and his team in creating Mickey Mouse and all the other innovations they unveiled. We can all learn something by that.

Happy New Year. Here’s to new beginnings…through innovation.

An excerpt from a new book underscores the impact that pricing carbon will have on business operations and management strategy.

Within the next decade, $1 trillion (with a “t”) in carbon emission-reduction costs will hit our economy. The first edition of The Post-Carbon Economy prepares you to survive and thrive when these staggering costs hit your organization.

The primary assertion of The Post-Carbon Economy is that by putting a firm price on a ton of CO2 emissions, the economics of virtually every product and service changes, along with your ability to compete. For example, our back-of-the-envelope calculation shows that at the arbitrary price of $50 per ton of CO2e, the producer cost of a bottle of $6.00 retail-priced liquid detergent jumps by about 12 cents. That may not seem like much to you. But when the producer cost for the bottle is $2.00, that’s a 6 percent hike in production costs. Not trivial.

Right now we do not know what price the U.S. government will set on a ton of CO2 emissions. But we can make certain cost assumptions based on strong research. It is a fact that energy expenses in most manufacturing and service industries run about 2 percent of total costs. Production costs for manufacturers rise by between 1.0 percent and 2.5 percent for each incremental per-ton charge of $10. In some cases, that effectively doubles the cost of the company’s energy. For service businesses, the total cost increases are less, 0.5 percent to 1.0 percent. Yet there are some wild exceptions, including cement makers, who suffer a steep 13 percent increase for each $10/ton. We do know that the U.S. government’s proposed cap-and-trade programs will involve free allowances of some portion of companies’ carbon caps. Resources for the Future calculations show that free allowances of about 15 percent of a firm’s emissions from fossil fuel and electricity use will be sufficient to avoid adverse impacts on shareholder value.

Our argument in The Post-Carbon Economy hinges on four interrelated observations. First, when carbon emissions costs are priced by the U.S. government, putting them on par with capital and energy and labor costs, the economics of our businesses and lives are changed forever, and our economy goes post-carbon.

Second, your ability to compete in the Post-Carbon Economy will largely hinge on how carbon efficient you are, since one way or another, these new carbon emission costs will undoubtedly enter your business as well as that of your competitors here and abroad.

Third, your best hope to find your way to carbon efficiency is to switch from a traditional allocation-based costing regime to activity-based costing with a focus on carbon-what we call “Activity Based Carbon Costing” or ABCC.

And fourth, since you already manage your business by processes, the best way for you to manage to compete on carbon efficiency is by managing each of your seven major business processes most carbon efficiently.

Here is the Post-Carbon Economy in one sentence: Once carbon is priced, your carbon efficiency will determine your competitiveness, ABCC will be your secret weapon, and a business process orientation will keep you managing to your optimal carbon competitive advantage.

There are 7 key business areas that forever change once carbon emissions are priced.
1. Corporate Facilities & Data Centers
2. Finance & Accounting
3. Human Resources
4. Customer-Facing Functions: Sales, Marketing, Distribution & Service
5. Product Design, Research & Development
6. Manufacturing Including Supply Chain
7. Energy Procurement & Generation

Click here to read details about each business process, and visit www.postcarboneconomybook.com to find out how to contribute your  company’s case studies to the second edition of The Post Carbon Economy.

This article is an excerpt from The Post Carbon Economy by Amit Chatterjee, CEO and founder of Hara Software,  and Jay Whitehead, president and publisher of CRO Magazine.

A new CEF research report provides a comprehensive guide to the best resources for demonstrating green business value to internal skeptics.

In today’s challenging economy, executives face more pressure than ever to sharpen their business cases for eco-related initiatives. CFOs and others who control the purse strings want hard, dollars-and-cents justifications, whether for existing programs or proposed new spending.

For many “low-hanging fruit” energy-efficiency projects that promise fast payback and big ROI—such as certain types of lighting or HVAC retrofits—it’s relatively easy to crunch the numbers that will lead to a green light. But what about cases where the bottom-line benefits are less obvious, and the skeptical CFO demands “proof”? How, for example, do you calculate the financial benefit of phasing out a chemical that governments may not ban for years to come—if ever? How do you put a number on the ROI of an employee eco-training effort that could create a more innovative culture? How do you estimate the worth of a brand-enhancing leadership play, such as being the first company in one’s industry to pledge carbon neutrality?

