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In the name of higher profits, powerful investors such as global banks are driving the adoption of eco-friendly business practices
In the name of increasing profits, of all things, more and more German companies are discovering climate protection. With increasingly stringent emissions laws and energy prices higher than they've been in years, sustainability has suddenly become a factor in economic growth. But can the new trend last?
Environmentalists usually devote most of their attention to such garden-variety endangered species as the brooding corncrake. But Winfried Häser, an environmental strategist with Germany's postal service, Deutsche Post, focuses his attention on another, equally sensitive species: the pin-striped financial analyst.
Häser regularly meets with the professional financial investors of international banks like Credit Agricole and HSBC to tell them about all the things his Bonn-based, internationally active logistics organization is doing for the environment. Once they've heard Häser's presentation, the investors usually fire back with questions about Deutsche Post's progress on reducing its CO2 emissions and how many of the company's 130,000 vehicles are already running on biofuels. The financial world suddenly has a burning interest in the answers to these and other questions about preserving the environment.
This is quite a sea change. In the past, no more than a handful of concerned shareholders would demand answers to their questions about the environment at annual company meetings. Critics of poor corporate environmental records were usually minor shareholders -- the kinds of troublemakers financial executives and CEOs rarely took seriously.
But nowadays the people asking the environmentally tough questions often control investments that run into the billions. They work for banks and mutual funds, and they look for attractive investment opportunities for the capital they manage.
Far from being driven by some noble-minded aim of saving the world, these masters of our money are mainly looking for one thing: profit, and as crisis-proof as possible.
This new environmental interest among powerful investors is probably the most salient indication of the important role climate change and its consequences now play in the economy. The issue has made it into the corner offices of top executives, and not just in companies already known for their support of environmental issues, such as German mail-order giant Otto and baby food manufacturer Hipp.
Companies in all sectors of the economy are suddenly examining their businesses to determine how sustainable and environmentally conscious they are in fact doing business. They are not doing this out of pure altruism. Instead, companies find themselves forced to adjust to new realities, including stricter environmental laws and the ever-rising cost of coal, natural gas, oil and electricity. In the process, some are even discovering ways to develop entirely new businesses.
Climate protection is becoming an important competitive factor. For this reason, companies are looking for strategies on how to address the issue in the future.
Major German corporations like Allianz, Deutsche Telekom, Bayer and BASF are establishing concrete goals, expressed in tons, for reducing their CO2 emissions. They are establishing sustainability departments and issuing mandatory environmental guidelines. They are forming new industry associations like the 2 Degree Initiative, which has set itself the goal of limiting global warming to a temperature increase of no more than 2 degrees Celsius (3.6 degrees Fahrenheit) compared to the pre-industrial age.
Meanwhile, they are making sure that the public is well aware of their efforts. Some companies have already launched ad campaigns to hype their efforts to preserve the environment, almost as if they were no longer in the business of producing cars or building power plants, but were suddenly intent on generating cleaner air. Or could it be that it's all nothing but hot air?
DaimlerChrysler touts its tiny Smart car as a "CO2 Champion," all the while raking in most of its revenues with larger vehicles, many of which emit three times as much carbon dioxide as the Smart. German energy utility company RWE seems to think that "Less CO2 through Innovations" is "An RWE Idea" -- and one that the company has only recently come up with. And yet no other German company is a bigger emitter of carbon dioxide.
Good Deeds or Bluffing?
One could almost be forgiven for suspecting that these and other companies are more interested in green labels than good deeds. Are they serious about their new environmental consciousness or is it all a bluff?
One thing is clear, and that is that the issue is more than just a trend. "Sustainability is developing into a central element of corporate strategy," says Martin Koehler, a senior partner at the Boston Consulting Group (BCG). "There is so much demand that we have brought together our experts worldwide to form a separate division."
BCG's clients want to be prepared to deal with the fundamental changes in the conditions under which they do business.
For utilities that will be required to purchase emissions credits in the future, the CO2 emissions of their power plants will be the most decisive factor in determining their costs in the future. The automobile and aviation industry will have to adjust to increasingly stringent environmental regulations, and the chemical industry will face much higher electricity costs in the future. Even food manufacturers will see rising costs in raw materials like corn and wheat, which will also be used to generate energy. The Organization for Economic Cooperation and Development (OECD) predicts a 20 to 50-percent rise in the prices of agricultural products within the next 10 years.
According to a study by investment bank Lehman Brothers, global warming is a "tectonic force that, like globalization and the aging of society, will gradually but powerfully change the economic landscape."
