Respected by both students and executives, Anant Sundaram holds the distinction of having established the first MBA course on business and climate change at a business school in the U.S. The director of Tuck’s Executive Sustainability Forum, he has advised the National Academy of Sciences on Climate Education, and crafted Fossil Fuel Beta (FFβ), now a benchmark metric for the impact on a stock price of a company’s exposure to fossil-fuel price changes and CO2-emission risks. His “Handbook of Business and Climate Change” will be published in 2021.
Climate&Capital’s David Garrison spoke with Sundaram in his office on a visit to the Tuck School of Business at Dartmouth in late 2019.
It’s generally agreed that international coordination is vital to address climate change. What role should corporate leaders play?
If you’re going to try and solve a problem, you’ve got to go solve it where it’s happening. When you strip the conversation down, it is not countries that emit; it’s companies and people. And the single biggest source of emissions is the corporate and industrial sectors—the energy producers and distributors, heavy industry, mining, cement, and others like them.
In a country like the US, roughly 70% of CO2 emissions come from corporations burning fossil fuels. This happens not because we’re evil people, but because 80% of the world’s energy consumption comes from fossil fuel-based production systems.
“Companies are meeting our needs—our demand—for goods and services. So, every one of us is implicated in the process and is involved in making change happen.”
What that means is that, if you’re going to make the issue salient to a corporation, it has to be somehow linked to its business model. It has to impact revenues, costs, the way you think about making investment decisions, and the way the market perceives risk.
Climate change is often framed as a negative market—one where we’re mitigating risks, hedging, or forcing new markets based on “alternatives.” What’s the burning opportunity for business in this?
We all know what the problem is. When you strip away the BS, there are only three solutions.
- Efficiency. When you look at aggregate economic forecasts, fossil fuels continue to dominate. So, we’ve got to burn fossil fuels, but the question is can we burn them more efficiently. Energy- and carbon-efficiency technologies are a significant emerging market.
- Non-fossil fuel-based sources. Incremental energy for production and consumption must—at least going forward—come from non-fossil fuel-based sources of energy. I’m not calling it renewables, because that’s only a piece of it—it includes hydro, nuclear, and many things that we haven’t even thought of yet; things that are still far away, such as wave or tidal energy.
- Carbon capture, sequestration, and use. We’ve got to figure out technologies and solutions to capture carbon, put it away for good, and find alternative uses for it. Because there’s only so much of the first two that we can realistically do. I may need four thousand nuclear power plants , but the reality is that we’re only building fifty a year now. We’re just not going to get there any time soon.
“The three key elements are carbon efficiency, non-fossil fuel-based sources of energy, and carbon capture, sequestration, and use. These are the three big pieces—frankly, the only pieces—of the solution.”
Just as we talk about the digital economy, the emerging economy, or the development of the global economy, there’s also a climate economy. Each of these on their own is a potentially multi-trillion-dollar industry in the offing.
What’s stopping us right now? What needs to happen before we see more companies taking meaningful action?
Right now, in terms of global policy, there is very little by way of positive incentives.
First-year organization behavior and finance classes will teach you that there’s a difference between incentivizing people to avoid punishment as opposed to incentivizing people to seek reward. In policy discussions, so much of the discussion around corporate response is wagging fingers and saying that, if you don’t do the right thing, we’re going to punish you.
Yes, punishment has to be a piece of it—if you screw up, you have to pay for it—but the way companies really motivate employees to do the right thing is by encouraging rewards-seeking as opposed to punishment-avoidance. They need to see the potential to get wealthier when they do the right thing.
Ultimately, that means companies like Apple have to internalize it. They have to communicate to analysts that it’s not simply them being 100% non-fossil fuel-based within their walls, but also that they’re working with the FoxConns of the world to do the same. To put this in perspective, if Apple influences four gigawatts of non-fossil fuel-based energy in its supply chain, that’s like setting up four average-sized nuclear power plants.
“What complicates this is that these are often under-the-radar opportunities—not splashy ones. It’s working in the bowels of your supply chain to help others improve their technology. This is why carbon pricing is important—because it impacts incentives to improve behind-the-scene supply chains.”
If corporate leaders are making these changes, why don’t we see the markets rewarding them—or at least putting a value on the internal corporate policy changes and investments that properly address climate change?
“Does it make sense to do well so that you can do good, or does just doing good get you to doing well? The evidence, in spades, is that the former is true. It’s when companies are already doing well—when performance is not an issue—that it differentiates you from competition and they reach a higher level of being.”
If you look at the S&P500 companies, 310 of them have a chief sustainability officer or equivalent (or board-level oversight), someone reporting to the CEO who is responsible for measuring, managing, mitigating, adapting to issues of climate and CO2 emissions. That’s a significant investment, and the list of companies is a who’s who.
The big question is how you convince investors that climate-driven decisions tell them something about how you lead, what makes you a great company, and how you think about your business model.