A new CEF report, “Show Me the Money,” arms executives with the tools to help better show green business value to other decision makers within their organizations, whether advocating for discrete projects, multi-project initiatives, capital investments, changes in process/product design or product mix, eco-friendly purchasing or green supply chain initiatives. Topics include:

• Overcoming shortcomings in traditional accounting and financial analysis
• Linking green factors to cost and sales drivers
• Identifying and choosing key metrics
• Translating eco-related factors into dollars and cents for inclusion in ROI and cost-benefit analyses
• Using non-financial techniques to quantify costs & benefits
• ROI success stories

The heart of “Show Me the Money” is a comprehensive table detailing resources to help you monetize green costs and benefits. Resources in four categories are identified:

• General guidance on environmental management accounting and total cost assessment
• Models for ROI analysis and project evaluation
• Monetizing risk
• Monetizing value of eco to brand

Below is an excerpt featuring one of the report’s recommended resources, HDR Inc.’s “Sustainable ROI Model”—a methodology to monetize all potential internal and external sustainability-related costs and benefits for ROI analysis and project evaluation.

HDR, Inc.’s Sustainability ROI (SROI) Model
HDR, Inc., a large international architectural, engineering and consulting organization, developed the SROI model to measure the financial value of social, environmental and economic impacts of projects or programs aimed at the sustainability triple bottom line. The SROI model helps both public and private sector decision makers evaluate projects competing for limited funding. Its approach draws heavily on stakeholder input, which lends credibility to the controversial process of assigning monetary values and assessing probability associated with key variables.

The example above shows how a standard financial ROI valuation would not reflect full impacts and benefits. The difference between the values shown for the financial ROI (the blue curve) and the sustainable ROI (the gray curve) is the value of “green.”

The SROI approach consists of the following steps:
1. Identify all potential cash benefits using life cycle costing, then calculate a financial return on investment (FROI).
2. Identify all potential non-cash benefits to a company and external benefits to society, using structure and logic maps to reveal all variables.
3. Quantify inputs and assign a monetary value to each, using the best-available third-party research, contingent valuation and other means.
4. Assess statistical probability of various outcomes and assign a probability distribution for each variable.
5. Validate assumptions with stakeholder groups and build consensus.
6. Calculate the ROI for a range of possible alternatives, using a Monte Carlo simulation to account for the various values and variables.

For more information about HDR, Inc. and this model, contact John F. Williams, SVP, HDR, Inc., at john.williams@hdrinc.com or visit www.hdrinc.com

For a copy of the full CEF report, “Show Me the Money,” including details on additional models and tools for demonstrating the business value of sustainability initiatives, projects and investments, email CEF Founder M.R. Rangaswami at mr@corporateecoforum.com.

With the U.N. climate summit in Copenhagen just weeks away, executives should consider the meeting’s possible outcomes and their implications for global businesses.

As world leaders announced at the recent APEC Forum that Copenhagen would be scaled down to a “political binding” agreement, it was at one level a very pragmatic acknowledgement that little has been resolved to move forward with the original agenda while leaving open when and if key issues will be resolved.

One key stumbling block has been when the U.S. would finally set its own emission targets. The Senate ended speculation about passing climate legislation this year and are looking at early next year for floor debate, which postpones any U.S. emission target to be ready for Copenhagen in early December.

Other countries, such as China and many developing nations, have said repeatedly that without a U.S. target, they were not going to negotiate meaningfully. As importantly, behind the scenes, questions about emission targets and financing for developing countries still haven’t been resolved. One piece of good news, at least politically, is that the U.S. and China have put forth new bilateral announcements in the last week about collaboration on energy efficiency, renewable energy, shale gas, cleaner coal, electric vehicles and clean energy research efforts.

Still, if the intent of Copenhagen was to create a comprehensive global agreement toward moving the world to a low-carbon economy, the current retrenchment leaves potentially even more questions and uncertainties for companies.

One of the best tools to think about and understand uncertainties and possible outcomes is scenario planning. Created by Royal Dutch Shell in early 1970s, scenario planning is now widely used by companies to help develop corporate strategies, create new innovation, and increasingly environmental strategies. As an early practitioner since 1991, I have used scenario planning for environmental issues with companies such as PG&E and Nissan, with the Clinton Administration to create the nation’s first sustainable 1996 National Energy Plan, and most recently, while leading Morgan Stanley’s global environmental efforts, I used it extensively with senior management and business units to identify key corporate risks and new environmental business opportunities.

There are at least four key areas that need to be resolved before an agreement can be reached beyond Copenhagen’s initial political agreement.

First, what will be developed country emission reduction targets? Europe has agreed to a 20% reduction in emissions by 2020 (and higher to 30% if a global agreement is eventually reached) and a limit of two degrees Celsius globally. The U.S. Senate is debating whether to agree for a 20% reduction in the current Kerry-Boxer bill or scale back toward the House’s 17% target. Given the Senate delay, it is possible that  various new versions of a Senate bill will emerge by early next year.