Studying Environmental Impacts to Save Costs
The green wave has long been underway in the United States. Companies like General Electric (GE), DuPont and Wal-Mart are analyzing the environmental compatibility of their procedures and process chains, with far-reaching consequences. "If Wal-Mart 'asks' its 60,000 suppliers to reduce packaging, this affects product and packaging design worldwide," explains US consultant Andrew Winston.
More and more German companies are looking into ways to improve the sustainability of their business operations. Hamburg-based coffee and consumer goods retailer Tschibo, for example, has set up a team to analyze the company's global flows of goods. The group reconstructs the path taken by items like shower curtains, towels and hair brushes, from production site to retail outlet, and analyzes the emissions generated in the process. The company is preparing this environmental impact study to determine how it can best save on shipping costs.
"It's incredibly grueling work," says Kay Middendorf, head of logistics at Tschibo. But the effort is also worthwhile, says Middendorf, who expects a 50-percent increase in shipping costs in the next decade. One of Middendorf's ideas is to reduce the speed at which container ships carrying his company's good travel, which would cut emissions in half. But shippers have been reluctant to cooperate so far.
Of course, for some industries adjusting to climate change doesn't always translate into cutting back in one way or another.
Steel producer ThyssenKrupp, for example, suffers from high energy prices but is benefiting from the boom in wind energy. Its Dortmund-based subsidiary Rothe Erde (Red Earth) is the world market leader in the production of slewing ring bearings.
Electronics giant Bosch is another case in point. The Stuttgart-based company already spends 40 percent of its R&D budget on products designed to help users preserve the environment and save resources -- products in the geo and solar power markets, for example. Bosch CEO Franz Fehrenbach is currently developing a new division in which he plans consolidate the company's efficiency-oriented business. Fehrenbach says he wants to "provide technological answers to ecological questions," adding that "the days are gone when there were only niche markets for regenerative sources of energy."
Siemens, another leader in the electronics business, has much to offer in the field of renewable energy. Indeed, energy and efficiency have been part of the company's core business since it was founded. Munich-based Siemens is a leader in such diverse fields as power plant construction, rail vehicles and lighting technology, and yet the public is hardly aware of its role in these sectors.
While US rival GE has been conducting its "Ecomagination" campaign for years and CEO Jeffrey Immelt never misses an opportunity to tout his company as a green giant, Siemens is just beginning to see itself as a problem solver when it comes to climate change. Klaus Kleinfeld, who resigned as the company's CEO, had already launched Siemens's strategic reorientation, and his successor Peter Löscher, a former GE executive, apparently plans to continue the effort. Climate change, Löscher recently said, is one of the company's most important challenges.
Part 2: Eco-Friendly Companies Promise Handsome Profits
The players in the capital markets couldn't be more pleased. In the past, those who chose to invest in companies with environmentally sustainable business practices could feel good about themselves, but were unlikely to earn impressive returns. "Sustainability and performance were often contradictions," says Holger Boschke of Dresdner Bank. But, says Boschke, this too has changed. Nowadays these companies promise handsome profits.
Pension funds, in particular, which generally look for profitable long-term investments, are now restructuring their investment strategies. Knut Kjaer, who heads the Norwegian pension fund, which now manages €220 billion ($303.8 billion) in profits from his country's oil revenues, making it the world's second-largest pension fund, has removed ethically and environmentally suspect companies from his portfolio. In fact, this is the fund's stated policy. Henri de Castries, head of the Axa Group, one of the world's largest financial investment firms, knows that for many industries the risks of climate change are "just as important as interest rates and exchange rate risks."
The question is, how does one measure whether a company does in fact conduct its business in a sustainable manner? Merely analyzing the changes in its CO2 emissions would be too simple. When a company spins off an energy-intensive division -- the way German consumer goods group Henkel once did when it sold its chemical subsidiary Cognis or GE did when it recently spun off its plastics division -- it automatically improves its overall environmental impact, but the end effect on the environment amounts to zero.
Calls for Carbon Disclosure
The Carbon Disclosure Project (CDP), a group of 280 major investors who manage combined assets of more than $40 trillion, is attempting to provide more accurate answers to these questions. CDP has called upon the world's largest corporations to disclose their climate-related risks and explain their strategies to offset the problem. The organization uses the resulting figures to develop a Climate Leadership Index of 50 companies on the vanguard of climate protection. The index is intended to serve as a guideline for investors.
There are a number of surprises on the CDP's list. It includes Bayer and BASF, despite the fact that many still view the chemical industry as suspect when it comes to climate protection. Only recently, for example, BASF CEO Jürgen Hambrecht criticized Berlin's climate protection policies as " fear mongering ." Nevertheless, Germany's chemical industry giants have already reduced their emissions by more than 30 percent since 1990 and plan to continue the trend in the coming years.
