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June 29, 2009

The Hope Behind The Holes In The Climate Bill

Kevin Wilhelm
Chief Executive Officer
Sustainable Business Consulting

Friday was a historic day for the United States with the passage of our first comprehensive climate change bill. While I think that the American Clean Energy and Security Act (ACES) authored by representatives Henry Waxman (D-CA) and Edward Markey (D-MA) falls short of what we need, and what President Obama promised during his campaign, all is not lost.

While I find failures in leadership like this disappointing, I’m still hopeful because even if Congress passes this watered down legislation, I think there will be many areas where the market will step in to pick up the slack.

Regulation is important—and don’t get me wrong, if we fumble on this cap-and-trade bill, we’ll be facing an even greater challenge—but business solutions to climate change need to come from all angles, and there are many factors that influence the market, not just federal policy. And this is where I hold hope.

We’re seeing these market signals in several different aspects of business: insurance, financial markets, energy prices, marketing and corporate social responsibility (CSR) reporting. Here are some examples:

Financial markets: For years institutional investors such as CalPERS and Socially Responsible Investment (SRI) firms have been putting screens on corporate activities. However, more recently, Wall Street has been looking at environmental, social and governance (ESG) performance of companies as an indicator of financial performance. In fact, AT Kearney reported that companies that had ESG policies averaged a market cap of $650 million more than companies that did not—even after the market collapsed. Compelling data such as this could very likely fuel a trend among analysts and investors to pressure companies to create policies and take action on climate change.

Insurance: Insurers who’ve taken a bath in recent years due to weather-related losses attributed to hurricanes, floods, drought, forest fires, etc. are moving aggressively to reduce their climate risk exposure. Some companies have seen premiums increase dramatically while others have watched their executive and officers insurance renewals freeze until they come up with a climate policy. Others are offering new products for customers that are committed to energy efficiency and green building.

Moreover, this spring the National Association of Insurance Commissioners agreed that insurance companies with more than $500 million in assets must disclose their climate risk starting in 2010. You can bet insurers will be leaning on businesses and policyholders to not only disclose, but to reduce climate risk, to lower the insurers’ exposure.

Energy prices: Businesses that burn a lot of gas may be breathing a sigh of relief at the prospect of getting free permits; but they shouldn’t be. Energy prices remain highly volatile. Just yesterday oil jumped over $71 barrel due to the attack on the Shell Oil platform in Nigeria and Goldman Sachs reported in early June that it now believes oil will once again go above $85 barrel by the end of 2009.

Marketing: Several recent studies indicate that younger Gen X, Gen Y and Millennial consumers care much more about the environment and climate change than our aging Baby Boomer generation. Even in the absence of regulation companies will be in trouble if they continue with business as usual, because when price, performance, and quality are the same, the deciding factor for this fast-growing segment of conscious consumers is sustainability, not celebrity endorsements or flashy commercials.

CSR reporting: More and more companies are publishing CSR reports, and what I’ve witnessed through my consulting work is that companies are already starting to jockey for leadership within their respective industries. Companies are raising the bar and those that want to keep up with—or beat—the competition now must set aggressive carbon-reduction goals and take bold action on climate change.

While I don’t want to underscore the disappointment I and others in the sustainable business community have felt over watered down version of this bill; hope still exists. The most important thing about this bill is that it opened a national dialogue, gets businesses moving in the right direction and regulation started.

Kevin Wilhelm is the CEO of Sustainable Business Consulting and the author of Return on Sustainability: How Business Can Increase Profitability & Address Climate Change in an Uncertain Economy.

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