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    Climate change survival: companies need courage… and new metrics

Climate change survival: companies need courage… and new metrics

April 25th, 2014|

First published in the Guardian on April 24th, 2014. 

Today, tremendous work is being done to develop the metrics of natural capital. All kinds of very smart people and organizations are making the “business case” for sustainability, making tortuous calculations as they analyze the life cycles, carbon production and water footprints of a variety of products, all in an attempt to make the best possible business and marketing choices.

This arduous work is being done – finally – by gifted and smart accountants, economists and supply chain and manufacturing experts, from the Global Reporting Initiative to the Sustainability Accounting Standards Board to the Carbon Disclosure Project to the World Bank’sNatural Capital Accounting. I appreciate all of this work. We need it.

But, impressive as this work is, it is no replacement for having the courage to actually contemplate the state of the world around us. Right now, we are looking on with a mix of disbelief and ennui as extreme weather engulfs us. In some cases, we are trying to take what appear to be reasonable steps, mostly in order to protect our precarious perch in the world’s economy. The trouble is, the time for reasonable has passed. We have somehow forgotten that if there is no nature, there is no business.

We are in a global environmental emergency, but we are behaving as if incremental improvements to “business as usual” will do. Talk to a scientist, a fisherman, a native of a low-lying island or a farmer stymied by drought, heat or floods. Or for that matter, talk to anyone who has been flooded in southern England or Pakistan; or who is making flood insurance payments in New Jersey or Florida; or who is witnessing the effects of drought in the southwest US or Iran; or who is being scorched by heat waves in Australia or Argentina.

This ripple effects of these environmental disasters continue across the economy, hitting investors whose livelihood relies on predicting commodity prices, managers who are counting on seasonal hotel occupancies, and insurers who are facing double digit losses from catastrophes. Their jobs are getting harder – and many are scared to death.

Everything is upside down, a very very dangerous spiral has begun, and we’re nowhere near ready. Even in California, home of environmentally savvy governor Jerry Brown, voluntary statewide water rationing has only just begun three years into a drought. Voluntary!

My brother, a small businessman in Brooklyn, owns a factory that employs about 50 people. He makes a good living, pays his employees well and has been working in his field (construction parts and machinery) for 35 years. He’s much more conservative than I am, but he lives a fine life with a beloved family and demonstrates honor and courage in most everything he touches.

He took a very conservative approach to the recession and subsequent “end of any building at all” that he saw coming in 2008. Realizing that the boom years of the mid-2000s would not last, he saved for these rainy days, took care of his workers (kept them all on at four days a week despite virtually no new revenue for two years), invested his own money to support the business, slashed his own salary, and hoarded materials when times were flush. All this planning paid off: despite a very rough two years, he was able to withstand the recession. Now, business is booming again.

My brother’s tactics were not about sustainability – they were about survival. Conservative, in this case, essentially means conserving resources to ensure long-term security. In my brother’s case, from the time he became aware of the coming crisis, there was no “business as usual” in anything he did: he took emergency measures to protect his company, his workers and his future. And it worked.

Many companies are looking beyond sustainability to survivability in their radical approaches to environmental issues. KPMG calculated that the environmental degradation caused by the world’s 3,000 largest public companies totaled $2.15tn in 2008. This estimate undoubtedly antagonized many of the company’s biggest clients.

Some companies are addressing sustainability. Unilever committed to double sales and halve its footprint between 2010 and 2020, and created a global advocacy team to help it achieve that goal.

Sometimes, this new knowledge spurs even more aggressive action. When Puma measured its 2010 Environmental Profit and Loss (EP&L) with the help of PricewaterhouseCoopers and TruCost, it learned that its profit would have been reduced by 72% if it had integrated environmental costs into its accounting.

Puma’s parent company, Kering, is now pursuing an even deeper understanding of the company’s real costs, and is creating an EP&L for all of its 16 luxury brands, including Yves Saint Laurent, Gucci and Stella McCartney. And, in 2012, Kering’s vice-chair Jochen Zeitz and Sir Richard Branson formed the B Team, an organization tasked with creating a business model for the 21st century – with the understanding that the current model will not allow us to survive.

All of these corporate leaders are behaving as if their survival is at stake. They dared to read the weather pages and register that the world their businesses inhabit is trembling from environmental damage. And they instructed their companies to take commensurate action.

Only by adding courage to sustainability will we survive.

