Daniel Esty tells The EcoInnovator about what’s changed since the publication of his 2006 groundbreaking book, and what companies need to focus on going forward.

Even Daniel Esty didn’t predict how quickly companies would connect the dots between eco-initiatives and improved performance. However, as co-author of the prize-winning book, Green to Gold: How Smart Companies Use Environmental Strategy to Innovate, Create Value, and Build Competitive Advantage, it is fair to say that Esty has played a key role in communicating the bottom-line potential of sustainable business practices to executives around the world.

A revised and updated edition of Esty’s sustainability classic debuted earlier this year. The new version incorporates much of the new thinking that has emerged since the book’s 2006 publication, as well as new case studies and strategies.

Esty is the Hillhouse Professor at Yale and the chairman of Esty Environmental Partners, one of the world’s leading corporate sustainability consulting firms. This past year, Esty served as an Obama Campaign advisor and later as a member of the Obama Transition Team.

From his privileged vantage point, Esty spoke with The EcoInnovator about how the recession, the new presidential administration, the House passage of Waxman-Markey, the shift in energy prices and next-generation mindsets are impacting sustainability strategy at companies today.

The EcoInnovator: How has the environment for corporate sustainability changed since the publication of Green to Gold?

Daniel Esty: The economic collapse has forced many businesses to rethink their commitment to sustainability but the smart companies recognize that there continues to be a strong logic for keeping a focus on the environment and sustainability as part of their core strategy. But the emphasis in some companies has shifted.

First, many executives are putting priority on initiatives such as cutting waste and improving efficiency — all of which promises savings that drop straight to the bottom line. Sustainability efforts such as reducing manufacturing inputs, recycling scrap, or cutting water or energy consumption return clear benefits.

Additionally, many business leaders recognize that they can seize market share in a downturn.  By leveraging green offerings, companies can differentiate themselves from the competition. And as the demographics of the consuming public shift to the younger generation, there is much more of an environmental presumption in their mindset.

This trendline is more visible in some industries than others. For example, companies in the personal care products arena – including Shaklee, Method, P&G, Burt’s Bees and Clorox more generally with its “Greenworks” — are pushing hard to be seen as attentive to changing consumer concerns.

The EcoI: As the economy recovers, what changes do you expect to see in green business strategy?

DE: The economic upturn that we all hope to see later this year will not simply represent a return to growth. It will herald a significant change in attitudes toward consumption.  While the full impact of changing consumer values cannot yet be defined, I think the rough contours of what I call “Capitalism 2.0″ are beginning to emerge. In this new economy, people are not going to be buying and throwing away products at the same rate that they used to do. Sustainability will be the new watchword.  This means there will be more focus on value and durability.

Recognition of this change can already be seen in the auto industry. As GM, Ford, and Chrysler work to reinvent themselves, they have come to understand that they will need very different product lines and vehicles mixes - better aligned with the values  that the buying public wants including fuel efficiency, durability, and safety.  These new commitments - and a push to be seen as more “green” — are now evident in their advertising.

The downturn has been fundamental and game-changing for other industries as well. Any business that operated with hidden costs or risks will not succeed going forward. The ramifications of this are most obvious in the financial arena. AIG profited mightily when things were running high. When the economy went south, it couldn’t meet its obligations. This behavior will be fundamentally unacceptable going forward.

The same intolerance will apply to companies that don’t account for environmental externalities. Those firms that continue to try to hide unsustainable practices must anticipate this behavior being unveiled. The same goes for any model in which pollution is not fully accounted for or in which operations produce considerable carbon exposure.

Sustainable business practices are suddenly of interest in the capital markets.  Companies will thrive or suffer according to their ability to control green house gas emissions.

The EcoI: What does the House passage of the Waxman-Markey Bill mean for sustainable business in America?

DE: The House vote on Waxman-Markey is only a first step toward addressing climate change - and getting serious about climate change is only a first step toward an economy rebuilt around sustainability.  There will be some rough sledding in the months ahead for the climate legislation. I am not at all sure the bill will pass the Senate. But the serious consideration and debate that is now going on represents a very important signal that America is now bearing down hard on climate change – and preparing to take action of some sort as a society.  It is looking quite likely that we will put a price on greenhouse gas emissions. Once companies have to pay for their emissions, they will be much more careful about their activities that cause harm, triggering the obligation to pay.

