On Alchemy
How to Turn Big Challenges into Big Opportunities
GreenBiz published an adapted version of the following post on April 11, 2023.
I had the pleasure of participating in the Aspen Institute’s recent climate conference in Miami. It’s always a good event, but this year was a particularly opportune moment to survey the landscape and assess where things stand when it comes to making progress against various environmental challenges. It had me really appreciating companies such as BP as climate innovators. That may sound strange, but hear me out.
Two things stood out to me:
We’re at an inflection point.
Audacious private-sector led environmental problem solving is absolutely pivotal for leading the way forward.
What do I mean by inflection point? I mean that looking back, we’ve come a remarkable way. But looking ahead, there’s still quite a distance to travel.
In terms of how far we’ve come, it’s remarkable how ESG has gone from outlier to mainstream. ESG practices are well understood and widely implemented. Most leading companies now measure and report transparently on their ongoing efforts to achieve positive outcomes on ESG scorecards. This is a big deal and a very positive development.
To be sure, there remains some noisy political pushback against ESG. But it won’t cause companies to lose momentum in my view. Business leaders have figured out that strong ESG practices make good business sense, period. Smart business leaders also realize its best to keep ESG disclosures straightforward and business-like, as we have been advising, to avoid distractions and controversies about so-called “wokeness.”
Let's acknowledge and thank the many people who deserve credit for ESG’s progress to date: activists and advocates, forward-leaning business leaders, institutional investors, politicians (and their staffs) who worked hard for various bills that meaningfully support business progress (particularly the IRA), and “ordinary citizens” – the students, employees, customers and shareholders who demanded more.
But let’s also be honest with ourselves and each other: continuing down this path won’t save us. The 2023 IPCC report, released earlier this week, is devastating. It issues a “final warning” that without swift and drastic action, we are on track for irrevocable damage. The climate time bomb is ticking.
While we’ve made gains against most of the big environmental challenges we face, they are clearly insufficient. Absent some totally unexpected arrival of game-changing public policy, we need business to go way beyond checking the box on ESG scorecards.
We need leading companies to think very big and transform their business models so that the outcomes we need happen fast and at scale.
What does this look like?
Fortunately, we have some encouraging examples:
Ford's big bet on making the F-150 pick-up truck — the best selling vehicle in America over the past 40-plus years – an EV. Yes, Ford is drawing on the example of others — Tesla of course, but also the recent quick start of Rivian and other EV makers. But Ford is arguably doing something more significant. Starting with its best selling product, it’s transforming the company's entire way of doing business from climate-damaging based on internal combustion engines to electric.
It's clear that this move is not easy as Ford confronts supply change obstacles and other challenges. But it’s great to see Ford steadfastly pushing both its customers — who are generally neither climate hawks nor early adopters of new technology — as well as its investors to support this big move.
BP’s pursuit of green hydrogen and other climate friendly initiatives. Those paying close attention might protest that BP has been in the news a lot recently (and getting a lot of flack) for scaling back some of its renewable energy goals. But I think the critics are missing the bigger point. The company is still boldly pursuing transformation. They are making a huge bet on green hydrogen and a less dramatic but still important bet on EV charging, among other new green initiatives. The controversy over the speed of BP’s transition away from oil shows just how daunting such transformations can be. BP is balancing demands from activists, on the one hand, who want much more green investing; and shareholders, on the other hand, who want much less. By the way, note the sharp rise in share price since BP’s recalibration.
We shouldn’t expect it to be easy for business leaders to get this balance exactly right at every step of the way. Activists are right to keep applying pressure for change, but we need to accept that business leaders must be mindful of their owners’ preferences. I expect more back and forth like this as companies try to figure out how best to achieve big positive outcomes in ways that work for as many stakeholders as possible.
Google’s effort to run itself with clean energy 24/7/365. Thanks to their very transparent disclosure, we know how difficult it is for the company to achieve this. And many of the company's peers, including Microsoft, Apple, and Amazon, have similar hugely ambitious plans to ramp up their direct investments in clean energy. This is transformative stuff.
Environmentalists were appropriately very positive when the draft of President Biden’s infrastructure/climate bill included the so-called CEPP, which aimed for rapid increases in the amount of renewable energy available in the grid. Unfortunately there was insufficient political support for that measure. The next best thing is for these giant data center companies to just do it on their own. What I expect next is that these companies will work with NGOs in order to address the concurrent need for positive biodiversity and community outcomes to accompany such transformative investing.
Despite the best efforts of even the biggest companies, sometimes the necessary business action is too much for any single company to handle on its own. That's where bold new partnerships can step in.
For example, the Frontier Fund committing $925 million to support startups that remove carbon directly from the air. Here Alphabet, Shopify, Meta and McKinsey are teaming up to do something at scale that, given the unfavorable economics of direct carbon capture today, would be difficult for any one of these companies to do at scale individually. Teaming up like this makes it easier to take on critical but economically daunting opportunities.
Another example like this is United Airlines’s new fund to invest in companies pioneering sustainable aviation fuels, where it’s teaming up with JPMorgan, GE, Honeywell, Air Canada, and Boeing.
So where are the biggest opportunities for impact right now?
Let’s start with the biggest challenges. Here are a few where we believe bold business leadership can result in the scale of change we need:
Reducing sharply the use of single use plastic
Measuring and cutting scope 3 emissions
Changing land use (by scaling plant-based meat substitutes, or improving agricultural practices)
Decarbonizing marine transportation
Developing the technology and business model innovations to address the climate resilience challenge (which we will have more to say about in our next blog)
The technologies and know-how to address these challenges generally exist today. The problem is the solutions are not yet economically viable or as convenient. Big companies can accelerate learning curve opportunities. Indeed, if the until-recently very favorable financing environment for tech startups sours — as is generally expected — big companies will be more able to swoop in and invest in/or acquire startups to accelerate progress.
In my opinion, this is the new standard (and opportunity) for businesses when it comes to their climate goals. And it’s why I am feeling bullish on those companies leading the charge, especially players like BP or Ford who are making real efforts to get us where we need to be.
All climate advocates can encourage business to go after these big challenges in the most ambitious ways.
Consumers can use their voice and their wallet. When a Patagonia reorganizes its ownership so that 100% of its profits go to environmental NGOs, favor the company in your purchasing. If you fly United, make a contribution to their SAF fund.
Institutional investors should urge fund managers to adopt longer time horizons to be more supportive of bold climate programs. Corporate CEOs and CFOs can help by explaining more transparently why and how they see upside in their longer term climate bets. Investors can direct their capital to funds who prioritize this strategy.
Activists should evolve their criticisms of companies by understanding that companies can't get far beyond what shareholders will support on a long-term basis. Prior to BP’s recent pivot and ensuant rise in stock price, rumors were swirling that a Chevron or Exxon would exploit the situation to buy BP. That certainly wouldn’t have been the outcome sought by activists.
Environmental NGOs can help ensure that ambitious companies with worthy climate goals achieve just outcomes. Impacts on communities and biodiversity can often be fine tuned, for example.
And all climate advocates should keep pushing hard for the public policy we need. Because despite our best efforts, there are limits to what voluntary business activity can accomplish.
Onward,
If you have a friend who might like this newsletter, send them a free subscription.