Navigant Research Blog

New Musings on Business Sustainability from a Guru in the Field: Part 3

— May 8, 2018

In this final blog in my series on Andy Hoffman’s article “The Next Phase of Business Sustainability,” I examine the ways that companies operationalize sustainability and how the current political climate affects its progress.

Sustainability Possible with a Circular Economy

Hoffman describes four new ways for companies to conceive an approach to operations, partnerships, government engagement, and transparency to address sustainability. From an operational standpoint, companies are moving away from linear models, where items are created, used, and disposed of once they reach the end of their serviceable life. Instead, they are moving toward circular models where items are created, used, and then either restored or reprocessed to recover energy and materials that can be used again. One key to this new vision of a circular economy is that it is organized to make the highest use of materials and reduce or eliminate waste to the best extent possible.

Regarding transparency, companies are disclosing numerous sustainability indicators through established standards. Navigant recently supported McDonald’s in developing a corporate climate target, which was approved by the Science Based Targets initiative. But transparency goes further as companies face increasing demands for data—for both internal management and external validation.

Business Must Be Held to Higher Ethical Standards

The market transformation challenges traditional ways of conceiving business and it demands new conceptions of corporate purpose and business success. Hoffman says that the business world is starting to revisit Peter Drucker and to question the basic function of business. In early 2018, BlackRock CEO Larry Fink sent a letter to CEOs of public companies telling them that they have a responsibility not only to deliver profits, but also to make “a positive contribution to society.” He wrote that, “without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.” The business community has not caught up to the power that business managers have, and with that comes immense responsibility. Business management should be viewed as a calling with obligations. Society has expectations of lawyers and doctors for ethical standards, but no similar structure for business.

Hoffman concludes with a discussion of political context, particularly the current climate in the US. He compares the Trump administration’s agenda of loosening the regulatory environment to Reagan’s time in the 1980s. While Trump’s approach to the environment bears similarities to Reagan’s attempts to roll back environmental regulations and likely faces a similar backlash, there are key differences. Unlike in the 1980s, this time some of the backlash will come from businesses that are leading on greenhouse gas reductions and not fighting government-led environmental policies. Recent surveys show that 85% of business executives believe that climate change is real (well above the national average of 64%), and many see the associated market risks and benefits.

With or Without the US, Market Transformation Is Underway

The bigger picture reveals that the market will shift with or without the US government, as other national governments and many US state and city governments continue to set policies. Many companies are part of global markets, and while they see the US withdrawal from the Paris Agreement as ceding US leadership, they do not see it stopping the market transformation that is under way.

The article ends on a positive tone about the future direction of the global business enterprise, a hallmark of Hoffman’s writing and teaching. He has been an inspiration to me and my career and hopefully will be the same for the current generation of business school students. No more Gordon Gekkos!

 

New Musings on Business Sustainability from a Guru in the Field: Part 2

— May 1, 2018

Part 1 of this blog series introduced Andy Hoffman’s article in the Stanford Social Innovation Review, The Next Phase of Business Sustainability. Impact investors who consider environmental, social, and governance (ESG) factors in their investment criteria were a large focus of the article. The sector reached $8.72 trillion of professionally managed assets in the US in 2016, or one-fifth of all investment under professional management. It’s not just the hippies and religious-based moral funds that are taking an ESG approach these days. Some of the largest investment firms—like BlackRock, Vanguard, and State Street—cast votes in opposition to ExxonMobil management and called for the company to disclose its climate change impacts. At the behest of shareholders, Duke Energy announced that it would be releasing a report detailing the utility’s efforts to mitigate climate change risks and plan future generation investments.

Recent cases highlight this movement, such as investors and corporations shunning gun-related companies after the school shooting incident in Parkland, Florida. Delta Airlines decided to cancel fare discounts for National Rifle Association (NRA) members, which led to the state of Georgia threatening to nullify a sales tax exemption for the company. This chain of events underscores the tenuous relationship between business and government in promoting social and political agendas.

How Can We Make a Difference?

The article included a spirited discussion on the benefits of capitalism to address sustainability. While some contend that other economic systems are better suited for such a pursuit, Hoffman disagrees. He believes that capitalism can adjust and change based on the needs of the people it serves. He likes to challenge his students to see who considers themselves to be “bright green” and see the free market as the solution, or “dark green” and view the free market as the enemy. Both perspectives are valuable in order to start from the current state of the market and to create new market models as needed.

There is some discussion of energy, my bailiwick. It is not enough to stick some wind turbines and solar panels on the ground and call that sustainable. We must incorporate the whole grid, encompassing generation, transmission, distribution, use, and mobility. There are examples of this integration in things like distributed energy resources, demand-side management, smart appliances, and smart meters. At the same time, jobs in the clean energy sector have exceeded those in oil drilling. People want to work in a field where they can have a say in the direction the world is moving before they retire or die.

Mobility Changes Lead the Way

EVs have the potential to change the grid, leveling the electricity demand curve by charging at night and providing storage capacity during the day for intermittent energy sources like wind and solar. Research is under way to allow consumers to rent their batteries to utilities while their car is parked. Although the future of Tesla is unclear at this point, it undoubtedly proved that major auto manufacturers were wrong about the viability of EVs and changed the sector fundamentally. In addition, automated cars may result in fewer cars on the road (at least in urban centers) as people purchase mobility services rather than own cars. Fewer cars on the road means repurposing unneeded roads, parking lots, garages, and service stations. However, there have been recent studies that have shown ride-hailing services like Uber and Lyft actually increase traffic in some cases if people use them rather than public transit, walking, or biking.