Another issue is financing for the many developing countries to make agreed-upon reductions and have sufficient technology transfers to meet a global agreement.

A third issue is developing country commitments, not just China and India, but all developing countries to meet a comprehensive treaty parameters. Finally, many legal analysts worry over the shape of such a massive treaty.

So, what might be possible scenarios for beyond Copenhagen and implications for business? There are at least four to think hard about for your business. A surprise outcome in Copenhagen and the follow-up meeting next year in Mexico City would be a comprehensive binding global agreement, including targets for all countries, a two degree global goal, and agreement to sort out details in advance of a completion date, say, 2012-2013. For companies, this would set in motion a very complex set of international variables and questions around broader competitiveness and cost issues, customers, jobs and emission goals far beyond the current Senate debate.

A second scenario would be a protracted delay future, in which participants come back repeatedly over the next four years and make incremental improvements, such financing details and country commitments, and eventually end in a comprehensive framework by 2012-2013.

This outcome would pose at least two concerns, among many, for companies.  It will be tempting for most companies to simply ignore, even forget, that UN negotiations are still going on. But if a comprehensive framework agreement emerges and sets up future obligations and requirements, it will be important to pay attention to the details and analyze if it affects you in significant ways and start preparing early. The worst case is that you suddenly find yourself in 2011 realizing you actually need two to three more years to get up to speed to effectively compete with key global competitors. Secondly, domestic country low carbon policies and efforts, such as Congress finally passing climate legislation in 2010, will likely dominate your attention, including any bilateral agreements we’re now seeing between the U.S. and China. But the danger is that an eventual global agreement may trump some domestic-focused business decisions in the interim, which may prove costly and difficult to reverse.

A third scenario may seem like a surprise to some, but consider how fast climate science and global changes are happening. Arctic sea ice is melting faster than scientists have calculated to date. In Asia, this is the second consecutive low snowfall year for the Himalayas, which provide water for nearly 1.6 billion people. Increasing weather volatility, such as a trend of unusually high temperatures and extreme rain patterns in the U.S., is surprising to many scientists. What is often not acknowledged by policymakers is that the world’s climate and eco-systems are non-linear systems, with complex feedback loops and interactions, while international negotiations typically proceed in a linear, cause-effect fashion. Given recent scientific evidence and more rapid climate-related feedbacks, it would not be too surprising to see a third scenario that has climate events – whether more significant weather volatility or massive sea ice melts – drive international negotiators back toward completing a comprehensive global agreement.

For companies, this is an outcome in which you have difficulty planning for, especially given the complexity of manufacturing sites and locations, supply chains, customers and most highly networked companies. But, not thinking about potential disruptions and what they might be for your specific company, would be a serious strategic error – even if this outcome doesn’t occur. From my past experience, just taking the time to think about what climate disruptions might happen to your company can often yield unexpected new insights and opportunities.

Finally, a last scenario to think about is a world in which delays never seem to end. A political agreement is signed in Copenhagen, in which all agree to a two degree global goal and a future date to complete negotiations – but, future meetings fail to provide a comprehensive agreement until some unknown point in time beyond 2012 when countries realize that it’s imperative to have a truly global agreement to reduce emissions. For companies, this is more of where we are today, with the focus still on the Senate climate bill deliberations and worry over possible EPA regulatory threat under the Clean Air Act if the Senate delays. However, you’re still left with the dilemma of global emissions continuing to rise, different country-by-country regulatory standards emerging, and the prospect of ever increasing future costs to comply with an eventual agreement.

As we now adjust to a post-Copenhagen world, even more uncertainties abound for most companies. There may even be a few surprises. Some countries, for example, may make some shocking large emission reduction numbers or energy efficiency announcements in coming months. The number and types of bilateral deals between major countries, beyond the recent U.S. and China announcements, may divert attention. But no matter what outcome unfolds, scenario planning can help you to be more prepared – and less surprised – in refining your environmental strategies while helping the world move toward a low carbon future.
Jim Butcher, former head of Morgan Stanley’s global environmental efforts, now leads his own consulting firm, Entegra, and can be reached at butcher@entegraconsulting.com and 505-466-6895.

Achieving significant green progress by 2020 will require shifting some innovation investment to the retrofits of existing products, cars, homes and energy systems.

The rate of innovation in clean tech, next-generation transportation, green products and sustainable business initiatives has never been higher. This year, nearly $4 billion in venture capital investment has been poured into green innovation, making it the most active sector of VC investment today. Pushing these new technologies into the market will most certainly help consumers and companies function with a lighter footprint in the future. But what about now?

