Rory Sullivan says clever capital spending can help business cope with climate change
As a result of uncertainties around climate change policy, most firms remain unwilling to commit significant sums to reducing their greenhouse gas emissions. Companies have adopted a “capital light” approach, where any investments need to be modest and provide quick returns in terms of cost-savings or boosts to brand and reputation.
The capital-light approach to climate change is clearly a sensible business strategy, in particular as we emerge from the global financial crisis.
That said, companies need to think about capital deployment in the round.
Think longer term
There are three issues to highlight in particular.
First, the capital-light approach searches for immediate or very short-term returns or benefits, and chooses these over actions that provide longer-term benefits.
The problem is that the longer-term implications of climate change are ignored. This, in turn, may see companies left with stranded assets, a higher cost base (because of the higher embedded energy and carbon in their products and services) and a business model that is simply not sustainable over the medium to long term.
Second, the capital-light approach means companies tend to focus on efficiency (or doing more with less) as the primary driver of value creation. In this mindset, research, product and service development, experimentation and innovation are seen as “expensive”, “too long term” and “distractions” from the core business of making money.
Unfortunately, as the history of business shows, focusing on what we do well today is rarely a strategy that enables the companies of tomorrow to be built.
Third, capital-light mindsets tend to harden into a general reluctance to invest in any part of the business. While waiting and seeing may seem like a sensible approach in the short term, it can leave companies vulnerable.
For example, they may be required to make large capital investments at the wrong point in the economic life cycle (rather than spreading such investments over longer periods); they may miss opportunities; or they may lock themselves into particular technologies or business models.
Risk is risk!
These points are not intended as an argument that all companies should, even if it were possible, seek to green themselves overnight or that they should necessarily abandon the capital-light model that has served many so well.
Rather, the argument is that companies need to treat climate-change-related risks and opportunities in a similar manner to other business risks and opportunities. That is, they should assess how climate change may affect their business and, based on this assessment, make decisions that allows them to manage these risks.
There are two areas where changing mindsets are particularly important.
The first is that, for most companies, the single biggest opportunity they have to future-proof their businesses and create longer-term value is when they invest capital. This can be into new projects, new products or upgrading existing equipment.
If climate change is factored into these decisions, it maximises the likelihood that companies will make decisions that create real business value over the long term.
The second is that making effective decisions builds on information, knowledge and expertise.
Understand the consequences
The companies that are recognised as successful innovators consistently emphasise how much time and effort they have invested in testing new technologies and new approaches. This means that when it comes to the point where they need to make investments they fully understand the financial and technical implications of their choices, and of the options that they are rejecting.
Developing this level of knowledge and expertise requires that organisations purposively and deliberately look for opportunities to take actions that fall outside the search for efficiency.
Dr Rory Sullivan is an internationally recognised expert on climate change and investment. He is a strategic adviser at Ethix SRI Advisers, a senior research fellow at the University of Leeds and a member of the Ethical Corporation advisory board.
This article is based on Corporate Greenhouse Gas Management: From Operations to Strategy, edited by Rory Sullivan and published by Environmental Finance.
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