Environmental Sustainability as a Business Opportunity and Risk
Consumers and businesses are starting to pay attention to the environmental impact of what they buy and sell. This is a trend responding to the reality of climate change, the loss of biodiversity, and a cultural awareness of the importance of the planet to human well-being. Of course, the definition of human well-being is changing in many parts of the world. In the developing world and places under assault like Ukraine, schools in Texas or supermarkets in Buffalo, the issue is survival. Staying alive and obtaining food, clothing, shelter, and protection from evil men with weapons is the priority in those places. But in most places in the developed world, human well-being assumes freedom from want and fear as a given and focuses on wellness and self-actualization. This leads to a concern for the environmental impact of human activity. While this concern is in some sense a luxury, for the planet, it’s a necessity.
It is not easy for consumers to know the environmental impact of a good or service. It’s also not easy to know how many consumers care or if this concern will continue to grow. Writing on this issue, Wall Street Journal reporter Ed Ballard observed that:
“Climate-change modeling largely draws from physical science. How much hotter will the world get as greenhouse gases enter the atmosphere, and what does that mean for heat waves, floods and harvests? But these hazards are only half the picture for companies facing pressure to assess their exposure to climate risks. The other half concerns people. Will consumers switch to eco-friendly products? Will governments raise carbon taxes? And how quickly could such changes occur?”
An even more important factor, not mentioned in this piece, is the impact of technology on the environmental impact of a product or service. The technology of renewable energy, energy transmission and batteries are all advancing, and so our measurement and understanding of environmental impact must be subject to rapid modification. The Sports Utility Vehicle (SUV) is a standard example of a consumer product with a massive impact on the planet. But what if it’s an electric vehicle (EV) powered by your home solar array and made with recycled aluminum and other planet-friendly materials?
And beyond manufacturing, what about people living in cities that are becoming more environmentally sustainable who might ride in that EV but not own it and instead ride in an Uber or rent a Zip Car to drive? About 80% of America’s GDP is in the service sector, and more and more consumption is light on material consumption and heavier on the consumption of entertainment, ideas, or physical activity. Software needs hardware to run, but the software on your smartphone is worth much more than the hardware. More and more of our time is spent communicating with each other or obtaining games, shows and information from our smartphones and computers. These consuming behaviors have very little negative environmental impact. As our energy sector slowly transitions off fossil fuels and as these electronic devices become less toxic and more reliant on recycled materials, it is easy to imagine an even lower environmental impact.
The point I’d make here is that in the long run, products that pollute will be more expensive than those that do not. I recognize that is not always the case now. But as drivers see gasoline at $5 a gallon, electric vehicles become price competitive. And environmental pollution, in general, is a form of production waste. An effluent discharged into a waterway might have economic value if someone gave some thought to how the substance might be used in production. The company that figures out how to make productive use of the waste will be able to sell it rather than pay to dispose of it. Energy efficiency is an excellent example of a practice that saves money while protecting the planet. If I can use less energy than my competitor to produce the same product or service, I can lower my cost and increase my profit. Home appliances like air conditioners and refrigerators continue to become more energy efficient. The engineers designing these products have been given energy efficiency as a design parameter. Due to government regulation, consumers buying these appliances are provided with information on the average annual cost of operating that appliance. So, companies are encouraged to invest in energy efficiency and consumers are encouraged to buy more efficient appliances.
The EVs and lower-impact appliances are an opportunity for the businesses that make them. If the environmentally sensitive products are of higher quality and the costs are lower, then the risk to business is not increased. In other words, the risk posed by consumer behavior stems from the perception that a concern for environmental impact raises the cost and could lower the quality of the product or service. But creative design and improved technology open up the prospect of the opposite being true.
So where then is the risk? The risk is often caused by disinformation from those with heavy investments in outmoded technologies and from the actual impact of environmental damage. Some companies are very good at marketing outmoded and dangerous technologies. The tobacco industry is the classic case. Smoking causes over 7 million deaths per year, and still, over 1 billion people smoke worldwide. These companies know they are killing people and making them sick but are quite good at promoting their product despite the danger. Similarly, the fossil fuel industry is doing everything it can to combat its up and coming rival: renewable energy.
The other source of risk is from climate accelerated extreme weather events, higher temperatures, and sea-level rise. Our food systems are impacted by warming. Planting seasons are changing, and some crops are being grown in warming places that were once too cold for a particular crop. Fish are migrating, and society’s most vulnerable people are getting sick and dying from the heat. Supply chains already damaged by COVID are also disrupted by storms, floods, and fires.
We are in a transition to an environmentally sustainable economy which is inevitable due to the dependence of human life on planetary systems for food, air, and water. The transition is inevitable because the physical factors that businesses could once ignore- are being degraded. The value of protecting them has increased, as has the cost of ignoring them. Energy, water, and waste are increasing elements of the cost structure for manufacturing and service businesses. It costs more money each year to cart away an organization’s garbage and keep the lights on. That means that recycling garbage is gradually becoming cost-competitive with dumping garbage: especially if an organization can make money by selling its waste stream. Organizations that ignore these issues will lose when they compete with companies that have learned to reduce consumption and recycle. This is an emerging business principle. The fact that in some cases protecting the planet costs money does not make this general principle less true.
Here in New York City, back in the 20th century, we used to landfill all our garbage locally. Today, we’ve run out of places to landfill, and so we ship garbage out of the city and spend more than twice what we used to spend on waste disposal. In 2000 we spent $830 million; now we spend over $2 billion per year, about $600 million of that is real, uninflated expenditure growth. New York City is not alone. Water that used to be free must now be filtered before it can be used. These costs are real, and they represent risks to cities and companies, but they also represent opportunities. What if New York could be paid for the minerals and nutrients in its waste stream? Some of the costs of waste disposal could be offset by revenues.
Predicting business and consumer “green” behavior is difficult, as is predicting the pace of technological development and diffusion. What is easy to predict is that we are in a period of change. Consumers, businesses, and governments are paying more attention to the environment today than they did yesterday. They will also be paying more attention to environmental sustainability tomorrow than they do today.