IPCC Fourth Assessment Report: Climate Change 2007
Climate Change 2007: Working Group III: Mitigation of Climate Change Market

Industry is a central player in ecological and sustainability stewardship. Accordingly, over the past 25 years or so, there has been a progressive increase in the number of companies taking steps to address sustainability issues (Holliday et al., 2002; Lyon, 2003) at either the company or industry level (see Box 12.3). A number of companies have, as part of their corporate strategy, voluntarily defined goals that reflect social responsibilities and environmental concerns that go beyond traditional company obligations. Following this line of thinking, an increasing number of companies are defining targets for GHG emissions and sinks. Some of the more widely acknowledged corporate sustainability drivers include regulatory compliance, market opportunities, and reputational value. Lyon (2003) hypothesizes that voluntary action on the environment might be explained by either a recognition by companies that pollution is a symptom of production inefficiencies, or a perception that consumers are willing to pay more for products with better environmental credentials. Either explanation would signal that markets are more important than regulation as an incentive for improved environmental performance. Lyon (2003) suggests instead that “it is the opportunity to influence regulation that makes corporate environmentalism profitable”.

Box 12.3: Role of Business

One well-known example of a corporation which has embraced sustainability is Interface Inc., a USA. manufacturer of carpets and upholstery. Since embracing the sustainability goal in 1994, Interface has reduced the carbon intensity of its products by 36% (Hawken et al., 1999; Anderson, 2004) Many of these reductions came through investments in energy efficiency and renewable energy (Holliday et al., 2002). However, Interface has also substantially reduced GHG emissions through other elements of its sustainability strategy, including reduction in raw material use and recycling materials not directly related to energy consumption (Hawken et al., 1999; Anderson, 2004). As most of the materials used by Interface in its production are derived from petrochemicals (Anderson, 1998; Hawken et al., 1999), these strategies have led to substantial reductions in the company’s carbon footprint.

CEMEX, a Mexican-based cement manufacturer, was able to achieve similar emissions results through adoption of sustainability-oriented business model. One of the major environmental issues facing cement manufacturers is energy use (Wilson and Change, 2003). As part of its sustainability strategy, Cemex has focused intently on its energy use in an effort to reduce its ecological burden. For example, in 1994 CEMEX embarked on an eco-efficiency programmes to “optimize its consumption of raw materials and energy” (Wilson and Change, 2003), p.29). Through this and other measures, CEMEX reduced CO2 emissions 2.7 million tons between 1994 and 2003 (Wilson and Change, 2003, p.32).

ITC Ltd, an Indian conglomerate and third largest company in terms of net profits in the country, reportedly sequestered almost a third of its CO2 emissions in 2003-04, and plans to become a carbon positive corporation through a programmes of energy savings and CO2 sequestration through farm and social forestry initiatives. Through programmes for rainwater harvesting, the company plans to become a water-positive corporation as well. Its ‘e-Choupal’ intervention has eliminated the need for brokers and helped 2.4 million farmers across six Indian states participate in global sourcing and marketing of products (Das and Dutta, 2004).

Some companies have recognized that pursuing sustainability offers potential cost savings (Thompson, 2002; Dunphy et al., 2003). For example, by increasing energy and material efficiency in production and by reducing wastes, companies can reduce costs per unit of production and thereby gain a competitive market advantage (Hawken et al., 1999; Schaltegger et al., 2003). This concept of ‘eco-efficiency’ further acknowledges that businesses which constantly work to evaluate their environmental performance will be more innovative and responsive businesses. DuPont, for example, has sought to elevate sustainability to the strategic level, using a three-pronged strategy involving integrated science, knowledge intensity and productivity improvements (Holliday, 2001). The company has achieved financial savings in excess of US$1 billion per annum, partly through reduced energy and raw material use and less waste (Holliday, 2001).

Lyon (2003) suggests that the influence of ‘green marketing’ is modest in terms of shifting industry behaviour with respect to the environment. Senge and Carstedt (2001) position consumers as a key influence in shaping the ‘next industrial revolution’, founded on an economic system that genuinely connects industry, society and the environment. Their view is that a shift in consumer attitudes and values is an essential prerequisite to building sustainable societies. Schaefer and Crane (2005) conclude that a change in behaviour by the majority of consumers is not imminent. They suggest that it will require a sense of crisis to bring about a sea change in consumption patterns.

Managing stakeholder relations has also been identified as a corporate environmental driver. Many companies seek to improve relations with government, NGOs and local communities, because this can offer benefits, such as faster approvals for projects or products (Thompson, 2002), a continuing ‘licence to operate’, and greater scope for self-regulation. In regard to NGOs, improved relations can reduce or eliminate protests, such as consumer boycotts and direct lobbying (Thompson, 2002). Companies are also improving their environmental and social performance in response to demands from their corporate clients. Many large corporations, in particular, have introduced purchasing guidelines that place demands on suppliers to meet environmental performance standards (Thompson, 2002). The role of trade associations is another factor - including at the international negotiations (Hamilton et al., 2003).

