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December 7, 2009 
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Copenhagen and Beyond: 4 Scenarios for Business
As I'm sure you know, the big global meeting on climate change in Copenhagen starts this week. What was meant to be the convocation of the century has begun. Representatives from 180+ countries and countless NGOs, business groups, and policy pundits are gathering to discuss policy options for reducing the greenhouse gas emissions that cause climate change. As originally envisioned, the Copenhagen meeting (COP15) would provide a forum for the world's leaders to reach a binding, global agreement.
So I thought I'd do something different with this e-letter. Instead of providing some thoughts on a strategic issue, such as using data for green advantage, I wanted to think about how the global policy discussions might unfold and what some possible outcomes mean for business. When I think about scenarios, I reach out to my colleague Jim Butcher, formerly the Managing Director of Morgan Stanley's Office of the Environment. Jim also had a long career in scenario planning, including a stint at the Global Business Network. Today, he's back to his roots with his own scenario consulting firm, Entegra. He recently sent me an article he wrote on the possible outcomes from Copenhagen and beyond, which he then published on the Corporate Eco-Forum (see Jim's full post here). We spent some time talking about these scenarios and I played around with them some more. Thanks to Jim for his time and thinking. So…here are some possible pathways forward and what they might mean for business. Please take any opinions on how likely these are with a major grain of salt, because who really knows. Scenarios are not meant to put percentages on outcomes, but prepare us mentally and strategically for possible futures. ~Andrew Winston, Founder, Winston Eco-Strategies. Scenario 1: The ultimate goal, achieved now during COP15 
What is it: A binding agreement on all countries (including the developing giants), an overarching goal on warming (e.g., maximum of 2 degrees), metrics, deadlines, finance mechanisms, possibly a global cap-and-trade, and so on.
What it might mean for business: With the U.S. Senate pushing off discussion on a climate bill until 2010, this larger global goal for COP15 is looking incredibly unlikely. But it's worth thinking through the ramifications since many countries may set their own goals anyway, and many leaders still have their sights set on the larger agreement. In this scenario, the cost of doing business will shift dramatically and fast. The world will, in effect, put a price on carbon soon. Businesses would need to include carbon costs in all investment decisions, and do it quickly. Companies would need to pick up the pace on any data gathering and footprinting work so they can find the carbon in their value chains…before the market does. For multinational companies, the policy environment will be much clearer - this is a good thing, and it will be a relief to many CEOs to know what they're facing. But a single global carbon market is unlikely even in this scenario, so the targets will vary dramatically by country. The effective price on carbon could be very different. Companies will need to think through the operating costs in different locations. There may be some flight to the least restricted areas, but the constantly evolving force of transparency - the demand for more data on where everything comes from and its footprint no matter where it's made - should make that kind of rush to the bottom much more difficult. Clearly the big carbon users will be hit first and hardest - energy, cement, natural resources, chemicals and other energy intensive industries. But a global accord levels the playing field within these industries (even as it exaggerates some differences between them). Either way, much of the price increase in these businesses may be passed along to customers and consumers, which will advantage those who can help customers reduce their impacts and carbon costs. Scenario 2: A delayed policy future 
What is it: The commitments do come, but much more slowly and incrementally. Each meeting moves the needle a bit more. We may get there by 2012, but then need even more time to get it ratified.
What it might mean for business: The same as scenario 1, but with much less urgency. The pressure to gather data, understand carbon risks and opportunities, and price carbon into investment and strategic decisions would be much lower. On some level, this would be welcome news to the majority of companies that are only starting down this path of getting much smarter. The danger here would be that companies could lose momentum internally, breathe a sigh of relief, and hold off until it seems like things are truly moving forward. The big carbon industries would likely still be pressing forward, since they often have very large lead times and asset lives to deal with (an extra few years until an agreement doesn't change the investment calculus on a 50-year coal plant much). But further down the value chain, companies may wait. This outcome would be parallel to the slow-down in green initiatives that's happened at so many companies during the recession. I argue in my new book Green Recovery that waiting until good times return is a strategic mistake. The same logic applies here - waiting until rules are finalized could be disastrous. The leading companies will continue pressing their sustainability agendas and get ahead of the curve. Another important outcome in this scenario: the large-scale investment dollars needed to build a clean economy will sit on the sidelines. Investors are waiting to unleash money, but without a clear path to a price on carbon, those funds will stand idle. Scenario 3: Real world events overtake discussions 
What is it: Climactic changes continue to accelerate and force discussions faster than many would like - picture a couple more Hurricane Katrinas, vast water shortages from loss of ice in the Himalayas, and climate refugees overwhelming support systems. The scenario here is that this happens much faster than most would predict. This possibility is "orthogonal" to the other scenarios - it could happen on top of the others.
