Unlikely partnerships, such as one between Greenpeace and McDonald's, are becoming the norm as special-interest groups become part of the business conversation on such key issues as climate change and water scarcity
Posted on Leading Green: July 14, 2008 8:08 AM
Who would have ever thought that Greenpeace and McDonald's would be collaborating to protect the Amazon rain forest? Or influential environmental groups would be partnering with private equity firms to prevent new coal-fired power plants from coming online in Texas? Or that investors and activists would be sitting across the table from Citi and other leading banks telling them how to tighten their lending criteria for high carbon-emitting projects?
To quote Bob Dylan, "the times they are a-changin'." These partnerships, once unthinkable, are now indispensable as companies navigate the complex environmental and social risks of the 21st century global economy. Outsiders—investors, environmentalists, public interest groups, industry experts—are increasingly part of the conversation in helping businesses identify and respond to thorny, multi-layered challenges such as climate change, water scarcity, and supply-chain labor pressures.
A more open society from globalization and technology has exposed companies to a flood of suggestions and critiques from many more perspectives. Companies that heed those perspectives and filter them strategically can propel themselves forward by avoiding unforeseen risks and seizing new opportunities.
Companies that don't heed them suffer. The recent subprime mortgage meltdown is a painful example of how companies and whole industries deluded themselves into ignoring even the most fundamental issues. If financial firms had been listening to outsiders warning of the risks from easy mortgages, they could have averted hundreds of thousands of foreclosures and softened the impact of an economic recession, and saved themselves a fistful of dollars.
Climate change is no different. It presents far-reaching financial risks and opportunities that many companies aren't grasping on their own. Outsiders warned Ford and General Motors for years that their gas-guzzling, high-polluting cars and trucks were too big, but the automakers did not listen. Now their large sports utility vehicles sit unsold in car lots, they can't make their more fuel-efficient models fast enough, and the companies' futures are at stake.
Last year's buyout of TXU is a good example of how outside stakeholder groups can yield positive benefits. For years, the Texas utility battled with environmentalists over carbon emissions and other pollutants. When it proposed in 2006 to build 11 new coal-fired power plants, the battle became a full-blown war. TXU's stock price sagged and two private equity firms began looking to buy the company, and that's when we saw a significant shift in business strategy as investors made environmental factors a part of their due diligence. The company consulted extensively with the Natural Resources Defense Council and Environmental Defense on the judiciousness of the new coal plants and possible green alternatives (coal-based power plants emit substantially more pollution than other generating facilities, making them especially vulnerable to carbon limits).
As a result of these partnerships, the equity firms scrapped all but three of the coal-fired power plants and agreed to cut global warming pollution and boost energy efficiency efforts. That's a good result for the environment but also for the company, which is in a better position for its bottom line, since fewer coal plants means lower compliance costs when climate regulations take effect.
There are many other examples of positive results from stakeholder engagement: McDonald's teamed up with environmental groups on sourcing sustainable fishery stocks and refusing to buy soybeans from the Amazon; Bank of America heeded the advice of investors and environmental groups in setting a greenhouse gas reduction target in its lending; Timberland and Nike responded to public-interest pressure by disclosing the names and locations of its overseas factories and boosted its assessments of those sites; Dell listened to advocacy groups and investors by supporting electronics recycling legislation and improving the energy efficiency of its products. These efforts brought lower costs, reduced regulatory, reputation and litigation risks, and built long-term shareholder value.
But some forms of stakeholder engagement work better than others. At Ceres, we prefer steady and long-lasting relationships between outsiders and companies, not one-night stands focused on only one problem or project. That is one reason why the jury is still out on the TXU buyout. The fact that the company is now privately held makes the task especially challenging since there is no requirement for public transparency. Yes, it is great that eight out of the proposed 11 coal plants are not being built, but let us hope that advocates keep the pressure on so that the company's green commitments stand the test of time.