Consider these market predictions:

• Renewable sources will account for 14 percent of U.S. electricity generation by 2030.
• Hybrid vehicles will number 11.3 million worldwide in 2020, 13 percent of global sales.
• Overall U.S. industrial energy consumption will drop 4 percent by 2030, while chemical companies will cut energy usage by 25 percent.

Encouraging? Yes. But this pace of progress won’t help us reach the emission reduction levels needed to avoid the serious climate change impacts forecast for 2050. The solution? Focus on the “Now.”

In order to achieve real environmental progress in the near future, investors and entrepreneurs must shift their attention to the retrofit market, developing ways to reduce the environmental impact of the cars, buildings and products that we already own. For example, rather than waiting for the 254 million cars on American roads to be replaced with the newer, more energy efficient vehicles in development today, we should focus on a mechanism that could be attached to a conventional car to reduce emissions.

By no means should venture capitalists abandon all the work our industry is doing on brand-new developments in energy efficiency and lower-impact products. I’m simply arguing for a shift in the investment mix.

It appears to me that the 80-20 rule is at work here: Approximately 80 percent of investment in green innovation is aimed at new projects, while only 20 percent is aimed at “Now” projects. I believe we could greatly advance our progress over the next decade by shifting that balance by even 20 percent or 30 percent — or better yet, realizing a 50-50 split between new and “Now” innovation.

It is impressive how quickly the global innovation machine can rev up and get moving. By aiming the same emphasis, urgency and talent on the retrofit market, investors, businesses and governments can work together to realize, in just a few short years, the same type of incremental improvements that the tech industry is known for — and gain immediate impact in the marketplace.

Look at the tremendous advances that have been achieved in the areas of renewable power generation and sustainable business practices in just the past few years. Since founding the Corporate Eco Forum two years ago, I am continually amazed and proud of the significant progress on eco-initiatives our member companies have achieved.

Maximizing the power of “Now” is a well-worn path to success in the developing world. Innovation in less-industrialized nations involves improving processes and adding enhancements to existing structures. The startup ToughStuff, for example, which is based in the Republic of Mauritius and aims to deliver solar power to the rural poor, has developed a solar panel that functions within the confines of today’s typical Mauritian dwelling.

The kind of massive retrofit that I’m calling for now has also been successful in industrialized countries. In recent decades, for example, advanced technology revolutionized the manufacturing process. Rather than throwing all the existing machines away, the old lathes, drill presses and other factory machines were retrofitted to operate with computer numeric controls. This retooling enabled manufacturers to take advantage of the latest innovation immediately rather than having to invest the money and time in purchasing new equipment. Upgrading the cars, buildings and machines of today for continued use — rather than replacing them for “green” reasons — can in many cases result in far less physical waste and unnecessary use of new commodities.

An increasing number of “Now” solutions are already on the market and in development. Many coal-fired power plants are being converted to burn natural gas, for example. And retrofits in the commercial building sector are gaining ground. In fact, a recent study says that green retrofits will account for 20-30 percent of commercial building projects by 2014, resulting in a $10 to $15 billion market. Initiatives such as Enterprise Community Partners’ $4 billion pledge to build or retrofit homes and community buildings to green standards will jumpstart progress in the public sector. But there’s room for much more innovation.

Successful “Now” solutions will meet the same success criteria as other green solutions. They will have to be simple, reasonably priced and deliver a demonstrable and immediate ROI. Think of driving your car into the eco-equivalent of a Jiffy Lube and driving out with a lower footprint, courtesy of companies that can turn your old gas guzzler into a fuel sipper or plug-in hybrid.

With the collective minds, funds and ideas available to the green innovation community today, I believe more “Now” solutions need to be in development now if we want to live more sustainably in the near future.

The industry’s green IT conversation has so far been dominated by tactical energy-efficiency and waste-reduction efforts. It’s past time for tech strategists to collaborate with sustainability execs in order to leverage technology’s “green” potential across the enterprise.

