Notwithstanding the present economic situation, environmental issues are a top concern of corporate executives. Every day seems to be Earth Day in the nation’s boardrooms.
The motivation for this corporate behavior is, for understandable reasons, mixed. It involves anticipating or preempting future regulatory action, mitigating liabilities, reducing costs, maintaining customer goodwill and brand integrity, recruitment of the best and the brightest employees and enhancing profit margins through development of new services and products.
The late Peter Drucker Peter Drucker , the dean of management consulting, argued in his book Managing in a Time of Great Change (1995) that “a business that does not show a profit at least equal to its cost of capital is irresponsible; it wastes society’s resources.” He also believed that “every organization must assume full responsibility for its impact on employees, the environment, customers, and whomever or whatever it touches.”
Nobel Laureate economist Milton Friedman argued that such social concerns were contrary to the primary function of business. The title of his famous 1970 article in the New York Times Magazine was “The Social Responsibility of Business Is to Increase Its Profits.” He believed the duty to maximize profits was the essence of the fiduciary obligation owed to stockholders. He did, however, recognize the imperative to obey the law and “ethical custom.”
Arguably, the “ethical custom” which Friedman noted has changed over the last four decades. Certainly, the laws have.
Social and political realities as well as the beliefs and behaviors of customers and even stockholders, both individual and institutional, are driving companies to be greener and cleaner whether they like it or not. The market and society appear to be demanding this behavior.
Forest L. Reinhardt, professor at the Harvard Business School, argues that one reason firms pursue “corporate social responsibility” or CSR is for risk-management considerations, i.e., “the social license to operate” under limited liability protections accorded to firms by society.
FOR SEVERAL YEARS NOW companies such as DuPont, GE, Dow, Anheuser-Busch, Wal-Mart, S.C. Johnson and many others have been developing and implementing environmental policies, products, and services. This Earth Day finds more and more companies traveling the same path.
Google, Inc., a voracious user of power, expects to spend tens of millions of dollars this year on research, development and related investments for renewable energy such as solar, wind and geothermal energy with a goal of producing 1 gigawatt, enough to power San Francisco (MarketWatch.com, November 27, 2007). It calls the program “Renewable Energy Cheaper Than Coal” and hopes to meet its goal “in years, not decades.”
Marriott International is pledging $2 million to protect 1.4 million acres of the Brazilian rain forest while inviting guests to offset hotel stays with contributions to the cause. The inn keeper is also furnishing rooms with 47 million Bic pens made from preconsumer recycled plastic, committing to reducing fuel and water consumption by 25 percent “per available room” within the decade, installing solar power in 40 hotels, and extending recycling to in-room guest trash. Ninety percent of Marriott hotels already recycle.
Marriott will buy one million “room-ready” towels, which will eliminate an initial wash cycle, saving 6 million gallons of water a year. It also seeks to migrate to recyclable carpets, compostable key cards, and “green meetings” to increase recycling and minimize packaging.
Enterprise Rent-A-Car, the nation’s largest car rental company, is putting its foot in environmental waters by opening four “green branches” in Atlanta with 60 percent hybrid or other fuel-efficient models. However, it will cost customers an extra $5 to $15 a day for a hybrid. Presently, it only has 4,000 such vehicles out of a fleet of 1.1 million.
Hertz Global Holdings Inc. has spent $68 million to add 3,500 Toyota Prius hybrids by this summer, and Avis now offers 2,500 hybrids.
Xerox has reduced its greenhouse gases (GHG) by 18 percent since 2002 by cutting emissions from cars and improving building equipment, thus exceeding its goal six years in advance. It is now stretching to reach a new target, a 25 percent decrease by 2012.
XEROX IS JUST ONE OF many companies that, for a variety of reasons, are anticipating customer and regulatory pressure, abroad and at home, and going on a carbon diet. This pressure will increase with a new president in the White House. All three candidates support various “cap-and-trade” bills to control GHG emissions.
American firms have been making steady progress in reducing GHG emissions relative to the nation’s economic growth. Overall emissions have grown by 16 percent from 1990 to 2005, while the U.S. economy has grown 55 percent over the same period.
