Business leaders must decide if they will adapt to new climate standards, of if they will define them
BY PETER MCKILLOP and DAVID GARRISON
Larry Fink was not the only corporate chieftain to send out a white flare about climate change in the early days of 2020. Microsoft President Brad Smith’s stunned the corporate world by announcing that the company would remove all the carbon Microsoft has ever emitted into the air since it founded in 1976. It also announced a plan to invest $1 billion in carbon extraction technology. Smith’s comments trumped even Fink because it went beyond acknowledging climate risk to going all-in on a post-carbon future.
These two corporate announcements demonstrate the different tacks companies are taking on how to think about climate change. On the one hand, we’re watching an important shift in language, represented by leaders like Fink, who acknowledge climate risk and are slowly adjusting their operations accordingly. On the other hand, leaders like Microsoft are taking an active stance in investing in a post-carbon future, going all-in to find—and make—opportunity in climate-friendly models.
Raising the bar on corporate climate action
Both announcements dramatically raise the bar on what is increasingly expected from the world’s largest companies and financial institutions in the transition to a post-carbon economy. In less than ten years, concern about climate change has gone from an annual meeting nuisance to the heart of how companies will do business going forward. As Microsoft pointed out, it’s no longer enough to be “carbon neutral” – that is the process in which you seek to offset your carbon footprint with efforts such as purchasing carbon credits. Instead, Microsoft argued, you must become carbon negative, and that takes fundamentally changing how you do business.
The actions taken by BlackRock and Microsoft highlights what Dartmouth Professor Anant Sundaram tells Climate & Capital’s David Garrison in our first Climate Leader Discussions. A successful market transition will require, among other things, a small number of bold early movers to set a positive tone and impose new constraints on themselves and the players they have influence over to shift priorities on where we invest.
This is most likely to start, Sundaram notes, with a moral stand that isn’t so much a public call for others to join as a way to force stakeholders around them to take a position to do business, reduce risk and improve performance. “I remember a speech that Tim Cook gave at a shareholder meeting a few years ago,” says Sundaram. “There was a guy who berated Cook, saying, What the heck are you doing with all these renewable energy investments? I’d rather take it in the form of dividends. And Cook looked at him and said, I don’t necessarily care about the bloody ROI in every decision I make. You don’t like the way I’m making these investments, sell the damned stock, and get on with your life!” It may also make good business sense. Julio Friedmann, a research scholar at Columbia University’s Center for Global Energy Policy, says that companies “by taking the lead in walking the talk of climate” are “making the stronger players, even stronger.”
This is the kind of groundbreaking leadership that has the potential to drive not just corporate action but public policy. Microsoft’s efforts put the pressure, for example, on governments to take stronger action. “Sooner or later, regulators will react, and capital will react, so it is just a good business decision if you have some confidence where this is heading,” says Judith Samuelson, executive director of the Aspen Institute’s Business & Society Program. “We will now see government policy take shape, reinforced by markets—or will it be the other way around?” After this past week, we have a better clue what the future can hold.”
But as Sundaram warns Garrison, it won’t be easy. At the end of the day, “the CEO must be able to say that the company produced an extra dollar of revenue, that energy efficiency lowered cost, or that it created a reputational benefit. And that’s still a tough case to make to equity markets and analysts.” The key to getting this right, says Sundaram, is to “convince all stakeholders that a green premium is desirable and not simply a reflection of higher costs—that investments in sustainability are a signal of strategic leadership, quality, and value.”
The best and the bravest
But only the best and bravest can take the kind of risk a Microsoft is taking. “You have to be a great company to say there is a three percent premium associated with the consumption of a product,” says Sundaram. “This means aligning the firm’s talent and culture to a climate first focus; convincing institutional investors to support a post-carbon transition; and, the most difficult, convince consumers that a climate-related premium for the company’s products and services is worth it.
That’s why the decision is controversial. Felix Salmon of Axios writes that Microsoft is naive by adopting a carbon negative business strategy before others. “The only way to eradicate that competitive disadvantage is to ensure that all companies have to play by the same rules. Up to now, we want it but are not willing to pay for it.” Still, others like Coca-Cola have no intention of how they operate. At Davos, Coke, one of the world’s largest producers of disposable plastic, was defiant in its defense of the single-use bottles. Despite growing opposition, Coke said it did not want to alienate customers or reduce sales. “Business won’t be business if we don’t accommodate consumers,” Cokes Head of Sustainability Bea Perez told the Davos participants.
Oil companies are not going away
Company positions, however, are not binary. There continue to be limits to what even Microsoft or BlackRock will do. BlackRock has not found a way, for example, to divest itself from stock indexes that include carbon-emitting businesses like the oil industry. Nor would it want to. Fink believes oil companies must play a crucial role in the transition to a post-carbon economy. Microsoft also continues to aggressively pursue the oil industry to become customers for its Azure Cloud computing services.
These tensions for leaders between the end goals and the process of arriving at them are real. It is clear that companies already squeezed between balancing the long-term benefits of environmentally sustainable business practices and short-term demands of meeting customer and shareholders expectations. And as pressure to make systemic moves builds, these perceived tensions will grow.
“We all want green in our lives,” says Sundaram. “We all want clean air, clean water, parks—everything fresh, clean, healthy—but there’s a values to value gap.” In going first, Microsoft is taking a gamble that moving into a post-carbon economy will give it disproportionate future returns on an emerging market that will simply be “the market” in the not-so-distant future. The question now is, who will follow?