Dealing with Climate Change: The Business Perspective
The first panel featured four representatives from energy, chemicals, agriculture, and finance, moderated by the chair of the steering committee, Janet Peace. The panelists were Dave Nagel, executive vice president, BP America Inc.; Michael Parr, senior manager, government affairs, DuPont; Valerie Patrick, sustainability coordinator, Bayer Corporation; and Camilla Seth, executive director, environmental affairs, JP Morgan Chase & Co.
Peace opened the panel by affirming the implications of climate change across industry sectors. She raised fundamental questions with regard to climate change and business:
- What is the fundamental information that businesses need in regard to climate change?
- What are opportunities and risks?
- What capacity to address these issues is expected from new hires?
- What knowledge and skills should newly minted MBAs have?
- What business sectors have the highest need for climate-literate graduates, or does the need apply to all firms and industries?
CLIMATE CHANGE AND ENERGY: PROBLEMS AND OPPORTUNITIES
Dave Nagel noted that energy infuses the entire economy. A somewhat small amount of money is invested in alternative energy, and major
investments are made into a variety of projects to tackle climate change in the technical and social arenas. Nagel made four suggestions on how top business schools might address climate change:
- Educate business students about the context and drivers of energy.
From his perspective in a company that works in the energy sector, students ought to be conversant in the area of climate and energy. Issues related to energy not only impact many areas, but also provide challenges and opportunities locally.1 Nagel stated that business school students ought to be familiar with basic energy statistics.
- Ensure basic science literacy for all business students.
In his view, future business leaders need a good layperson’s understanding of science to critically follow science debates and interpret relevant data, like probability distributions, that form the basis for strategic decisions on future resource allocations. (This topic was addressed later in the workshop.)
- Update operations management and finance courses to include energy issues.
He suggested the inclusion of issues related to energy in the core curriculum. Business students need to be ready to improve energy efficiency in their company’s operations. They need to understand capital investments into energy efficiency from a broad perspective and full accounting, including the risks involved. (Later in the workshop, Dan Reicher expanded on this point by explaining the need for new financial models and investment tools that are appropriate for innovative projects in the area of energy and climate.)
- Provide leadership courses that foster integrated system thinking.
Climate change is a long-term issue, with global interdependencies, and local variations and priorities, Nagel asserted. It requires leaders who can “look beyond the numbers” and employ integrated systems thinking. Students need to communicate beyond the confines of their particular area of expertise to address the “bigger strategic picture, but also the risks associated with the overall uncertainty.” (See also the later discussion about communication, language, and culture.) For instance, technological advances complicate the argument on when renewables might be competitive on cost alone (Chakravarty et al., 2009).
1Nagel referred to a January 2013 presentation on BP’s Energy Outlook 2030, which provides an overview of these issues. See http://www.bp.com/content/dam/bp/pdf/statistical-review/BP_World_Energy_Outlook_booklet_2013.pdf [May 2014].
Nagel explained that students need to be familiar with the complexity of decisions that are impacted by a combination of market forces and societal and political influences, and that business students need familiarity with issues that touch on the next century, rather than the next quarter’s results.
In her presentation, Camilla Seth identified fundamental challenges that climate change poses to all businesses:
- potential disruption to production and consumption,
- increased volatility of energy prices,
- uncertainty in the policy context, and
- challenges related to physical impacts from climate change.
A relatively new challenge, she said, is created by “unburnable carbon”: That is, the supply of fossil fuels at competitive costs may no longer present the limiting factor in the extraction and use of hydrocarbons; instead, the capacity of the environment to absorb carbon dioxide might pose the limiting factor. Seth asked how this consideration might become more widespread in business and finance decisions. She said this perspective requires identifying critical leverage points where strategic decision making can be aligned with long-term realities. Seth argued that to understand these issues, future MBAs need to embrace the concept of materiality (i.e., physical or material aspects that influence, or are influenced by, management decisions).
Seth explained that optimal leverage points might require that business leaders embrace nontraditional partnerships and cooperation beyond the typical scope. To succeed in these endeavors, students need “soft skills” to work across sectors and with a diverse set of stakeholders and civil society.
Like Nagel, Seth stressed systems thinking and wondered whether modeling should be part of the standard curriculum of business schools. Investments in energy efficiency, clean energy, and renewables pose risks as well as opportunities, she noted, but financing fossil fuels requires careful management of risks associated with the materiality of the underlying environmental challenges.
Michael Parr noted that DuPont derives one-quarter of its annual revenues of $40 billion from agriculture, using biochemical rather than petrochemical routes to materials and fuels. In the 1990s, DuPont was the first major U.S. company to set goals for public greenhouse gas reduction goals. Parr explained that addressing climate change and energy consumption on the operations side was ultimately also good for shareholders.
