Bursting the Sustainabiity Bubble?

Environmental Leader carries an article today on a report that asks whether the sustainability 'bubble' has burst. Two researchers at the executive education institute IMD note that rising fuel prices last year provided the incentive that companies needed to focus on reducing energy usage. Now energy prices have crashed, the pressure is off - and organizations such as the World Wildlife Fund are having a hard time convincing companies to move forward with further initiatives related to climate change. Companies become less likely to take risks in times of economic crisis, and any action that goes beyond regulatory compliance is seen as reducing shareholder value.

There is brighter news, though: the same Environmental Leader article also highlighted an AT Kearney report which found that companies having a strong commitment to sustainability significantly outperformed industry averages - to the tune of a 15% difference over May-November 2008. That averages out to a $650 million in market capitalization per company, even in troubling economic times. The high-performing companies shared several common characteristics:

• A focus on long-term strategy, not just short-term gains
• Strong corporate governance
• Sound risk-management practices
• A history of investment in green innovations

The juxtaposition of these two articles is really interesting. The IMD report highlights the low-risk strategies currently prevalent among companies, while the AT Kearney report speaks of managing risk. The two are not the same. A company that shies from risk is not an innovator; a company that finds a way to manage risk - or even turn it into an opportunity - is one likely to make it through a financial recession.

Clearly, some of the elements of a successful 'green' company are also elements of a successful company; a company that doesn't focus on long-term strategy is unlikely to see success over that period either. And strong corporate governance is a feature of any well-managed company. Just as clearly, policymakers have a critical role to play in risk management. Managing uncertainty resulting from ill-defined regulations is a waste of time and money. The new administration can help businesses by clearly defining policies and goals related to environmental issues such as climate change, even if these regulations are more stringent than some industries would prefer.

For example, a variety of bills proposed by different Senators would put different caps on the amount of greenhouse gas emissions that a power plant could emit. Power plant managers would clearly prefer no regulations, since mitigating emissions costs money. But the uncertainty of not knowing with what level of regulation the company will need to comply is crippling. If managers anticipate stringent regulations and spend money on mitigating technologies, but then weaker regulations are passed, the company has wasted money. If managers anticipate weak regulations, and strong regulations are enacted, the company may have to purchase expensive credits under a cap-and-trade system to make up the defecit, and will waste money in the future. The government must do what it can to minimize uncertainty in environmental regulations to allow companies to create innovative ways to comply.