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.

 

How Many Ways Can We Control a Microgrid?

— April 17, 2018

How to control a microgrid? Let me count the ways. In the Navigant Research Leaderboard: Microgrid Controls report, all energy storage and smart inverter companies were excluded. This was done to have an apples-to-apples comparison since controls encompass many different technologies. Among the available solutions, microgrids are controlled with digital relays, smart switches, traditional automation products, and increasingly, new sophisticated software algorithms.

This blog traces the evolution of one battery vendor—EnSync Energy—and acknowledges how key microgrid control innovation has flowed from the energy storage community. The story illustrates how battery vendors have evolved over time, turning many early assumptions about microgrids upside down. Whereas in the past microgrids were designed to minimize or eliminate the need for battery storage due to cost, today the vast majority of microgrids include some form of energy storage, especially systems that incorporate renewables.

The roots of what is now EnSync focused first and foremost on a unique flow battery chemistry, with its control architecture as a secondary feature. “The original company had significant intellectual property in power controls. That was one of the key reasons I joined the company,” said Dan Nordloh, executive vice president. “I believed there was peril ahead in remaining a flow battery supplier,” he noted, referencing the recent bankruptcy of ViZn Energy in validation of his concerns.

In contrast, EnSync is no longer focused on flow batteries and has an agnostic approach to battery type. It now boasts over 22 current projects in Hawaii alone, and these represent $35 million in electricity sales over the term of the power purchase agreements (PPAs). The company is deploying a modular, scaleable, off-grid system in East Africa that will likely link up with a larger village nearby. EnSync has also added to its list of partnerships by entering into a strategic relationship with Schneider Electric.

Is Plug and Play the Way to Go?

The key to EnSync’s success? “We decided to move away from single application cul-de-sac designs and instead shift[ed] to a more modular, rack-mounted plug-and-play approach, which future-proofs microgrids. Adding a new resource? Just slide a new drawer in,” said Nordloh. Picking up on a trend also evident among energy storage vendors such as Greensmith, companies that started out with a focus on battery optimization have expanded their reach to generation and loads. In short, they now offer microgrid controllers.

“I like using the analogy of Lego blocks. Remember, a small microgrid is just as complex as a large microgrid. But with our direct current (DC) bus as a backbone, it is easier to add to the microgrid over time, reducing the need to re-engineer the microgrid every time you want to expand the distributed energy resources (DER) mix. And with their integrated cloud-based DER Flex controls package, microgrids can be changed to enable export of grid services with a simple software adjustment,” continued Nordloh. He pointed to the Palama Holdings meat processing plant on Oahu that is installing a microgrid under a self-financed PPA. At present, the microgrid reduces costs by enabling demand charge abatement strategies. Yet state regulators are considering creating markets for grid services. This microgrid could provide demand response and frequency regulation through EnSync’s DER Flex controller with a simple software switch.

An advantage of EnSync’s DC-centric approach is that users do not need to control variable solar PV. Instead, voltage algorithms keep the microgrid in balance. This approach is the corollary to the droop in frequency of the alternating current controls approach known as CERTS. Both control schemes shy away from the common master/slave control protocol, moving the market closer to plug and play.

 

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