Parr explained how climate change provides DuPont with operational
challenges. For example, a DuPont factory in Mississippi was flooded by Hurricane Katrina, despite a 24-foot protection wall, and the company set up a refugee camp at the location. The incident intensified discussions about “stranded assets” and the need for prudent long-term forecasting in light of climate change when making decisions on infrastructure investments. Business school graduates need to think in these longer time frames, beyond the pressure of “meeting the numbers” monthly or, at best, quarterly.
For DuPont, climate change is not just a strategic issue for long-term planning and cost savings, but also changes important markets. For example, DuPont observes current effects of climate change through shifts in its seed sales. These changes illustrate the need to adapt by developing products for new and emerging needs. In that sense, the markets react with more sensitivity than the political discourse. Climate change, Parr noted, illustrates real operational costs but also significant opportunity, and it provides the backdrop for evolving DuPont’s concept of sustainability. A lower carbon future provides business opportunities only for those who think ahead and innovate into new markets; an innovation pipeline can help markets adapt to the new realities of climate change. To capitalize on these new opportunities, new business skills are needed, including analytical capacity or basic science literacy. Parr gave as an example the use of comprehensive life-cycle analysis (LCA). A failure to grasp the full scope of a product’s LCA, he explained, means to potentially miss important business opportunities. Because energy is a fundamental driver, Parr said, business school graduates need the basic technical and analytical skills to understand how businesses embed (and potentially optimize) energy-related decisions in their operations and their products.
Valerie Patrick explained that Bayer is mostly removed from the end users of its products, as sales to final consumers represent only 15 percent of its revenue. To her, climate change provides a new lens and way of thinking about business, particularly with a focus on the supply chain. More frequent and stronger storms or unusually hot weather add to the cost of operations, and, particularly in Bayer’s crop business, uncertainty and unpredictability of weather can mean loss of revenue and loss of business.
Patrick added a challenge salient for a multinational business: reputation. Her company has a strong position on climate science globally, but the lack of social consensus on the science of climate change in the United States means Bayer treads lightly in the United States in order not to lose business partners.
Patrick pointed to business opportunities in markets where climate change mitigation (i.e., avoiding greenhouse gas emissions) is important, as well as where customers are beginning to address the need for adapta-
tions to help with the consequences of climate change. To capitalize on these opportunities, however, requires the ability to learn as a fundamental organizational capacity. Business school graduates, in her opinion, require the foundational knowledge needed to “wear the climate change goggles.” This knowledge includes environmental literacy, management acumen, and the ability to understand business processes and culture or the policy environment. The business structure then needs to be set up to make it easy to employ skilled people in appropriate functions, something that supports strategic execution: That is, the willingness to take action today and engage the resources for tomorrow’s benefits and to monitor progress in order to ensure that strategic goals are being met. Her expectations for business school graduates include thought leadership and enterprise management, and the ability to assess the materiality of risk. Patrick explained that it is in the latter area where companies experience the effects of climate change. Future business leaders need to be able to execute change management to align their operations to new conditions, something that requires innovative thinking in making the business case beyond the return on investment, for instance by monetizing as many intangibles such as “biodiversity” as possible for a business decision. Patrick summarized her priorities in training future business leaders in the following way: Leaders need the capacity for system thinking; to be creative and flexible; and to establish a culture of problem-solving inside and outside their company to convene, lead, and activate strategic partnerships with unlikely partners.
CULTIVATING SYSTEMS THINKING
In response to a question about how to best cultivate system thinking, the panel pointed to the importance of first-hand and practical experiences. Also helpful are good cases with implicit models that allow the creation of system maps, which visualize key points of leverage and help people see their roles within the overall system. This may require some level of scientific literacy to manage uncertainty within the context of LCA. Additionally, panelists commented, business leaders need to develop the willingness and ability to listen and talk to a variety of people, particularly those who might disagree with them, in order to expand their own thinking and help address broader needs with limited internal and external opposition.
PREPARATION OF MBAs
Panelists were asked if they are looking for MBAs who have the requisite knowledge and skills or, if not, if they provide relevant training in-
house. While the panel members acknowledged some forms of on-the-job professional development, they said companies gravitate toward applicants who bring the requisite basic skill set, like a level of science literacy.
In answering a question on where these ideas fit in the core curriculum of business schools, Nagel said business schools should not move away from the basic core curriculum, but rather bring some of these ideas alive through examples and tools within the core education. Patrick, on the other hand, said she wishes more attention were paid to environmental science aspects that undergird all businesses.
Another question touched on developing skills to prepare future business leaders to solve problems rather than manage dilemmas. As a concrete case, how would one prepare business leaders to make a choice not to locate a business near a vulnerable area? Parr responded that students need to be taught in the core curriculum to think about markets more broadly and to include externalities to see where markets may be going. He referenced assets that cannot be moved and might require expensive adaptation if market forces change, be it for climate change or other reasons. Seth added that students need to learn how to ask the right questions about managing risks and to bring these risks and dilemmas up in appropriate decision points and planning sessions.