It seems that not a week can pass without media coverage of a new report on climate change. In the UK, all the political parties have now identified it as a major issue for people, the environment and the economy. It seems a long way from the early 1990s when ‘global warming’ was first identified in the mainstream as a trend. A decade ago, most businesses were able to plan their futures without making reference to worldwide temperature rises, increasingly frequent extreme weather events and sea level changes. If climate change was mentioned, it was an issue of scientific debate and, perhaps, something that regulation would address some time in the future.
Fast forward to 2006 and scientific opinion is, at last, near-unanimous in its statements that climate change is happening, and that emissions of “greenhouse gases” from human activity are driving it. Carbon has emerged as a new currency with greenhouse gas emissions traded across Europe, and worldwide for some sectors. Investors and insurers have woken up to the price of climate change and are demanding that companies face up to the implications for their business. May this year saw the prices of the EU Emissions Trading scheme shake down after the first full year of operation and the real costs of exceeding your permitted emissions are hitting hard.
With the issues now inescapable, Article 13 offers three key questions to think about in finding the path to innovation and value in climate change.
1. How does climate change affect business and the supply chain?
A changing climate affects the viability of enterprises up and down the supply chain. As oil prices rise to the once unthinkable $70 a barrel and show no sign of falling again business buying energy will see costs escalate, and it’s worth remembering that suppliers may well feel the pinch more than you do since energy is typically a higher proportion of total costs the further back towards commodities you go along the supply chain. So questioning what kind of energy you need, as well as creative thinking about how much energy you need is an area of innovation likely to pay dividends.
The London Climate Change Agency (LCCA) has been set up to support that sort of creative thinking in the UK’s capital. Working with businesses and buildings in specific geographic areas, the LCCA wants to help replicate the success of the town of Woking, where a “private wire” system has made the town self-sufficient in its energy production, with technological innovation (like a hydrogen fuel cell1) made possible by the collective support of all the energy users in a location. LCCA envisages a number of these energy islands across the capital, each of which would spread risk and reward between energy users.
Climate change is altering the location, size and purchasing priorities of key markets too. The huge impact of new production and markets in China and India feature in the business press even more often than climate change does – but it’s true that growth in these markets will swamp all others soon – and selling future-proofed, climate friendly and energy efficient products into these markets is a tremendous opportunity. To capitalise on the opportunity, businesses are going to have to find new ways of communicating with international and cross-sectoral partnerships that are unlikely to be comfortable for anyone at first! Knowing the market you’re aiming for, and the challenges it poses, helps focus innovation effort where it will give greatest payback. This also means that innovation in technology will need to be matched by innovation in business models.
2. How does climate change affect products and services?
Thinking about climate change, and particularly the focus on needing to reduce emissions associated with fossil fuel use, means that you can start to categorise which are the products of the past and what are the opportunities of the future. Which products will be in high demand in a low-carbon economy? Which services will help people and business adapt to the new conditions imposed by climate change.
Energy company Ecotricity is a great example of how innovative thinking has led to a completely new form of business model for energy delivery. The traditional model og energy delivery is to put all the investment up front in large power plants like nuclear, oil, gas and coal. This model is, to some degree, being replicated by the huge wind farms aiming to mop up the UK’s renewable energy market. The plant operator then needs to find electricity contracts which will use the megawatts generated by big plants. Ecotricity has taken an incremental approach. They sell electricity contracts which then enable them to fund small scale renewable energy generation (typically a handful of wind turbines rather than a field full, or a small hydroelectric plant), which reflects the size of the contracts assured. This means that investment is in smaller chunks, their generating portfolio is more flexible and resilient to changes in the financial markets, and that they have minimised their risk at every stage of the way.
In the healthcare industry, climate change, as one of the biggest environmental factors impacting on human health, will mean that new healthcare priorities will emerge. An increase in global warming will increase the range of diseases that can spread in different parts of the world, and new vectors of transmission will spread them. Health education on issues of water quality and conservation will be important. The tan-obsessed Western world will, no doubt, continue to see the incidence of melanoma increase. These are the kind of pointers that will shape products and services to maintain the health of a growing population.
The aviation industry is under scrutiny for the climate impacts brought about by potent greenhouse gas emissions from aviation fuel, and one way that a concerned traveller can appease their eco-conscience is by buying a “carbon offset” alongside their flight ticket2. A handful of organisations, like Climate Care offer the chance to recoup your impact on the environment by doing something to absorb the emissions associated with your flight, or increasing energy efficiency and therefore reducing emissions somewhere else. But it’s interesting that it’s a major player in the automotive industry, Ford, who are the first vehicle provider to innovate and start actively promoting voluntary carbon offsets to their customers. At the end of April 2006, Ford launched its "Greener Miles” programme, where drivers can calculate the amount of CO2 emissions they generate in one year of driving and then buy an offset that supports the production of renewable clean energy from wind or dairy farm methane.
Earlier innovators will see the highest returns. Toyota and Honda hybrid cars command a price nearly 50% higher than similar sized and specified petrol or diesel cars in the UK – and yet demand still outstrips supply with waiting times of several months for delivery. This extra price won’t translate into 50% extra profit because Honda and Toyota need to pay for their early investment in commercialising hybrid fuel technology. But achieving strong sales with those high process is still a sign that markets are willing to pay more for climate friendly products. That willingness-to-pay should translate into some level of increased profit, particularly for the first movers in a particular product field.
3. How will climate change affect infrastructure essential to product and service delivery?
Transport is going to become a high profile issue for most businesses. Costs of transport are likely to rise in two ways: transport costs will increasingly reflect direct carbon emissions associated with moving goods and people around, and transport infrastructure itself will become increasingly vulnerable from the extreme weather events which climate change brings, increasing insurance costs at best, and isolating businesses from their markets at worst. So an organisation that starts to recognise the full costs of transport, using this as a lever to innovate into more distributed systems, or avoiding the need to move goods over ever-increasing distances, will see benefit.
Often over looked, but a business cost that is rising fast and relentlessly, waste management has a strong interest in climate change. Methane emissions from the disposal of biodegrade waste are potent greenhouse gases, 22 times more powerful than carbon dioxide in warming the planet. So some waste management companies are recognising the need for innovation to reduce methane emissions, whether this means capturing the emissions for power generation or reducing the emissions by changing waste disposal technology, as Severn Trent are considering. One particularly interesting example is the ongoing activity of Biffa Waste Services (part of the Severn Trent group). Unusually for business, Biffa engages with government and society to make the case for higher taxation. They actively lobby for increasing landfill tax as it is their assessment that only increasing the cost of waste disposal will eventually provide sufficient impetus for people to take seriously the radical innovation in waste management methods and waste recycling or avoidance.
Neither Denial nor Rose Tinted Glasses
The time for hoping that climate change will just go away, or that, at least, it won’t affect your organisation appears well and truly past. Equally, simply assuming that facing up to a challenge is enough to overcome the challenge is optimism without any basis. Organisations need to structure a systematic approach to understanding climate change – how will it affect your organisation directly, the people in your supply chain, the use of your products or services? This understanding is essential as the basis for identifying where the opportunities lie, so that climate change offers you the chance not to increase costs, but to innovate and add value.
Additional reading:
1. Read our CSR case study on First Group and their participation in the trial of hydrogen fuel cell buses for an example of innovation in climate change.
2. See Article 13's CSR case study on BA and their Climate Change Programme for further insight.
Also in this feature:
© Article 13 – June 2006
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