In the final blog in this series, I examine the ways that companies operationalize sustainability and how the current political climate affects its progress.

 

New Musings on Business Sustainability from a Guru in the Field: Part 1

— April 24, 2018

I recently had the honor to interview my former business school professor and mentor Andy Hoffman about his new article in the Stanford Social Innovation Review, The Next Phase of Business Sustainability. Professor Hoffman has been teaching and writing about corporate sustainability for over 20 years, and is a leading academic voice in the field. This latest article reflects his and the industry’s changing perspective on what sustainability means and how it will be accomplished, based on the belief that we are not going to solve the problem unless we change the system. The bottom line? The era of corporations integrating sustainable practices is being augmented by a new age of corporations actively transforming the market to make it more sustainable.

Business Students Prioritize Environmental Sustainability

Before diving into business itself, the article discussed the changing atmosphere at business schools, where future leaders are trained and develop their management beliefs. Surveys show that 88% of business school students think that learning about social and environmental issues in business is a priority, and 67% want to incorporate environmental sustainability into their future jobs. As a clear example of supply and demand, the percentage of business schools that require students to take a course dedicated to business and society has more than doubled since 2001, and specific academic programs on business sustainability can be found at almost half of the top 100 US MBA programs. Another recent article rated the seven best business schools for careers in cleantech.

Hoffman noted that students used to go to public policy/government/non-profit management graduate programs to address these types of topics. Today, more and more believe in the power of business to make a difference. When I decided to go to grad school 20 years ago, I chose business school over policy school because I felt that business was slightly less corrupt than government. I also felt it would help me make more of an impact on society. Who knows if I was right.

Enterprise Integration and Market Transformation

From there, the article discusses two phases of business sustainability. The first is “enterprise integration,” which is founded on a model of business responding to market shifts to increase competitive positioning by integrating sustainability into preexisting business considerations. The second is “market transformation,” where instead of waiting for a market shift to create incentives for sustainable practices, companies are creating those shifts to enable new forms of business sustainability.

Hoffman feels that changing the way we do business is essential to addressing the challenges of environmental degradation. The market is the most powerful institution on earth, and business is the most powerful entity within it.

I asked him about his thoughts on the term corporate social responsibility (CSR), which is a common way to look at these issues outside of the core of business operations. He tries not to use CSR as a term because it makes people’s eyes glaze over when they hear it—it can sound like a peripheral issue like philanthropy or social activism, and not central to the corporation’s purpose. Instead, he aims to teach sustainability as business strategy by translating the issue into the core language of business management, as opposed to a separate and distinct topic.

In the next part of this blog series, I will explore impact investing, capitalism, and energy and mobility.

 

2016 Marks a Year of Disruption for the Energy Industry

— December 29, 2016

Energy CloudAs 2016 draws to a close, it’s difficult to identify which events of a tumultuous year will affect the energy industry the most. The UK’s vote to leave the European Union and Donald Trump’s victory in the US presidential election will certainly top most lists for significant events in 2016. However, no one yet knows the extent to which either will affect the industry. I would like to remember 2016 for other events that gained less airplay than Brexit and Trump but still demonstrate the significant disruption that is occurring to traditional energy business models.

For many years, I have discussed the hypothetical risk of competitive disintermediation caused by the future convergence of electricity and telecommunications markets. Until this year, I relied on a handful of small-scale projects and strategies that amounted to little substance to make this point. However, events in 2016 show that the risk is no longer hypothetical, nor will convergence happen in the future: major utilities are planning large-scale telecommunications projects now, while telcoms are entering the mass market for electricity.

The Spread of Smart Grid

Enel is Italy’s largest utility and has led the charge into smart grid technology adoption. Italy was the first country to adopt smart meters, and it also has one of the most advanced distribution automation projects in Europe. However, Enel’s ambitions extend well beyond the utility industry. It is targeting the Italian broadband market, aiming to provide 250 towns and cities with broadband, and the company’s recent Metroweb acquisition sets Enel on this path. Enel has also discussed plans to deliver broadband to its international customers through wholly owned electricity subsidiaries in Spain, Romania, and South America.

SoftBank is Japan’s third largest company and provides fixed and mobile telephony, Internet, and digital TV services. When the Japanese market liberalized in early 2016, SoftBank recognized an opportunity to expand its services into electricity supply. It has partnered with TEPCO—the former Tokyo Electric Power Company—to deliver power products to its telecommunications customer base of 60 million. In a bold statement that highlights SoftBank’s ambitions in Internet of Things (IoT), the company also acquired leading chip manufacturer ARM for $31 billion.

Transactive Energy

Finally, 2016 saw a profusion of announcements of transactive energy proofs of concept. From North America through Europe, across Asia and into Australia, utilities are investigating ways that customers can start trading power between themselves. Again, transactive energy has been something the industry has discussed for several years, but has seen very little activity. The combination of solar PV, storage, and transactive energy platforms threatens to turn the old centralized business model on its head. The three technologies are complementary and each contributes to the accelerated deployment of the others: solar PV provides the opportunity to self-generate; storage enables the use of electricity at other times of the day; and transactive energy allows the owner to sell power to whomever they choose, at an optimal price.

Utilities face innumerable risks. There are threats from new entrants encroaching on the mass supply market, and massive changes in consumer behavior bring their own share of uncertainties. How each utility reacts will depend on market conditions and their appetite for change. Some will do their utmost to force regulators to protect their current businesses, and others will procrastinate their way to extinction. The likely winners will be those that recognize where future value lies and innovate their way to future success.

 

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