  • Permalink De-carbonizing the economy globally: could accelerated depreciation be the answer? Photograph: David Sillitoe for the GuardianGallery

    A simple accounting change can make green infrastructure more attractive

A simple accounting change can make green infrastructure more attractive

April 9th, 2014|

First published in the Guardian, April 8th 2014

Many businesses struggle with the question of how to invest in large fixed assets. These are painstaking decisions, because they always demand long-term thinking and guessing about markets, future technologies and risk factors. How much revenue will a new factory generate? How much savings will a new technology produce? What unintended consequences might occur because of a purchase?

As companies attempt to answer these questions, they also have to deal with long-term trends that further complicate the question of fixed-asset purchases. Issues as diverse as globalization, environmental degradation and climate change can affect commodity prices, cause fires or floods, drive up the cost of living, and undermine political stability and security. And even positive developments, like the growing use of renewable energy, can lead to instability as coal producing areas will need new economic lifeblood. For governments hoping to deal with these trends by incentivizing green investment, one simple accounting change – accelerated depreciation for green infrastructure – could make a considerable difference.

Companies attempting to adjust to these changes with large fixed assets often find themselves trying to balance a financially viable long-term solution with a steep up-front cost. At the same time, companies also have to deal with several long-term issues that further complicate their purchasing decisions. I recounted one such story in my book,Environmental Debt: the Hidden Costs of a Changing Global Economy. Several years ago, PepsiCo built a state-of-the-art facility for its Frito-Lay division in Arizona. The installation had near net-zero waste, water, and energy systems. It isn’t hard to see how these advanced systems not only helped PepsiCo, but also the surrounding community: approaching net-zero water use would seem pretty valuable, actually imperative, in the middle of a water-constrained area like the American southwest.

Unfortunately, these engineering feats are actually disincentivized in our current accounting system because they are more expensive in the short term despite having huge long-term savings. However, there is a basic accounting solution that could fundamentally alter business fixed asset and technology profile, one that will make sense to engineers as well as CFOs and board finance committees: accelerated depreciation for green infrastructure investments.

Accelerated depreciation allows greater accounting and tax deductions in the earlier years of the life of an asset. In doing so, it enables a company to depreciate its fixed assets faster, so its earnings, balance sheets and tax bills would be calculated according to a truer value of these investments.

Microsoft is a good example of the potential value of accelerated depreciation for green infrastructure. Like its fellow IT companiesGoogleFacebook and Apple, it wants to de-carbonize its business. Internally, it has already begun charging divisions for the carbon they use and rewarding them for the carbon they save; additionally, it has made a major wind investment.

Given its actions thus far, it seems likely that, if Microsoft were incentivized by accelerated depreciation, it would invest aggressively in renewable energy for its global data centers, just as its rival technology companies are doing. Under the current system, however, it is de-incentivized from making this sort of large-scale change.

Global accounting and business consortia like GRI, the Financial Accounting Standards Board and the B Team are all exploring the viability of new rules, but looking at the whole of our economic and environmental conundrum, we can become paralyzed by the enormity of the task. However, accelerated depreciation is a simple but exceedingly effective tool as we aim to create the 21st century business paradigm. It doesn’t require a team to spend a year calculating Life Cycle Analysis that is measured differently between industries, sectors, and countries – and occasionally, measured differently within industries, sectors and countries. Accelerated depreciation can, effectively, level the playing field so that the biggest polluter no longer makes the biggest profit, and every country and company benefits as well.

Accelerated depreciation could and should incentivize PepsiCo, and every other company with comparable breakthrough technology, to spend more today in order to save money, energy, waste and water in five years’ time. However, in order to de-carbonize the economy globally, the accelerated depreciation incentive has to work for the average struggling business on every continent. We cannot depend on goodwill, young entrepreneur/founders, or pioneer companies to make this right. Accounting rules are the basic guidelines for investment strategy and must begin to serve the laws and constraints of the natural world, as well as the bottom line.

Because of its effect on tax revenue, accelerated depreciation may seem like a costly solution for governments. However, any loss of short-term tax revenue would be offset by the billions of dollars governments would save from the preservation of healthy ecosystems and the lowering of climate change’s catastrophic risk profile. China, for example, has estimated that environmental degradation cost 3.5% of its GDP in 2010, and KPMG estimated that the 3,000 largest publicly traded corporations caused $2.15tn in environmental damage in 2008. We’re talking big money here.

Accelerated depreciation is a solution that the G20 can implement. We have a global climate and environmental emergency that is poised to destabilize the world’s economies and governments. Here is a relatively simple, uncomplicated solution. World leaders, unite! Do something constructive together on behalf of all the world’s peoples and businesses!