The intersection of IT and sustainability presents vendors a broad array of business opportunities that go far beyond improving the energy and carbon footprint of clients’ IT infrastructure. And these opportunities are ripening fast in the current economic and political situation as government spending is poised to stimulate green investments across a range of public and private infrastructure. The 2009 economic stimulus bill approved by the US Congress, for example, includes $11 billion in funding to modernize the national electric grid and almost $9 billion for improving energy efficiency in federal and military buildings and facilities.
It is time for IT industry strategists to organize their planning at the nexus of sustainability and information technology around two categories of opportunity, each made up of two elements (see Figure 1):

• Green for IT. This is the traditional “green IT 1.0″ world, which applies sustainability practices to a company’s IT operations and infrastructure. We divide this category of business opportunity further into two elements: 1) data center and facilities, and 2) distributed IT infrastructure.
• IT for Green. This is the new horizon of “green IT 2.0,” which applies information technology to improving the sustainability of company operations and society. Again, two elements define this category of opportunity: 1) business process and applications — supply chain, building automation, telework, and other business operations outside of IT, and 2) public infrastructure — capturing information technology’s role in creating efficient transportation systems, smart electric grids, and entire green communities built from scratch.

Figure 1: Green IT 2.0

As the opportunity to achieve sustainable business value shifts from green IT 1.0 toward 2.0, tech strategists and CSOs will:

• Improve the connection between tech execs and corporate eco-strategists that will be 2.0 drivers. While green IT 1.0 is largely an IT-driven planning and implementation exercise, the drivers of green IT 2.0 will hail from far outside the boundaries of the IT organization. Tech vendors and their sales partners must be comfortable speaking the language of the chief sustainability officer, the CFO, the corporate brand manager or CMO, and others for whom sustainability is becoming a strategic priority. Understanding their challenges and opportunities in environmental reporting, the costs and benefits of energy efficiency, or the green characteristics of their brand will be a prerequisite for IT suppliers to become partners in addressing green IT 2.0 opportunities.
• Create road maps for CIOs to tackle 2.0 challenges. For most tech companies, the IT organization is their customer beachhead. It will most often be with the blessing of the CIO and other IT leaders that tech vendors get opportunities to engage with the business sponsors that need “IT for green” capabilities. But most CIOs are not ready, and not eager, to become catalysts for enabling greener processes and practices throughout the organization. They don’t have the incentive structure, the organizational bandwidth, and, in many cases, the expertise to tackle the green IT 2.0 challenges for their companies. Vendors must lighten up on the big-picture vision and instead hone in on road maps that offer incremental steps for IT departments that will move them in the right direction.

A new Sustainable Enterprise Institute report presents the evidence and the financial rationale for corporate sustainability  leadership.

By Peter A. Soyka and  Mark E. Bateman

Our new report, “The Road Not Yet Taken: The State of U.S. Corporate Environmental Policy and Management” finds the typical company in the Russell 1000 Index has an identifiable, enterprise-level environmental policy. This policy, however, only offers generic statements, not specifics. It also does not specifically apply to all operations of this typical company. It makes no commitment to stakeholder involvement, third-party auditing, or public reporting. It does not address greenhouse gases, energy use, or water use. This policy also does not identify a person or entity within the company specifically responsible for its implementation. In addition, the typical company does not have an identifiable environmental management system, has little in the way of other apparent infrastructure with which to implement its policy and manage its environmental issues, and does not publish a report based on the framework of the Global Reporting Initiative.

Why These Issues Matter to Investors
When developing this report, we found ourselves in an interesting place. In 2009, there seems to be a sizable contingent within the business community believing that sound environmental performance creates financial value for the companies capable of achieving it. To us, this represents a sea change of significant scale. For many years, we have, individually, advocated the view that based upon the facts and fundamentals, environmental regulations, management, and performance can exert significant impacts on a firm’s legal liabilities, capital cost obligations, and production methods and costs. Increasingly, company executives recognize that a company’s environmental image can have a positive or negative influence on its brand, access to capital and new markets, and ability to attract and retain employees, among other important assets.

In parallel with this significant change in corporate attitudes and beliefs, environmental and other sustainability investing has been expanding in recent years beyond its traditional base within the socially responsible investing (SRI) community. Increasingly, non-SRI “mainstream” investors have begun to invest funds using, at least in part, environmental criteria, have joined ongoing initiatives to promote the consideration of environmental issues, have developed and are actively promoting new investment approaches and tools using environmental criteria, and have made acquisitions and other investments to enter the emerging environmental investing market space.

Despite this growing awareness and signs of behavioral change, the available data indicate that environmental issues are not being considered by the vast majority of U.S. equity and fixed income investors. Recent investor surveys reveal that the vast majority of U.S. investors do not currently believe that a number of environmental issues are “currently relevant for consideration in mainstream financial analysis.” These issues include sustainability (21.6 percent of U.S. respondents), environmental management (8.1 percent), climate change (5.4 percent), and water use/availability (2.7 percent) (Mercer Investment Consulting, 2006 at 14).