Demands of investors, insurers and other financial institutions are providing further incentives in relation to sustainability. Through improved sustainability performance, companies can potentially increase the attractiveness of their shares in the market, reduce insurance premiums and obtain better loan terms (Thompson, 2002). For example, the rapid growth of socially responsible investment funds (SRIs) in the last decade is providing an incentive for greater corporate sustainability (Thompson, 2002; Borsky et al., 2006). The role of institutional investors, and the growing concern in some business circles about liability due to inaction on climate change should also be acknowledged. This has led to a growing number of stakeholder initiatives to have publicly owned companies become proactive on climate change, and a growing number of initiatives to monitor and manage GHG emissions, even in the absence of domestic legislation and mandatory requirements (see Innovest, 2005; Cogan, 2006). The Carbon Disclosure Project has emerged as an important framework internationally for company reporting on their carbon footprint. Disclosure of environmental impact is increasingly seen as a crucial element of a company’s risk profile for legal liability as well as competitive position in the face of possible future regulation. For example, re-insurers, companies providing insurance to insurance companies, have shown considerable concern about how climate change could impact insurance claims. Zanetti et al. (2005) suggest that climate change should be a core element in a company’s long term-risk management strategy. Risk and return, demand, compliance and enforcement regimes, amongst other factors, are also likely to have an impact on investment.

Notwithstanding these achievements, there is widespread debate as to whether industry’s responses to environmental decline and sustainability issues more generally are sufficient (Elkington, 2001; Sharma, 2002; Doppelt, 2003; Dunphy et al., 2003).

All the same, notions of corporate social responsibility (CSR) have gained a wider hold. The essence of the CSR perspective is that there is a clear basis for businesses to widen their focus from simply profit maximization to include other economic, social, and environmental concerns. The arguments in support of CSR include competitive advantage (Porter and van der Linde, 1995; Porter and Kramer, 2002), notions of corporate citizenship (Marsden, 2000; Andriof and McIntosh, 2001), and stakeholder theory (Post et al., 2002; Driscoll and Starik, 2004; Windsor, 2004). Drawing on the experience of DuPont, Holliday (2001) acknowledges the importance of shareholder value, but adds that business practices focused on sustainability outcomes can generate financial gains.

Colman (2002) reported that 45% of the Fortune Global Top 250 companies have issued environmental, social or sustainability reports. Similarly, CSR would seem to have become a more serious concern to European companies, though Pharaoh (2003) suggests it is primarily sales driven. In the UK, socially responsible investment (Srivastava and Heller, 2003) grew from US$ 46 billion in 1997 to US$ 450 billion in 2001 (Sparkes, 2002). Borsky et al. (2006) report that the US$ 2.16 trillion of socially responsible investments held in the USA accounted for approximately 11% of the total investment assets under management in 2003. The standards used by SRI funds to evaluate firms vary widely in the issues they address (with many simply staying away from weapons, tobacco, alcohol, and gambling) and how rigorously these standards are applied. Some SRI companies emphasize diversity and labour relations, while others focus on environment. There is no set of common criteria, and thus not all companies on SRI lists can be considered sustainable. However, growing public interest in SRI has led more companies to be concerned about a variety of social and environmental issues.

In considering the role of business, a distinction between multinationals and smaller, entrepreneurial enterprises is useful. A recent UK report identifies a difference in perspectives and approaches to global climate change in these two groups of businesses, with multinationals taking a long-term view, positioning for the future based on broad policy directions (Hamilton and Kenber, 2006). By contrast, smaller businesses, entrepreneurs or venture capitalists are more sensitive to the details of immediate or shorter term policy reforms. Similarly, there may be a difference even within the multinational sector between the energy suppliers (e.g., electricity producers/distributors, oil companies, or even coal companies) and energy intensive industries (e.g., chemical or aluminium companies). The former takes a longer term, market development or pro-active view and the later a more reactive view (e.g., BIAC/OECD/IEA, 1999). Finally, some companies are likely to be ‘winners’ with any effort to advance sustainable development through clean energy policies (e.g., insulation industry, window manufacturers, energy service companies) and some are likely to be ‘losers’ (e.g., producers of energy inefficient products). It is therefore difficult to speak about ‘market’ sector preferences because there are different types of businesses with significantly different perspectives in different places.

In summary, although there has been progress, the private sector can play a much greater role in making development more sustainable. As the number of companies that operate both profitably and more sustainably increases, the view that addressing social and environmental issues is incompatible with shareholder maximization may loose ground. Opinions vary on the extent to which business can be relied upon to meet sustainability objectives. These range from business being inherently self-interested and exclusively profit-driven, to socially responsible businesses going ‘beyond compliance’ are on the forefront of the sustainability curve. Although the issues are complicated, there can be no question that the shift towards improved sustainability is fundamentally connected to the social, economic and environmental performance of the private sector. This is especially true in relation to the issue of climate change.