What it might mean for business: In this scenario some stuff has hit the proverbial fan. It may seem heartless to figure out what it means for business in the face of some serious human suffering, but business may actually provide many of the solutions. Opportunities might arise for companies to discover, as Wal-Mart did during Katrina, that their organizations were more effective than government at reaching people with critical needs. Katrina was one of the key turning points for Wal-Mart. Large-scale disasters might drive more companies down the sustainable path. But on the down side, companies will face some serious business continuity issues. If certain regions face drought conditions with limited time to prepare, companies operating in those areas could find themselves unable to run at full capacity. As I warn clients all the time, there's one harsh fact that makes water planning a very serious issue for business: if there's a shortage, industry will be at the back of the line. This might come as a shock to executives used to having enormous influence over political decisions. But water goes primarily to three areas - agriculture, personal use, and industry. If you're the mayor of a city, are you going to short-change food, homes, or businesses? But the other outcome of disruptive events is that political reactions in the heat of the moment are often not well-formed. Sudden policy shifts are hard for business to deal with and they're generally expensive (think Sarbanes-Oxley). Scenario 4: A global climate agreement never happens 
What is it: The delays and roadblocks never end. The developing world will not accept absolute caps, and the developed countries will not cap their emissions unilaterally. A corollary to this scenario is that agreements happen, but are never fully ratified.
Without a global framework, each country will be left to make its own policies if at all, which will vary enormously. Regional agreements will continue to evolve in a patchwork pattern. In the U.S., and perhaps elsewhere, the lead environmental agency may regulate carbon instead (the EPA is moving this direction already). What it might mean for business: Leaving aside the devastating problems for humanity and thus business, think of the tactical issues. Compared to legislation and agreements, regulation as the primary form of "stick" will surely cost businesses, and economies, more in the long run. The lack of certainty as the policy discussion drags out for many years will cost business as well. Figuring out how to operate in many different carbon frameworks at the regional level will introduce additional complexity and cost into day-to-day operations. Many of the long-run trends away from carbon will continue. All countries, as they get richer, "decouple" economic growth from carbon (this is why China isn't really promising all that much in reducing carbon intensity 40% by 2020). But the change for the last 100 years has been slower than the overall increase in economic output - thus emissions rise absolutely. In this scenario, that trend will continue, but without any urgency and likely without significant investment dollars in the clean economy. But does it all matter? 
Well, obviously it does. Without a clear policy future, which gives business certainty and a price on carbon, the transition to a truly sustainable economy is unlikely. But what I'm asking is whether the actions companies should take now and in the medium-term, for financial and strategic reasons, are really all that different in each scenario. The pressures on business to go green are many and varied. Looming carbon cost and/or regulation is only one of a few mega-forces driving this wave - the others, including greening of the supply chain, technology-driven transparency, and generational shifts in expectations from consumers and employees, are still gaining strength.
So no matter what happens, a few major strategic and tactical moves make sense. Gather data on your impacts to locate your risks and opportunities up and down the value chain. Move down the path away from volatile and unpredictably-priced resources (see fossil fuels), dematerialize (use less stuff), and help your customers reduce their impacts. All of these actions are good business in any policy environment. But, still, keep your fingers crossed that the world's leaders will show the political will to create a framework that makes all of these actions easier and more profitable. Get the conversation going! Click here to post your comments on this issue of "Eco-Advantage Strategies." |
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What Readers are Saying... In response to Andrew's "Why This Is the Right Time to Go Green": Your article is spot on that sustainability often overlaps with economic profit. However, there are many instances where it doesn't. Capitalism rests on continued growth. How can continued growth be anything but but bad for the planet unless 100% of a company's products are 100% closed-loop? A company reducing it's packaging by 30% is great, but they're still going to try to grow their unit sales 10% a year. When are we going to start requiring companies who tout these achievements to also show us their long-term plan for a POSITIVE impact on the planet vs. a LESS NEGATIVE one. After all, the bottom line is "Is the planet better or worse off that this company exists?" Green Recovery Available Now!
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