Even within the SRI community, it is unclear whether environmental management and/or performance are routinely considered by investors. Indeed, a review of the most recent comprehensive survey of the investing behavior of SRI practitioners in the U.S. (Social Investment Forum, 2008) suggests that only eleven percent of the total funds invested using environmental, social, and governance (ESG) considerations specifically include environmental criteria, as opposed to other ESG criteria.

To us, these facts suggest that even among SRI investors there is either continuing skepticism about the relevance of environmental considerations to investing (and/or to the values of these investors), a general absence of generally accepted or clear methods for integrating these considerations into the investment process, and/or an absence of the necessary data with which to apply environmental tests or analysis across a wide spectrum of prospective investments (i.e., securities of specific firms).

The lack of either adequate management structure or disclosure materially limits the extent to which investors can fully evaluate the future revenues, earnings, cash flows, volatility, and risk of their current (or potentially new) holdings in the securities of these firms. Accordingly, we believe that it is important to 1) demonstrate that the presence or absence of a complete or appropriate environmental management structure and/or of performance data are both relevant and material to investment evaluation, and 2) examine whether current corporate disclosure practices might limit the ability of investors having an interest in environmental issues to formalize and apply methods for environmental (and broader ESG) integration into their core investment processes.

To address the first need, we present below highlights of the major findings that have been reported in the academic and investment literature regarding the importance of environmental management, performance, and disclosure from a financial perspective.

Regarding both the relevance and materiality of corporate environmental management practices and the results that they produce, multiple published studies, mostly in the form of peer-reviewed journal articles, have established each of the following points:

• There appears to be a positive correlation between pollutant emission reductions and profitability on a firm-wide basis (Hart & Ahuja, 1996; Stanwick & Stanwick, 1998).
• Companies routinely fail to report, either in sufficient detail or at all, environmental liabilities related to site contamination, potential new regulatory controls, and other environmental issues. These failures are in apparent violation of long-standing disclosure rules established by the U.S. Securities and Exchange Commission (Barth & McNichols, 1994; Repetto & Austin, 1999).
• The intangible asset value of firms is directly correlated to the extent to which they have instituted complete and far-reaching environmental management standards and/or have achieved reductions in pollutant emissions (Dowell, Hart, & Yeung, 2000; Konar & Cohen, 2001).
• No “performance penalty” is associated with applying a thorough and meaningful environmental screen or weighting in constructing an investment portfolio. Such portfolios have been shown by several investigators to offer comparable risk-adjusted returns relative to otherwise similar unscreened portfolios (Cohen, Fenn, & Naimon, 1995; Stone, Guerard, et al., 2003).
• Environmental issues can induce changes in stock market behavior and in individual company valuations. Pronounced short- to medium-term stock price/market value impacts resulting from environmental events, whether positive or negative, have been documented by a number of studies (Blacconiere & Patten, 1994; Bosch, et al., 1998; Hamilton, 1995; Klassen & McLaughlin, 1996).
• Stock price volatility and the cost of equity capital can be influenced by environmental issues and also by the management of these issues. (Feldman, Soyka, & Ameer, 1997; Garber & Hammitt, 1998).

In addition, studies issued by a variety of investors, data providers, and stakeholder consortia have shown that environmental and other ESG issues are related in a number of ways to the financial success of firms. Two noteworthy examples, among many others, follow.

• One report summarizes many of the points made above by review of the supporting published literature, and concludes that not only does strong environmental performance have a positive influence on firm financial performance and that some environmental issues can pose threats to portfolio value, but that fiduciaries (e.g., investment fund managers) should play a far more active role in encouraging effective environmental management practices and improved performance. (Goodman, et al, 2003)
• Another more recent study summarizes a variety of investment analyst reports, and concludes that 1) ESG issues are material to investors, 2) the impact of these issues on share (stock) prices can be valued and quantified, 3) they are becoming apparent, and 4) their importance can vary among sectors. This report also asserts that mismanagement of environmental, social and governance issues can pose a real threat to company and investor value. (UNEP-FI, 2006).

In the aggregate, the published literature demonstrates that environmental issues can have a meaningful impact on a firm’s financial success as well as that of investors. Therefore, investors and the individuals and institutions that they often represent should have an abiding interest in understanding the extent to which companies in which their capital is invested (in equity or fixed income securities) have developed and implemented comprehensive, systematic, and business-driven approaches to identifying and managing their environmental issues.

Click here to read the full report, “The Road Not Yet Taken: The State of U.S. Corporate Environmental Policy and Management,” including additional insight and statistics on governance, performance management and energy issues.
Peter A. Soyka is president of Soyka & Company, LLC and  Mark E. Bateman is director of research for IW Financial, Inc.

