Josephine V. Yam

Sustainability

Climate Change Strategy: The Business Logic Behind Greenhouse Gas: An Article Review

Josephine V. Yam, June 2013
Article Review On Hoffman, A. J. (2005). Climate Change Strategy: The Business Logic Behind Greenhouse Gas Reductions. California Management Review, 47(3), 21-46. Submitted for the Strategic Environmental Planning for Energy Organizations, SEDV 623 Spring 2013, University of Calgary.

In this review, it will be argued that Hoffman’s paper exploring the reason why corporations pursue voluntary greenhouse gas (GHG) reduction projects, particularly in order to achieve competitive advantage, is a substantive but incomplete piece of research. This review will discuss that Hoffman’s study fails to recognize that corporations are also significantly motivated to attain environmental protection and social responsibility goals as part of achieving the triple bottom line of sustainability. This argument will be developed through a critical review of Hoffman’s paper in the light of the course readings discussed in the Strategic Environmental Planning for Energy Organizations (SEDV 623) course. This course is offered by the University of Calgary’s Haskayne School of Business, as part of its Master of Science in Sustainable Energy Development graduate degree program.

Article Summary


The purpose of Hoffman’s article is to discuss how large U.S. corporations have undertaken voluntarily GHG reduction projects in pursuit of their varied strategies for competitive advantage. Because of the lack of any U.S. mandatory GHG reduction targets, they have taken proactive business approaches to addressing climate change, which has become a potent, inevitable market force to contend with across the business landscape.

Hoffman states that a corporation’s reason to proactively pursue GHG reduction projects is primarily driven by a business decision. It is strategic for a corporation to carry out such projects because it can secure its position in the competitive environment for both the short-term and long-term horizons. In the short-term, a corporation can unlock significant cost savings through improved operational efficiencies that enhance its financial bottom line. In the long-term, a corporation will be ready and prepared if and when the U.S. government issues GHG regulations.

Thus, the primordial question that every corporation should ask itself is: “Is it worthwhile to pursue a voluntary GHG reduction project using cost-benefit analysis?”. Hoffman believes that a corporation is not motivated to do address climate change out of environmental concerns or social pressures. The answer to such question is strictly based on business judgment. It is grounded on a corporation’s strategic advantage in the marketplace, buttressed by solid analysis of its internal strengths and shortcomings in the context of the external business environment. As Hoffman asserts, it “must all be based on sound business logic”.
Using “sound business logic”, a corporation that decides to carry out a GHG reduction project opens its doors to a plethora of benefits that can prove very valuable for the corporation.

First, it can improve operational processes. When pollution prevention is measured using economic metrics to quantify its costs vis-à-vis its beneficial impacts, such metrics demonstrate positive outcomes to the corporation’s bottom line through energy and cost reductions.

Second, it can proactively prepare for and influence emerging climate change policies and regulations. While government is developing GHG regulations, the corporation can positively influence such regulations to accommodate its chosen approaches to climate change in respect of regulatory standards and specifications. When they are eventually issued, it can be a leader in the industry as it has already adapted its businesses to comply with such regulations.

Third, it can access new sources of capital. Because of the lack of GHG regulations, governments and third-party organizations have stepped up to provide financial incentives to corporations to pursue GHG reduction projects in the form of grants, subsidies and interest-free loans.

Fourth, it can mitigate its financial risks from natural and financial causes. It can lower the risk of losing its physical assets destroyed by erratic weather conditions such as floods and droughts. It can also decrease the risk of drastically diminishing its liquid, financial assets to the compliance costs of climate change regulations that include taxes and fees. A corporation’s senior managers should be mindful to mitigate these risk or they may be in breach of their fiscal responsibilities.

Fifth, it can improve its corporate reputation. A GHG reduction project can boost a corporation’s reputation and image as a good corporate citizen among its disparate stakeholders and in the communities in which it operates.

