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    No Nature, No Business: The Cost of Climate Change and the Financial Crisis

No Nature, No Business: The Cost of Climate Change and the Financial Crisis

April 15th, 2013|

First published on CSRWire, April 15, 2013

No Nature, No Business is the underlying assumption that must guide all financial regulations and international climate treaty negotiations. I can imagine buy-in actually coming from a majority of both the world’s businesses and governments as a new level playing field is built.

I would never have imagined that my faith in corporations telling the truth would supersede my faith in governments telling the truth. But there is a change in the weather.

Our environment has become so consistently terrible that its effects on business are now undeniable, unpredictable and expensive. In multinational boardrooms and executive suites across the world, environmental problems are now noted as primary risk factors; derailing corporate success —even survival.

And corporations are beginning to step out and speak up.

Governments Fail To Connect Environmental Harm To Business Risks

Governments, not so much.

When extreme weather destroys 15 percent of the world’s cotton crop, corporations are hit with higher costs, shortages and unpredictable P&Ls. But governments do not yet connect the costs of climate change and pollution to the financial crises at hand – or the government’s bottom line.

Even though the external costs of coal and oil in the U.S. total more than $1.1 trillion (the 2012 investmentdeficit), these costs were not mentioned during the recent U.S. Congressional debate about the sequester. This “environmental debt” has not yet entered our governments’ financial deliberations.

One exception: China recently noted that the cost of its environmental degradation comes to 3.5 percent of the country’s GDP. That’s a game-changing number and most certainly lower than the true cost.

Rewarding Smart Investments Now For Long Term Value

Responding with adequate urgency to the global environmental crisis will cost money. Lots of money.

Unfortunately, this smart spending conflicts with every corporation’s strong imperative to cut costs in the short term. If a company invests heavily in dramatic changes that will secure its environmental and fiscal future through green technology, systems and sourcing, it is likely to endure some lousy quarterly earnings. This is because today’s rules and regulations encourage businesses to separate long- and short-term choices.

What would happen if companies were instead rewarded for smart investments, wherein P&Ls and balance sheets reflected long-term value vs. short-term reporting? Both businesses and governments would benefit and save money in the fairly near term, just not this quarter.

Object Lesson: PepsiCo Makes Progress, But Hits Limits

Perhaps the climate talks to nowhere of the past several years (from Copenhagen to Rio) might instead become Accounting Change Negotiations that empower business to make smart long-term investments with encouragement rather than attacks from stockholders and Wall Street analysts. The additional costs of goods and services would then be spread over long-term accounting cycles so that the higher costs would not cause extreme price spikes. This would avert great social and economic disruption while protecting politicians and businesses.

Al Halvorsen, senior director of environmental sustainability for PepsiCo, explained with great pride Solar panelsthe state-of-the-art manufacturing facility he helped develop for Frito-Lay (a PepsiCo division) in Arizona. The plant’s innovations include near-net-zero energy use and a three-quarters reduction in water usage compared to plants of similar size. Everything possible is recovered, reused and recycled, and efficiency and conservation are the governing principles.

Halvorsen also noted that he is beginning to use some of these advances in PepsiCo factories globally, and the company is constantly looking for opportunities to use best practices.

When I asked why all the improvements weren’t instituted in all of PepsiCo’s factories, the conservative businessman and engineer replied:

“It’s expensive to make all of these changes. When water costs or limited supply justify these expenses, PepsiCo will deploy all of these advances everywhere. Same goes for energy.”

His story perfectly illuminates the need for a change in the rules. PepsiCo engineers achieved extraordinary advances that will benefit the company and the world. Without any doubt, water and Environmental Debtenergy crises are going to hit PepsiCo factories somewhere in the world soon enough — but it is excruciatingly difficult for all companies to install these kinds of changes in a financially secure way. The extra expenses hurt quarterly reports.

There are thousands of multinationals in exactly the same conundrum as PepsiCo with countless of executives sharing consternation about their companies’ inability to invest more heavily in great innovation because of short-term financial reporting considerations. This is why governments and businesses might actually agree on a change in the rules so that businesses reap rewards instead of penalties for transformative R&D and investments. 

Tackling Environmental Debt Will Trim Government Costs

And governments will save as less “environmental debt” is incurred.

As China’s new Environment Ministry report notes, the country will have to spend hundreds of billions of dollars remediating bad choices. Why not start by empowering businesses to make better choices immediately?

Why can’t governments and businesses just support a change in accounting rules wherein external costs (both long and short-term impacts) are priced into goods and services? This fundamental change has the ability to become one of the primary levers to solve both our environmental and financial crises.

