Decoupling Business Growth from Green House Gas Emissions

JUL-AUG 2017|BY DR. ANDREAS ROBOTIS, ASSISTANT PROFESSOR OF DECISION SCIENCES, ALBA GRADUATE BUSINESS SCHOOL AT THE AMERICAN COLLEGE OF GREECE
In recent years, the notion of sustainability has earned increasing attention due to public concerns regarding climate change.

Regulatory and market pressures are forcing firms to be eco-efficient—that is, to design products and services which take into account energy and material savings during production and the greenhouse gas emissions generated not only during production but also during the lifecycle of the product or service. Increasing the economic value-added per environmental footprint is a major strategic target for firms that consider themselves leaders in their field.

Nowadays, firms are increasingly starting to publicly disclose emissions reports for their operations and services while a high percentage of firms are committing to reduction targets as well. See, for example, cdp.net. This practice is followed by firms that span a broad scope of sectors and industries, including healthcare, financials, industrials, information technology, consumer discretionary, materials, consumer staples, and energy.

There are three incentives for firms to disclose and report their emissions. The first incentive is that investors and customers request to review and evaluate these reports before they decide to invest in a firm. Infosys India reports that 85% of their customers demand emissions reports before making their choice.

The second incentive is that the environmental footprint is a reliable proxy for measuring operational efficiency. In the manufacturing sector, firms that follow the philosophy of lean manufacturing eliminate waste from their operations, which results in a lower environmental footprint. Similarly, an energy-efficient firm consumes less energy and has lower emissions for the same output compared to a firm that uses energy inefficiently. The third incentive is the anticipation of future environmental regulations and the management of risks that might arise in the future.

The unit of reporting, however, is not uniform across firms and industries, making the ranking of firms difficult. Emissions and reduction targets are reported either as absolute or intensity emissions. Absolute emissions are the total emissions of the firm. Intensity emissions are the absolute emissions normalized per employee, per square foot, per product output, etc. While a firm is free to choose how it reports emissions (absolute or intensity), if it publicly commits to a future reduction target, this target should be measured using the same choice of metrics so that the firm’s reporting is comparable across years.

Reporting absolute or intensity emissions was a major issue of debate among politicians during the discussions for the Kyoto protocol. To see why, consider the following example: A firm grows by acquiring another firm. The absolute emissions of the firm might increase substantially while the intensity emissions (emissions per employee, for example) might decrease. Thus, while the firm harms the environment more than before, it will report reduced emissions. Obviously, reporting absolute emissions is more beneficial for the environment, but it might be an obstacle for the growth of the firm.

It is generally considered that growth and reduction of absolute emissions at the same time is a difficult and risky target. Nevertheless, the number of firms that have managed to decouple business growth and emissions by growing while reducing their absolute emissions is increasing.

Firms such as Walmart de Mexico, Givaudan in Switzerland, Lixil in Japan and numerous others that span industry sectors and countries have countries have decoupled  growth and emissions. These firms realized that process energy efficiency initiatives, the use of an internal carbon pricing as an internal benchmark, and the identification and elimination of waste are drivers of innovation that can turn the challenge of emissions reduction from risk management to business success.

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