Sixth, it can recognize new market possibilities. In launching a GHG reduction project, a corporation becomes keenly aware of emerging market opportunities that upcoming regulatory constraints can bring. It then devises creative strategies to seize the advantages of being the “first mover” in its industry.
Lastly, it can improve employee productivity. When a corporation pursues a GHG reduction project, its employees become proud to work there. This translates into improving employee morale, increasing their productivity, enhancing retention rates and attracting top talent.

Hoffman concludes that a corporation’s decision to pursue a GHG reduction project depends on whether such initiative possesses clear economic benefits that outweigh its costs. It is crucial that such economic benefits accrue to the corporation with a reasonable rate of return and at reasonable time period. After all, Hoffman declares that “climate change is not a scientific or social issue, it is becoming a strategic issue”.

Article Critique


This review sets out three criticisms of Hoffman’s study in respect of its failure to recognize that corporations are not only primarily motivated by achieving competitive advantage. As discussed in the SEDV 623 course readings, corporations are also primarily and simultaneously motivated by environmental protection and social responsibility goals as part of achieving the triple bottom line of sustainability.

First, the article espouses the outdated paradigm of trade-offs between competitive advantage and environmental protection. It claims that concerns for environmental protection are adversarial to a corporation’s quest for profitability. Thus, in order to achieve financial growth that enhances shareholder value, the decision to pursue a GHG reduction project is strictly justified by cost-benefit analysis. Hoffman notes:

[M]any of these companies are agnostic about the science of climate change or the social responsibility of protecting the global climate. The reasons that they are making these emission reductions are decidedly strategic… Understanding these initiatives requires shifting our view of controls on GHG emissions from a strictly environmental issue driven by regulatory or social pressures to a strategic issue driven by market pressures… Not all companies will benefit from GHG reductions and voluntary reduction programs must be based on sound business logic. They must have a bottom-line rationale or such efforts will be financially unsustainable. [Emphasis supplied.]

This outdated paradigm is referred to as having a “static mindset”. It reflects the distrust and animosity that exist between regulators who try to enforce environmental regulations and companies who resist them because of perceived higher compliance costs. This “static mindset” stymies a corporation into innovating new ways of doing business to improve its competitive advantage (Porter & Van Der Linde, 1995).

Companies must adapt a new mindset that appreciates that simultaneously complying with environmental regulations and pursuing competitive advantage do not amount to a zero-sum game. Rather, environmental regulations are precisely crucial to gaining competitive advantage because they compel corporations to find imaginative ways to lower costs, improve productivity and eliminate waste (Porter & Van Der Linde, 1995). This new mindset involves recognition of the triple bottom line of sustainability that simultaneously considers economic profitability, environmental protection and social equity (Bertels, 2010). Thus, a corporation can move towards the “clean technology” stage towards corporate sustainability, which goes “beyond greening” and involves investments in pioneering technologies that are both good for the environment and good for its bottom line (Hart, 1997).

Second, the article recognizes competitiveness as the most prominent driver that motivates a corporation to pursue GHG reduction projects. It asserts that a corporation should engage in climate change projects in anticipation of future GHG regulations. Otherwise, it will bear huge financial risks for not proactively anticipating such compliance requirements. As Hoffman declares: “To ignore the possibility of carbon regulations would be fiscally irresponsible.”

The article fails to explicitly recognize that there exist equally powerful motivations, in addition to competitiveness, which drive companies to pursue climate change strategies. The three leading motivations identified in academic literature are competitiveness, legitimation and ecological responsibility (Bansal & Roth, 2000). Competitiveness is the motivation that drives a corporation to improve its bottom line by focusing on cost-benefit analysis of a climate change undertaking (Bansal & Roth, 2000). Legitimation is the motivation that drives a corporation to comply with established regulations and norms by focusing on its social license to operate with government and its various stakeholders (Bansal & Roth, 2000). Ecological responsibility is the motivation that drives a corporation to pursue the “social good” by seeking “to do the right thing” (Bansal & Roth, 2000). One or a combination of these motivations may drive a corporation in pursuing a climate change initiative. When a corporation recognizes the simultaneous interplay of various motivations, it will discover more opportunities that it can capitalize on than if it had solely recognized competitiveness as its singular underlying motive.