– See more at: http://www.csrwire.com/blog/posts/802-no-nature-no-business-the-costs-of-climate-change-the-financial-crises#sthash.8JkmsneU.dpuf

Countries and Companies Can Agree: Something’s Gotta Give

April 6th, 2013|

First published in the Huffington Post, April 9, 2013

China admits to having a big problem. This admission alone is big news. China’s own Ministry of Environmental Protection now estimates the costs of this degradation at $230 billion for 2010, or about 3.5 percent of its Gross Domestic Product. (This estimate came before Beijing’s recent air quality crisis and the 15,000 dead pigs found floating in Shanghai’s water supply.) As Americans, we are a large part of China’s professed problem — both the causes and the solutions. Much of this pollution is caused by China’s huge consumption of the coal-fired energy that keeps its factories running round the clock as well as the manufacturing process itself.

How much of China’s exports go to the United States? In 2011, China exported $400 billionof goods to the United States and imported $104 billion of our goods, giving China a $300 billion trade surplus and United States politicians and economists agita. In 2009, according to the WTO, 25 percent of China’s total exports went to the United States. How much of China’s pollution is created by American demand and consumption of cheap Chinese goods, from clothing to computers and everything else?

But herein lies the opportunity. Right now, we do not pay the real price of any of our goods because we are not paying for their environmental degradation. But the Chinese government is now debating how much to spend on remediation, how much to spend on changing factories and electrical plants to cleaner technologies, and how much to spend on new agricultural practices. Numbers in tens of billions of dollars are being tossed around as necessary expenditures for protecting the country from untenable losses of viable water, land and air. There is a visceral understanding in China that these environmental losses could translate to economic and social chaos all around. So why aren’t Americans having the same debate?

Americans are not so good at tackling cost/benefit analysis when it comes to economic growth or employment opportunities. Now that China is publicly discussing how environmental losses threaten its very stability, why not begin an honest debate in the United States about our own environmental debt? In recent testimony before the U.S. House Judiciary Committee, William L. Kovacs, Senior Vice President of the U.S. Chamber of Commerce said: “Regulations impact jobs in three ways: they impose significant compliance costs that divert resources away from other needs; they can cripple or even destroy industries; and they can impose such complexity that they discourage business expansion and job creation. To bring manufacturing back to this country, we must understand the impacts of excessive regulations.” It is absolutely true that government regulations are often implemented with a Kafkaesque logic that has neither common sense nor acceptable timelines. But U.S. industry has been fighting environmental regulations since 1972 when Mobil ran a full page ad in the New York Times claiming that the Clean Air Act was a $66 billion mistake ($366 billion in 2013 dollars).

The radical 1970s Clean Air Acts are the only reason that the air in American cities does not resemble the air in most Chinese cities. And it’s not as if we don’t have terrible air and water problems in the U.S. We do. They’re just not as bad as China’s today, although Salt Lake City recently endured a month-long health emergency due to bad air. I live in NYC where the air is often disgusting and dangerous on a regular basis, especially in the summer. This pollution raises health care, education, sanitation and water costs.

There is no clear consensus on how much pollution really costs. But if China openly states that it’s a 3.5 percent hit on its GDP, why don’t we seize the opportunity to re-value our economy and GDP? British economist Nicholas Stern estimates that just to combat climate change, western economies should now be spending 3.5 percent of GDP per annum. Imagine if China and the United States led a global negotiation to fund and build global renewable energy infrastructure at the same time? Imagine if China and the United States led a global negotiation whereby companies that pollute least are rewarded for their positive environmental investments and companies that pollute most are charged. The EU’s decade of experience in this kind of spending can help provide the outlines of a path.

Under no circumstances can pollution remain free. Why don’t we actually try to make this fundamental change to the underpinnings of global trade WITH China? As China is faced with a dire environmental crisis, the cold war’s Mutual Assured Destruction has taken on a new form. We cannot outspend the Chinese to avert climate change and environmental disaster. We must embark on a path of Mutual Assured Survival.

Hundreds of multinational corporations that manufacture in China (and in the rest of the world) would like to embark on this path. They are constrained now because the biggest polluter currently has the financial advantage. It is in all parties’ interests to change that. I think the Chinese government would now agree. Mr. Kerry, are you ready to negotiate a deal that would benefit the planet as well as the global economy? Let’s use this crisis to negotiate an end to the era of cheap goods and the beginning of the era of sustainable goods.