Corporate Strategies for Addressing Climate Change Prepared for the Pew Center on Global Climate Change in fulfillment of the Masters Opus requirement of the School of Natural Resources and Environment University of Michigan Project Team: Douglas Glancy Michael Horn Scott Pryor Mark Shahinian Greg Shopoff Faculty Advisor: Andrew J. Hoffman November 2006 DRAFT – Please do not cite, quote or distribute Acknowledgements The project team would like to thank the Pew Center on Global Climate Change for supporting this project. In particular, Truman Semans and John Woody were quite helpful in gaining access to the subject companies and in providing feedback on our report. We would also like to thank the countless people at the subject companies for their time and effort. This project could not have been completed without them, and we sincerely hope that our work provides guidance in their efforts to address climate change. We are grateful to have had Professor Andy Hoffman as our Project Advisor. He put many hours into this project, and is a large reason for its success. And finally, we are indebted to our family and friends who have supported us throughout this effort, putting up with sleepless nights, endless conversations about climate change, and a few gripe sessions. 2 DRAFT – Please do not cite, quote or distribute Table of Contents Executive Summary . 4 List of Figures . 16 Research Findings I. Introduction . 17 A. Scope . 20 B. Methodology . 20 C. Overview . 22 II. Strategy Development . 24 A. Drivers and Outcomes. 24 B. Differentiating Energy Efficiency and GHG Reductions . 28 C. Calculating the Bottom Line . 30 D. Calculating GHG Emissions . 32 E. Funding and Investment . 34 III. Organizational Integration . 36 A. Senior Leadership. 36 B. From Idea to Adoption . 38 C. Overcoming Resistance. 40 IV. External Outreach . 44 A. Reputation Benefits. 44 B. Public Reporting. 45 C. Targeted Audience. 47 D. External Resistance . 48 E. Partnerships . 49 V. Policy . 50 A. Policy is on the Horizon . 52 B. Policy Mechanisms . 54 VI. Conclusion . 58 A. Timing is Critical . 58 B. Challenges Ahead . 61 Case Studies Cinergy: Managing “Stroke of the Pen” Risk . 65 Swiss Re: Staying One Step Ahead, Not Two . 91 DuPont: Shifting from Risk Management to Business Opportunity. 117 Alcoa: Weaving Climate Change into the Business Case . .144 The Shell Group: Maintaining a Seat at the Table. 166 Whirlpool: Don’t Switch Tracks When the Train is Already Moving. 187 Glossary. 203 Endnotes. 207 3 DRAFT – Please do not cite, quote or distribute Executive Summary Climate change is now a bright, blinking issue on the radar screens of companies worldwide. Companies have started addressing climate change for a myriad of reasons – reasons as diverse as their respective business models. The academic and business literature has done a fairly good job of exploring why companies are addressing climate change. This study examines how they are addressing climate change. It explores the risks, rewards, opportunities and barriers surrounding corporate action on climate change and provides insight into the strategies employed by companies that have led the way in taking early action. The lessons learned by early actors can inform the efforts of those who follow. Climate change presents companies with significant risks, uncertainties, and an increasing number of market opportunities. Companies now confront a patchwork of regional regulation. In addition, most companies in our survey expect federal regulations to limit GHG emissions within the next decade. The unknowns of potential regulation create uncertainty, and therefore risk, for businesses making strategic decisions. Volatile energy prices wreak havoc on cost structures, severely impairing the ability to accurately forecast profitability. Large storm events have caused companies to think differently about the physical risks of climate change. Accumulating scientific evidence, coupled with these large storms, has boosted public awareness, leading to changing consumer preferences. Companies are looking at these changing preferences and 4 DRAFT – Please do not cite, quote or distribute identifying market opportunities, broadening the traditional risk-mitigation- centered approach to climate change. The focus of this study is “climate-related strategies,” defined as the set of goals and implementation plans within a corporation that either aim to reduce GHG emissions, or that significantly reduce GHG emissions as a co-benefit. This includes strategies and measures for achieving near-term emission reductions from a company’s own operations; research, development, and investment in low-carbon production and process-related technologies; alternative products that have a more attractive carbon profile; energy-efficiency initiatives; reductions obtained through offsets and emissions trading; and activities to reduce “upstream” or “downstream” GHG emissions along their value chain. Methodology There are two primary research methods used in this study. The first method is a one-hundred question survey of twenty-seven members of the Business Environment Leadership Council (BELC) of the Pew Center on Global Climate Change1 and four non-BELC members.2 The second method is a set of six in- depth case studies of companies taking action (five member companies of the BELC3 and one non-BELC member).4 Each of these companies has a stated commitment to address climate change. The demographics represent a sample weighted toward large, publicly-held, North American-based, multi-national corporations. 5 DRAFT – Please do not cite, quote or distribute Findings This study examines four elements of climate-related corporate strategies – strategy development, organizational integration, external outreach and policy. This study focuses on the common aspects and recurring themes across strategies, but will also highlight unique and innovative practices. Strategy Development To develop an effective strategy, companies must understand their motivation for addressing climate change, identify options for GHG reductions, determine which options align with corporate goals and values, and find ways to fund the initiative. We found three primary drivers of climate-related strategies: cost savings, mitigation of risk and values-based reasons. These drivers are not mutually exclusive or comprehensive. Because profits are the ultimate measure of corporate success, many seek to make a link between GHG emission reductions and bottom-line results. Despite these efforts, the financial case for justifying such efforts remains vague. Therefore, companies have relied upon cost-saving energy efficiency to achieve GHG reductions, discussing the potential future value of managing risk and enhancing institutional knowledge in the present, and linking climate-related strategies to corporate culture and values. 6 DRAFT – Please do not cite, quote or distribute Cost savings are most closely tied to energy and operational efficiencies that deliver bottom-line results in the short-term. Energy efficiency is often easier to connect to traditional business strategy than GHG reductions. As an element of operating costs, energy use flows directly to the bottom-line and is therefore easier to communicate to employees. Furthermore, companies have been addressing energy as a cost issue for years, and in many industries it is a guarded strategic element. In contrast, risk mitigation seeks long-term payoff by managing the political, legal, price and physical risks associated with climate change. The most consistently- cited risk identified by companies is the uncertain political environment. However, an effort to reduce GHG emissions is a much newer – and trickier – concept than energy efficiency. There is no direct link to operating results, and the benefits are uncertain, often described as distant and speculative. While an effort to reduce GHG emissions is viewed as strategic at the corporate level, building a connection to the business unit and employee level has proven more challenging. Values-based reasons center on “doing the right thing” and addressing climate change because it is consistent with the corporate culture and values. Often, the targets of these values-based reasons are employees – both to allay the concerns about straying from the business plan described above and to improve employee morale. 7 DRAFT – Please do not cite, quote or distribute Methods of addressing climate change traditionally come in the form of either energy efficiency or GHG reduction initiatives. More recently, however, some companies have identified market opportunities within the climate change issue. Some are changing their product mix, while others are also pushing customers and suppliers to seek GHG reductions. While calculating the financial benefits is difficult, the process for measuring and tracking GHG emissions is more clearly defined. The GHG Protocol and other GHG accounting standards have established well-accepted principles and guidelines for corporate reporting of GHG emissions. However, without strict regulations in place, companies face two major issues: what method to use in accounting for emissions, and how to measure those emissions. These calculations require data that is not always available, sometimes prompting the development of new information systems. Another critical element of a climate-related strategy is funding. Some companies in this report simply utilize special pools of capital allocated to climate-related projects. Some lower their internal hurdle