To be honest, we are still in the middle of the debate about how best to address climate change. The domestic political negotiations are only one part of the dialogue. In parallel, there is also an international negotiation going on with a goal of producing a new climate change treaty by the end of the year. But whether the Climate Change meeting in Copenhagen in December can achieve this result is deeply intertwined with the question of how far the US goes this year with its climate change debate. Simply put, the U.S. Congress will not complete work on a serious greenhouse gas emissions control program unless it is clear that China, India, and other countries that have been on the sidelines will step up and do their share to control emissions. And whether any of these countries will take action depends in very large measure on whether they see the US getting serious.  It is hard, therefore, to predict what the final outcome will be.

But the contours of the U.S. climate change strategy are beginning to fall into place.  Almost certainly, we are going to put a price on greenhouse gas emissions, creating an economic incentive for every business - and every citizen - to be more attentive to fossil fuel burning and the need for more energy efficiency.  Beyond that, I think we are looking at a portfolio approach. Along with price signals on greenhouse gas emissions, we’ll have tougher CAFE standards — raising the fuel economy of our cars and trucks. And I also expect new energy efficiency standards for appliances, green building standards, and a substantial commitment to ramped up R&D on clean energy options such as wind and solar power (and many other alternative energy ideas such as geothermal electricity, biofuels, wave and tidal power, and more).

The companies that are smart about emissions will have a cost advantage in the marketplace. We’re going to see a lot of shifting dynamics and realignment in the marketplace as the legislation plays out.

The EcoI: Do you see near-term challenges for corporate eco-strategies?

DE: There are two things that companies need to be careful about in the short term. First, no one should be fooled by the fall in energy prices that has taken place over the past ten months. There remains a fundamental imbalance between supply and demand for oil. The rise in energy usage across the developing world will continue to drive energy prices up over the medium- to long-term. This makes energy efficiency an ongoing concern.

Frankly, any company that hasn’t reexamined its energy spend will likely find itself facing competitive disadvantage within the next several years.  Today’s price of $60 per barrel is still twice the oil price of three years ago. Companies that haven’t reoptimized space allocations, distribution systems, and tackled other efficiency initiatives are being underattentive to the opportunity to squeeze out costs, especially as they relate to energy price dynamics.

As I noted earlier, there is a growing recognition that business norms in the post-crash economy will be significantly different from the past. Very few companies have really thought through the fundamental discontinuities will separate the business practices of the past from those that will define the future.

I anticipate a broad push for greater transparency and reinvigorated regulation.  In particular, I foresee a push to internalize externalities of all sorts. Companies must expect that they will not be able to hide risks or push costs, including environmental burdens, onto society as a whole. So look for mandates that require full-cost pricing of natural resources consumed including water, timber and other items.  I envision a day not too far off where “zero waste” is the norm.  Smokestacks and effluent pipes will have readers on them — with charges accruing for any amount of pollution that is emitted.

Thus, sustainability will increasingly be an important agenda item shaping a company’s success in the marketplace. And not just product markets! The ability to attract and retain high quality employees, especially high-end knowledge workers, now indicates that they want to work for sustainable companies.

The EcoI: Are there areas in which you believe that companies’ progress toward sustainability has excelled beyond your expectations?

DE: The widespread recognition of the importance of environmental factors to marketplace success is pretty impressive.  Almost all companies now recognize that sustainability needs to be a core element of business strategy.  How quickly this imperative has come to be understood is really quite impressive.

CEF readers should also realize that the U.S. political dynamics are pointing in the direction of increased payoffs for sustainability efforts. I’ve just come off working a good bit of last year on the Obama Campaign and then on the President’s transition team.  Although one might think that the country’s economic stress would preoccupy our new leader in the White House, but President Obama has been unflinching in his commitment to the environment and a clean energy future. In action after action, he has shown a real commitment to his agenda on sustainability.

For companies on cutting-edge of sustainability strategy, the administration’s commitment means that any investments that have been made in eco-strategy will be likely to pay off more dramatically and sooner than expected. For companies that are lagging, the business environment will become increasingly untenable.

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