A September 2009 Harvard Business Review Spotlight article co-authored by Ram Nidumolu,  C.K. Prahalad and CEF founder M.R. Rangaswami offers a framework for determining your company’s green opportunities and an overview of what Global 500 leaders and other innovators are doing with energy efficiency initiatives and new product/business models.

“There’s no alternative to sustainable development…………..

Indeed, the quest for sustainability is already starting to transform the competitive landscape, which will force companies to change the way they think about products, technologies, processes, and business models. The key to progress, particularly in times of economic crisis, is innovation. Just as some internet companies survived the bust in 2000 to challenge incumbents, so, too, will sustainable corporations emerge from today’s recession to upset the status quo. By treating sustainability as a goal today, early movers will develop competencies that rivals will be hard-pressed to match. That competitive advantage will stand them in good stead, because sustainability will always be an integral part of development.

It isn’t going to be easy. Enterprises that have started the journey, our study shows, go through five distinct stages of change. They face different challenges at each stage and must develop new capabilities to tackle them, as we will show in the following pages. Mapping the road ahead will save companies time—and that could be critical, because the clock is ticking.” (See article for a full discussion of the five steps in the framework.)

A Few Simple Rules
Smart corporations follow these simple rules in their effort to become sustainable.

Don’t start from the present.
If the starting point is the current approach to business, the view of the future is likely to be an optimistic extrapolation. It’s better to start from the future. Once senior managers establish a consensus about the shape of things to come, they can fold that future into the present. They should ask: What are the milestones on the path to our desired future? What steps can we take today that will enable us to get there? How will we know that we are moving in that direction?

Ensure that learning precedes investments.
Top management’s interest in sustainability sometimes leads to investments in projects without an understanding of how to execute them. Smart companies start small, learn fast, and scale rapidly. Each step is broken into three phases: experiments and pilots, debriefing and learning, and scaling. These companies benchmark, but the goal is to develop next practices—not merely mimic best practices.

Stay wedded to the goal while constantly adjusting tactics.
Smart executives accept that they will have to make many tactical adjustments along the way. A journey that takes companies through five stages—and lasts a decade or more—can’t be completed without course corrections and major changes. Although directional consistency is important, tactical flexibility is critical.

Build collaborative capacity.
Few innovations, be they to comply with regulations or to create a new line of products, can be developed in today’s world unless companies form alliances with other businesses, nongovernmental organizations, and governments. Success often depends on executives’ ability to create new mechanisms for developing products, distributing them, and sharing revenues.

Use a global presence to experiment.
Multinational corporations enjoy an advantage in that they can experiment overseas as well as at home. The governments of many developing countries have become concerned about the environment and are encouraging companies to introduce sustainable products and processes, especially for those at the bottom of the pyramid. It’s easier for global enterprises to foster innovation in emerging markets, where there are fewer entrenched systems or traditional mind-sets to overcome.

Ram Nidumolu (ram@innovastrat .com) is the founder and CEO of InnovaStrat, a Santa Cruz–based firm that helps companies design and implement sustainability strategies and new business models. C.K. Prahalad (ckp@bus.umich.edu) is the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigan’s Ross School of Business and a member of the board of directors of the World Resources Institute. M.R. Rangaswami (mr@sandhill.com) is the founder of the Corporate Eco Forum, a global organization of senior executives, and the cofounder of the Sand Hill Group, a San Francisco–based strategic management, investment, and advisory firm.

Greg Dalton of Climate One at The Commonwealth Club points to the surprising results of a Chevron-Sierra Club debate as evidence that face-to-face meetings of would-be adversaries can identify fertile, common ground for future cooperation.

Chevron and the Sierra Club are two California icons that used to be headquartered on the same block in San Francisco. For the more than 100 years these organizations have driven change in their respective fields, yet their current CEOs had never met - until June.

When Chevron CEO Dave O’Reilly and Sierra Club Executive Director Carl Pope met as part of the Climate One initiative of The Commonwealth Club of California, the 700 attendees were ready for sparks to fly. But observers soon realized that the two national leaders had much more in common than one might think.

Climate One’s founder Greg Dalton spoke to The EcoInnovator about where the executives found common ground, where their interests diverged and the potential benefits of meeting with “enemy.”

The EcoInnovator: How did the meeting between Chevron and the Sierra Club come about?

