News

By AiIleen Ionescu-Sommers, alternate director of the Corporate Sustainability Management of the Swiss-based business school – IMD; and Tania Braga, associate researcher.

The second half of 2009 will be decisive, since the world is getting ready to tackle two concurrent crises: the economic crisis and the critical threat of global warming.

Some business leaders are wondering if they will be able to afford the price of global warming in the midst of this severe economic crisis, while others argue that both crises can and should be tackled simultaneously, constructively.

In May 2009, business leaders met in Copenhagen and asked for an agreement on climatic change claiming that drastic measures “would eliminate uncertainties, trigger investments, and strengthen the current efforts to resume growth in a sustainable way.”[1]

Lord Nichols Stern [2] and Nobel Prize laureate Paul Krugman [3], both renowned economists, hold that a sharp turnaround toward a “low-carbon” economy would create the greatest technological opportunity of our time, comparable to advances and innovations such as electricity and IT.

However, even if the world economy were to benefit from a huge action focused on climatic change, would your business be able to cope with and afford possibly “big steps”?

IMD’s Forum for Corporate Sustainability Management (CSM), after an empirical survey on how corporations have dealt with sustainability, including climatic change, points out that what is actually happening is that this pressing subject is being approached in a conservative way. Corporations are still very far from taking such “big steps”.

During the April 2009 forum, CSM/IMD created a venue for corporations to discuss the challenges of climatic change. The following questions and definitions resulted from this meeting:

1. How to put into practice the “big steps” that will mitigate global warming? How can companies carry out more aggressive long-term strategies and still maintain positive results in the short term, even in today’s uncertain times?

- In order to take big steps it is necessary to stop considering climatic change as corporative responsibility and make it a true business issue. A prerequisite for this to happen is to include economic sustainability issues, such as climatic change, as priorities in the corporate business model.

- Vigorous action regarding climatic change requires a fixed corporate strategy throughout the whole value chain. However, management must also agree on providing flexibility and elbow room for knowledge improvement and actions to be included in the chain.

- High oil prices are seen as a driving innovation force. Moreover, reducing innovation costs by means of advances in collective knowledge and intelligence can also be a powerful weapon.

- Holding climatic change as a corporate value can be a strategy to speed up actions, but it is only the first step. Values must be measurable, integrated to rewards and performance evaluation and in line with the administrative model if they are to stimulate action and changes in outlook, effectively.

2. What has been the impact of the financial crisis in corporate strategies with reference to climatic change?

- On one hand, the financial crisis exposed the limitations of a short-term focus creating, in some sectors, a sharper awareness about the importance of tackling risks in their initial phase. If this will lead companies to postpone long-term actions, like the ones required to face climatic change, we still don’t know. On the other hand, it is clear that companies do not have time, or money, to develop a strategy on global warming while their core businesses are still unstable.

- The negative impacts of the crisis, such as scanty funds for research and for clean technology companies are already apparent. However, it is important to note that sustainable investment funds are doing better than conventional funds.

3. What are the main steps that organizations can take to ensure that long-term initiatives to tackle climate change will go on, even in an increasingly uncertain business environment?

- Make sure that the climatic change strategy is well defined and well directed.

- Build bridges between expectations and implementation.

- Make sure that there are plenty of and well-directed resources (human and financial), from the very start.

- Change long-term objectives into short/medium term ones.

- Balance long-term objectives with short-term results. Generate profit (even if minimal) or reduce costs at the beginning of the implementation.

- Involve significant shareholders.

4. It is hard to predict what will happen at the UN World Business Summit on Climate Change, in Copenhagen, in December. But right now we think that there will be more regulations for companies, and their consequent costs. Corporations have already accepted that they will not be able to sway any decisions made there. So, is it a matter of “wait and see”? How can companies get ready to cope with the inevitable regulations, if nobody knows for sure what lies ahead? Here are some ideas that came up during the CSM Forum:

- Focus on long-term certainties – stricter regulations, carbon trade, and scientific evidence of climatic change speedup – instead of on short-term uncertainties like specific features of future regulations.

- Take advantage of the momentum created in the company and involve all the organization’s managers.

- Be prepared for possible stricter regulations and involve your financial team in planning.

- Develop strategies. Climatic change must be one of the CEO’s priorities.

- Go beyond agreement. It is not good to wait. Reduce risks by reducing your carbon footprint and stay away from “greenwashing” (deceitful practices implemented in companies under the guise of being environmentally beneficial), from the very start.

- Try to cooperate with outside institutions. If you are doing a good job, communicate this in partnership with other shareholders.

- Do not accept regulations as an external obligation; try to participate and contribute to the whole process. A unanimous declaration from all CEOs, for instance, can make a lot of difference. Even if your company is not able to influence decisions, at least you will have access to privileged information and will incorporate this knowledge into your strategy agenda.

These and other global leadership challenges are being discussed in Business Performance and Orchestrating Winning Performance programs, at IMD.

[1] Excerpt from “The Copenhagen Call”, launched by global business leaders at the closing session of the World Business Summit on Climate Change, on May 26, 1999.

[2] Lord Nicholas Stern was chief economist and senior vice-president of the World Bank, and permanent second secretary of UK Treasury. He prepared analyses and reviews on the economic effects of climatic change for the British government, known as the Stern Report.