The term “sustainable development innovation” signifies the confluence of these three leading motivations of competitiveness, legitimation and ecological responsibility. It acknowledges the tangled combination of market, environmental and social pressures that are generated by competing needs of disparate primary and secondary stakeholders (Hall & Vredenburg, 2003).

Third, the article narrowly identifies a corporation’s GHG reduction project as the primary cause for enhancing its reputation with its employees, which then uplifts their morale and boosts their productivity. In other words, a corporation’s GHG mitigation initiative will directly create happy and productive employees but not the other way around. Hoffman explains:

[T]he adoption of greenhouse emissions strategies can improve the morale of the company and thereby increase the retention rates of skilled workers, lower the costs of recruiting and training new ones, and attract and retain higher caliber applicants. An analysis by the Pew Center on Global Climate Change found that GHG reductions motivated employees and drove innovation within companies studied. [Emphasis supplied.]

The article fails to appreciate the encompassing positive effects of a strong “culture of sustainability” within a corporation, in which everyone in the company, from the Chief Executive Officer all the way down to support staff, consciously collaborate to innovate new ways of doing their work to achieve the corporation’s triple bottom line of “economic efficiency, social equity and environmental accountability” (Bertels, 2010).

Rather than a single directional, top-down approach to creating happy and productive employees, a culture of sustainability also acknowledges the bottom-up, horizontal and diagonal approaches that can also occur when they collaborate across business units to produce groundbreaking GHG reduction projects that lead to competitiveness. This strong culture of sustainability is what sets apart corporations that will successfully achieve long-term sustainability from those that will fail.

Conclusion


Hoffman’s article studies competitive advantage as the foremost driver for a corporation to undertake voluntary GHG reduction projects. It provides a substantive discussion on the “sound business logic” that a corporation uses to assess whether a GHG reduction project is worthwhile to carry out. A corporation assesses such opportunities through the lenses of cost-benefit analysis and competitive advantage. The article sets out valuable benefits that can accrue to a corporation that successfully engages in a GHG reduction project. Indeed, Hoffman’s article has contributed valuable insights to the academic literature on the business value proposition that a corporation presents when it decides to implement a climate change project.

This review argues, however, that Hoffman’s article fails to recognize that corporations are also significantly motivated to achieve environmental protection and social responsibility goals as part of achieving the triple bottom line of sustainability. This argument was developed through a critical review of the article in the context of the SEDV 623 course readings.

The first criticism is that the article espouses the outdated “static mindset” of trade-offs between competitive advantage and environmental protection. It claims that concerns for environmental protection are adversarial to a corporation’s quest for financial success. This review argues that a new mindset is required that positively views environmental regulations as pivotal to gaining competitive advantage because they compel corporations to find creative ways to lower costs, improve productivity and eliminate waste (Porter & Van Der Linde, 1995).

The second criticism is that the article recognizes competitiveness as the most prominent driver that motivates a corporation to pursue GHG reduction projects. A corporation will bear huge financial risks if it does not proactively anticipate future regulatory compliance requirements by engaging in GHG reduction projects. The article fails to explicitly recognize that legitimation and ecological responsibility are equally powerful motivations, which can be combined with competitiveness to drive companies to pursue climate change strategies (Bansal and Roth, 2000).

Third, the article narrowly identifies a corporation’s GHG reduction project as the primary cause for creating happy and productive employees but not the other way around. The article fails to appreciate the encompassing positive effects of a strong culture of sustainability within a corporation, in which everyone in the company consciously collaborates to formulate new ways of doing their work to achieve the corporation’s triple bottom line of sustainability (Bertels, 2010).

Consequently, this reviewer suggests that further research be undertaken to study how corporations have strategically integrated the triple bottom line of corporate sustainability as they pursued various GHG reduction projects. The research can discuss best practices on how they innovated and created business value by using also the environmental and social lenses as they built their competitive advantage. It can also illustrate the various economic metrics that were used to measure the environmental protection and social equity bottom lines of sustainability as well as the other major factors that contributed to the successes or failures of a corporation’s GHG reduction projects.