What does it tell you about the quality of the decisions I’m willing to make? It might tell you, for example, that I’m willing to incur short-term pain in my cash flows. What a CEO wants is for the market to recognize that these behaviors are a signal of quality; that it reflects the way a company designs products; the way it designs packaging; the way it motivates employees. At the end of the day, though, the CEO must be able to say that it produced an extra dollar of revenue, that energy efficiency lowered cost, or that it created a reputational effect. And that’s still a tough case to make to equity markets and analysts.
I remember a speech that Tim Cook gave at a shareholder meeting a few years ago. 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!
But not every CEO can get away with this. Apple is a stock nobody can quarrel with. You can’t talk about forward-looking ESG-aligned investments if you are providing poor returns to your shareholders.
You counsel business leaders and teach the leaders of tomorrow. So much of our conversations with leaders is still about outcomes – the urgency, the metrics, the tradeoffs to get there. What do you tell them to consider about the process of transforming their organizations?
At the end of the day, we have to be willing to pay a premium to help solve this problem. So, how do we change our mindsets and behaviors? There are three things to consider in the transition we’re talking about.
- Align talent and culture. A necessary condition to even contemplate the transition is having the right kind of human capital and corporate culture. While it isn’t my forte as a finance person, there are certain industries where this is very, very difficult, and I have trouble seeing this happening in organizations that have fractured cultures or multiple constituencies.
- Create financial runway. Financial asset ownership in the US is transitioning toward institutional ownership—not just the BlackRocks and Vanguards and Fidelities, but pension funds and asset managers. We’ve got to somehow convince these institutional investors to give companies leeway to make this transition we’re talking about.
- Guide market transitions. You’ve got to deal with customers, and you have to be a great company to say there’s a three percent premium associated with consumption of a product. On the consumer side, maybe millennials are collectively conscious enough that there’s opportunity there. Maybe they’re willing to pay two bucks more for a Beyond Meat burger because it’s not made from cows. I’m not trying to trivialize that. There’s a transition there, and the CEO has to enable it.
This is the challenge. And if you, as CEO, can get your employees behind you, get your key investors behind you, and at least start the conversation with the market, there is enormous opportunity here.
“I’m also not saying any of this is costless. I’m not saying any of this is riskless. This is a balancing exercise. The moment you make a case for this in public as a business opportunity, it pisses off a lot of constituencies; we’re very suspicious of profit-making corporations. But it has to make economic sense for companies to deploy talent and innovate technologies.”
You mention customers. Are consumers ready to transition?
People say, “Oh, I drive a Prius, and I have a solar panel.” But this is just virtue signaling. It’s not even scratching the surface of the problem.
We all want green in our lives. We all want clean air, clean water, parks—everything fresh, clean, healthy—but there’s a values to value gap. We want it, but we’re not necessarily willing to pay for it.
Are you, for example, willing to have a fourth-generation nuclear plant in your backyard? Oh, boy! These are tough questions, and people will recognize immediately that real change is happening when it begins to conflict directly with their lives.
What about capital markets? You talk about the need to make the case to them, but are they ready?
Bond markets have finally woken up to this and (led by players like the sovereign wealth funds and pension funds) want green bonds in their portfolio, but equity markets still are not rewarding the right behavior. While there’s been remarkable growth in the field of ESG investing and ETFs, the evidence at this point says that those portfolios essentially underperform. Hard analysis says you have to believe in it enough to trade off a couple points.
And there are many investors—people—who do believe. They’re willing to settle for a little loss of freedom or return because they’re saying, “Having a portfolio that reflects my values matters to me.” But that is not your NYSE or NASDAQ investor on balance. Yes, ESG funds and ETFs are growing and the trends are there, but they’re still just nibbling at the margin. Unless the conversation moves to a bigger level, I don’t see a great deal of innovation happening in capital markets.
What about innovation and emerging markets?
Here’s why this is a nuanced question. As you look ahead to the next 30 to 40 years, where is global growth going to come from? It’s not the US and the EU. We forget that it’s not the GEs, the Siemens, the Schneiders, the Honeywells, or the United Technologies of the world. No, a substantial portion of incremental global growth is going to come from emerging markets like India, China, Brazil, Russia, and South Africa.
The problem is that these are also the highly resource-inefficient economies of the world. India today, for example, makes almost a ton of CO2 for every thousand dollars of GDP that it produces. Compare that to the US at about a quarter of a ton and the EU at more like a fifth of a ton.
There are reasons for that. But as you look ahead to where global growth is going to come from, it’s the Indias and the Chinas of the world transitioning from a $3,000 per capita economy to a $15,000 per capita economy fifteen years from now. You do the arithmetic on the resource consequences of that: It is stunning. If you’re United Technologies, Owens, Corning, Caterpillar, that’s where your future markets are. So, the biggest opportunity for companies—and here’s where it gets difficult—is in how they enable changes in the production economy in these places.