Sustainability ratings like the London-based CDP and the Zürich-based SAM (Sustainable Asset Management) have already become standard tools for evaluating companies. As a result, businesses are taking steps to project a positive image.
This has proven to be all too easy for some companies, which buy certificates from organizations like Climatepartner or Atmosfair, which use the money to invest in solar, hydroelectricity and wind energy projects. By purchasing the certificates, the companies hope to save precisely the amounts of greenhouse gases they were previously emitting, making them "climate neutral." The deals have since become the modern equivalent of the selling of indulgences.
"Carbon neutral" has since become a label that is liberally applied to rock concerts, television sets, computers, air travel and even banks like Credit Suisse and Barclays. Indeed, "carbon neutral" was named The New Oxford American Dictionary's Word of the Year for 2006.
Critics say that this method is a temporary solution at best. Although she welcomes such initiatives, Regine Günther of the World Wildlife Fund (WWF) is highly skeptical of the reforestation programs offered by some agencies. "There's an incredible amount of nonsense out there," she says. It also remains to be seen whether these contributions will be sufficient to offset environmental damage being done elsewhere. For example, someone who purchases gold jewelry online from Christ Jewelers through Climatefriends pays a "climate contribution" equal to 4.5 percent of the sale. This is a modest toll, though, considering that, according to the Wuppertal Institute, more than half a ton of earth has to be moved to mine a single gram of gold -- not to mention the tremendous volume of water consumed in the process.
The efforts of the oil and gas industry also seem highly disingenuous. "We take concerns about the climate very seriously," insists Kurt Döhmel, the head of the German division of Shell. It is true that oil companies like Shell and BP have been investing in renewable energy for years. But these investments are paltry compared to the billions they pump into their polluting core business: the production and sale of oil and gas, which is burned and causes air pollution.
But that happens to be the way oil and gas companies make their money, and this is unlikely to change anytime soon. According to Döhmel, fossil fuels will still cover 80 percent of the world's energy needs in 2050.
Environmental standards will be even more problematic for the utility industry. According to the WWF, six of Europe's 10 most polluting coal power plants are in Germany, and RWE operates four of them. Nevertheless, power companies still plan to build close to 30 new coal-fired plants.
Part of their planning is based on the expectation that a technological solution will soon be developed to capture and sequester CO2. But it will take years for these technologies to come online, and it remains to be seen whether it will even be possible to retrofit all of the coal-fired plants currently on the drawing boards.
Failing to reduce emissions could prove extremely costly for RWE and other German utilities. In the next phase on the emissions trading process, which begins in 2008, governments will reduce quotas for emissions rights even further, likely increasing the cost of polluting from the current price of upwards of 20 euros per ton of CO2.
Energy experts like Georg Erdmann, a professor at Berlin's Technical University, predict that prices could eventually top €100 a ton, a level that would spell economic disaster for utilities like RWE.
The Painful Lessons of the Auto Industry
These scenarios offer a taste of the massive impact climate change will have on many businesses. Those who fail to react early on stand to be punished by the consumer, a painful lesson the German auto industry is already learning today.
For Toyota, the initial costs of developing its energy-saving hybrid drive ran into the billions. But now the Japanese carmaker, which once suffered from a reliable but somewhat boring image, is suddenly the world leader on both the environmental and technological front. Indeed, Toyota is far more deserving of a slogan coined by German competitor Audi: Vorsprung durch Technik (Progress through Technology).
Ultimately, the question is whether sustainability will in fact bring about lasting change within the economy. The advertising industry, at any rate, is skeptical about whether the green economy is a lasting phenomenon. "We've seen this sort of thing before," says Peter Haller, the head of Serviceplan, Germany's largest independent advertising agency.
A few years after Haller founded the company in 1970, skyrocketing oil prices lead to public debates over the limits of growth. But, as Haller recalls, the issue was soon displaced by concerns over terrorism and unemployment.
But the situation in the energy markets quickly normalized after the 1970s oil crisis. Today a similar stabilization seems unlikely, with oil prices remaining above the $40 a barrel for the third year in a row. Instead, continually rising energy costs are more likely to force companies to improve their energy efficiency, thereby enhancing climate protection efforts. The European Union, for its part, will continue to increase its pressure on industry by enacting tougher environmental laws.
This is why many executives believe that we are unlikely to see a repeat of the early 1970s. In fact, Bosch CEO Fehrenbach is convinced that "we will be dealing with this for decades to come."