Greg Dalton: Last year, Sierra Club board member, Larry Fahn, attended the Chevron shareholder meeting and publicly invited Dave O’Reilly to debate Carl Pope.  O’Reilly accepted. As organizers began to plan the meeting, we were approached to host the event because both executives had spoken here before.  The Climate One initiative brings together experts in business, academia and science in order to find common ground  - and so the Chevron-Sierra Club meeting was a natural fit for us.

After more than a year of planning, the meeting was held on June 10. The encounter was eye opening. Many in attendance felt that the two CEOs were very civil and found far more points of agreement than expected.

The EcoI: What areas of common ground were identified?

GD: Both chiefs agreed with the IPCC scientific consensus that human activity is warming the Earth’s climate. Both decided not to join the USCAP for the same reason (they didn’t want to be tied down by the “lowest common denominator.”) Both felt that coal was a very big problem and that corn-based ethanol is more of a problem than a solution.

Overall, the two leaders appeared to take different paths but arrive at the same list of priorities and direction. In the transportation area, both executives felt that fuel efficiency of automobiles was a more immediate priority than changing to other liquid fuels or types of energy such as electric power.

The two chiefs took issue with T. Boone Pickens’ plans to use natural gas in cars and trucks to replace oil imports. O’Reilly said Argentina has lots of cars running on natural gas but the country’s supply of that fuel is declining.

Rather, Pope and O’Reilly contend that using natural gas as a substitute for coal in electricity generation would have the biggest impact on reducing carbon emissions. In that scenario, natural gas would serve as a bridge fuel until renewable sources of electricity can reach widespread industrial scale. O’Reilly said conventional fuels will remain part of our energy supply for the foreseeable future because of the sheer magnitude of demand and the need for renewables to reach commercial scale at a competitive cost.

Pope complimented the oil industry on its advances in technology which allow it to drill for oil much more efficiently and with less environmental impact. For example, now an oil well can be drilled in one location and underground branches can be created to collect oil up to a few miles away.

The EcoI: What did the disagreements center on?

GD: The biggest disagreement was on how much the world can reduce carbon emissions by 2050. Pope called for an 80 percent drop from 1990 levels by 2050, in line with IPCC recommendations. O’Reilly says only 25 percent is possible due to the pace of turning over infrastructure such as cars and refineries.

Pope countered that if the rest of the U.S. achieved the electricity efficiency that California has achieved over the past thirty years, the result would be a 25 percent drop in carbon emissions over the next 30 to 40 years.

A second area of disagreement was the pace at which the energy sector can and should adopt new technologies for burning fossil fuels. Pope reminded attendees that some power plants in operation today were built during the presidency of Calvin Coolidge and that most light bulbs in use today would be recognizable by Thomas Edison. Government regulation has kept innovation in the energy sector to a sluggish pace. And while oil producers have made progress in the area of oil extraction, there has been little advance in the way that oil is burned – with troubling consequences for the planet. The oil industry should reinvest more of its earnings in innovative, cleaner technologies.

O’Reilly noted the average car is on the road for 15 to 18 years, a long time to turnover the capital stock. And he said energy companies are investing heavily in technologies for extracting geothermal power, solar, fuel cells and building control systems. It’s a capacity issue, he said.

The EcoI: What post-meeting moves were discussed?

GD: As the one-hour discussion winded down, the two leaders agreed to itemize their agreements and disagreements and put them down on paper. They also pledged to continue the dialogue in the future.

Another area of cooperation involved going together to Washington. They agreed to consider a trip to call on the senators who might agree to see one executive but not the other, and present their areas of common concern such as subsidies to the coal industry in the Waxman-Markey bill.

The EcoI: What can organizational leaders learn from the Chevron-Sierra Club meeting?

GD: At Climate One, it is our belief that successful organizations can disagree on some things, agree on others and leverage that common ground to move forward. The O’Reilly-Pope meeting was a great example of that phenomenon.

If you talk directly to your adversaries, you might have more in common than you think. The important part is beginning a direct dialogue, without the use of the press and other intermediaries.

When the apparel industry was exposed for “sweatshop” labor practices, some clothing companies now admit they should have gone directly to the labor activists and NGOs earlier in the conflict. It doesn’t pay to wait until your adversaries are pounding down your door.

Humanizing the adversary is a good start. In the case of Chevron and the Sierra Club, the chiefs clearly respect and understand the pressures of the other’s job. And after meeting in person, it is clear they have more in common than before. That’s a start that hopefully they will build upon.

If companies can reach out to stakeholders and other parties they disagree with, it is possible to foster understanding of key differences and possibly head off major confrontations. In the information age, news travels fast. It is much harder for companies to control their brand image through strong arm tactics. Start the conversation with stakeholders – don’t shut them out. You might be pleasantly surprised with the results.