Boeing’s new 787 Dreamliner jet, unveiled last July, is selling briskly due in part to its environmental and fuel efficiency features. It is the world’s first large commercial airplane made mostly of lightweight carbon-fiber composites and a lot less aluminum. Quieter on takeoffs and landings, it uses 20 percent less fuel and carbon than any previous commercial jet and consumes about one gallon of fuel, per seat, per 100 miles of travel. According to Boeing, this is less than a typical sedan and a half to a third that of an SUV.
Even the publishing world is getting into the environmental game. In 2006 Random House announced its intention to increase its use of recycled paper tenfold. Recently, Simon & Schuster announced plans to eliminate the use of paper with fiber from endangered and old-growth forest areas. By 2012 the company wants at least 10 percent of its purchased paper to be derived from forests certified by the Forest Stewardship Council (FCS), a third party which verifies sustainable forestry practices in the field.
Thomas Nelson, Inc., has published a Bible consisting of only recycled and FCS-approved paper.
Coca-Cola Co., a business in which water supply and quality are of paramount concern, has articulated its goal to become “water neutral” through water recycling, reuse and treatment. It is donating $20 million to the World Wildlife Fund to assist the company in its water conservation efforts in seven major river basins around the world and to verify the program’s progress.
The Wall Street Journal (June 6, 2007) quoted E. Neville Isdell, the company’s chair and chief executive, as saying that while the water efficiency program could well produce savings, the company’s goals are primarily about preserving goodwill. “If we do not act responsibly, society will not give us the social license to continue to operate,” said Mr. Isdell.
Over the previous five years, Coca-Cola cut its water usage to 2.5 liters for every liter of final product, down from 3.1 liters.
ENTREPRENEURS AND VENTURE CAPITALISTS are starting to move into the environment in a very big way. In the first nine months of 2007 alone, U.S. venture capital firms invested a record $2.6 billion in clean technology — a 46 percent jump compared to the $1.8 billion invested in all of 2006.
The Economist of March 1 ran a story entitled, “From geeks to greens,” which described how executives are switching from the computer industry to clean-technology firms. The article described how several high-flying executives shifted toward greenery. Elon Musk, a co-founder of PayPal, is now chairman of Tesla Motors, an electric-car start-up.
Evidently, there are elements in common between solar panels and microchips. An early successful venture in the new green world is SunPower, a solar-energy firm spun out of Cypress Semiconductor. As of March its stock market value was nearly $6 billion.
Making money and creating incentives for environmentally friendly behavior is a theme running through many corporate initiatives. Coca-Cola recently invested $2 million in a startup called RecycleBank, with hopes of “turning trash into cash.”
RecycleBank was the brainchild of Ron Gonen, its thirty-something chief executive who came up with the idea while studying for an MBA at Columbia.
Basically, RecycleBank signs up customers who receive a special container embedded with a computer chip. According to Fortune magazine’s Marc Gunther, “every time the recycling truck comes for a pickup, it records the weight of the bin and transmits it wirelessly to an online account. Homeowners accrue up to $35 worth of credits a month based on the amount of recycling they do.”
These credits can be turned into coupons redeemable at more than 300 retailers including Starbucks, Whole Foods and Rite Aid.
“So the homeowners save money, cities save money as disposal costs go down and Recycle Bank wins by collecting a share of the cities savings,” says Gunther.
RecycleBank serves over a 100,000 customers in Pennsylvania, New Jersey and Delaware. In Wilmington 90 percent of residents reduced garbage going into the landfill by 40 percent. With “tipping fees” at $70 a ton, that yields of savings of $800,000, half of which the city shares with RecycleBank.
This Earth Day finds many more companies moving into a wide variety of environmental services, products and markets. It seems to be worth their while thus encouraging more of the same.
Incentives matter: this is a fundamental principle of free market environmentalism. Making money through the provision of environmental amenities creates powerful motivation for conservation and cleaner technologies to the benefit of all.