Admittedly, it is not easy for a corporation to pursue long-term sustainability because of the various opposing demands that it faces. The quandary it faces is clearly recognized:

Accordingly, the business climate today is challenging in ways that require new perspectives. The public in the U.S. and many other countries expects that companies will operate in compliance with the law and in ways that are environmentally sound, treat their own people and those in surrounding communities fairly, and engage with their stakeholders on issues of common interest. At the same time, the expectations of the capital markets have not changed. Publicly traded companies must grow revenues and earnings, consistently generate cash, and effectively manage risk. Balancing these sometimes conflicting imperatives requires a framework that, when applied to a specific organization, is flexible and yields an internally consistent set of values, normative behaviours, business goals, methods, and performance metrics. [Emphasis supplied.] (Soyka, 2012)

Indeed, corporations should keep in mind the framework that is needed to achieve long-term profitability in a carbon-constrained world, “[S]mart companies seize competitive advantage through the strategic management of environmental challenges” (Esty & Winston, 2006). And “[s]ustainability offers this framework” (Soyka, 2012).

References


  • Bansal, P., & Roth, K. (2000). Why companies go green: a model of ecological responsiveness. (Vol. 43(4), pp. 717-736). Academy of Management Journal.
  • Bertels, S. (2010). Embedding sustainability in organizational culture. Network for Business Sustainability. DOI: www.nbs.net/knowledge/culture
  • Esty, D. C., & Winston, A. S. (2009). Green to gold. Hoboken: John Wiley and Sons.
  • Hall, J., & Vredenburg, H. (2003). The challenges of innovating for sustainable development. (Vol. 45(1), pp. 61-68). MIT Sloan Management Review.
  • Hart, S. (1997). Beyond greening: Strategies for a sustainable world. (Vol. 75(1), pp. 66-76). Harvard Business Review.
  • Porter, M. E., & Van Der Linde, C. (1995). Green and competitive: ending the stalemate. HarvardBusiness Review.
  • Soyka, P. (2012). Creating a sustainable organization: Approaches for enhancing corporate value through sustainability. New Jersey: Pearson Education, Inc.
Josephine V. Yam
Josephine is CEO & Co-Founder of B3 Canada, a mission-driven organization in Canada dedicated to building breakthrough boards through innovative board matching services for businesses, professionals and nonprofits.

Josephine is a highly accomplished lawyer-social entrepreneur with significant years of professional legal, policy, leadership and entrepreneurial experiences in the private, public and nonprofit sectors in Canada and internationally. She has been admitted to practice law in New York (USA), Alberta (Canada), Ontario (Canada) and the Philippines. She has also been interviewed on international television such as CNN and CNBC and featured in the international news magazine Newsweek.

Josephine recently graduated from Stanford University's Executive Program for Non-Profit Leaders. She also completed her Master of Laws (LLM) degree at the University of Calgary, Faculty of Law. Complimenting her advanced education at Harvard Law School and the University of Toronto, Josephine currently serves as one of the Energy Futures Lab Fellows of The Natural Step Canada.

Before founding B3 Canada, Josephine was the Executive Director of the Environmental Law Centre of Alberta and Lead Advisor for Corporate Consulting at the Pembina Institute. As Board Member of Immigrant Services Calgary, a large registered charity, Josephine served as Corporate Secretary, member of the Executive Committee, Board Development & Nominating Committee, Audit & Finance Committee and CEO Evaluation Committee. In the public sector, Josephine served as Senior Legal Counsel with the Government of Alberta’s Ministry of Justice and Ministry of Energy. In the private sector, Josephine worked with the international law firm Baker & McKenzie in its Hong Kong, Manila and Toronto offices, the Asian Development Bank and Procter & Gamble.

With her significant legal and senior management experiences in the private, public and nonprofit sectors in Canada and internationally, Josephine deeply understands that cross-sector collaboration in social innovation is crucial to achieving positive change in the world. This is what drives her deep commitment to advance B3 Canada’s mission of strengthening the board leadership capacity of Canada’s nonprofit sector as a force for good in society.

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