How firms profit from going 'green'

Regulation

The UN Climate Change summit begins in Durban next week but few business leaders are expected to attend. Unfortunately, attendance of executives has been in decline since the Copenhagen summit in 2009. The reality is that bosses were interested in being green when regulation of greenhouse-gas emissions was highly probable. Ernst & Young’s study of 300 global firms showed 83% are keen to see the Durban summit achieve a multi-lateral agreement to update the Kyoto protocol and put a price on carbon emissions.  Only 18% expect this to happen illustrating the impact of regulatory uncertainty. British investment in clean technology has fallen to $3.3billion, a 70% fall from 2009 levels and its lowest level since 2003.

Although public sector spending cuts and lack of regulatory commitment are damaging the potential of being ‘greener’ and more sustainable, firms have seen considerable benefit from implementing and investing in such policy. In the same report 44% of Ernst & Young’s respondents said spending on sustainability had increased since the financial crisis. Another 44% said spending had remained the same. In some instances a lack of regulation can make commercial sense.

 Green Policy

The primary function of green policies is to cut costs, mainly through improved energy efficiency and waste management. Rising commodity prices mean small improvements lead to massive savings. Schumpeter explains this is why firms who set strict emissions targets have tended to tighten rather than relax them in recent years. This includes Wal-Mart, which is estimated to be saving $200m a year in transport fuel. Tesco plans to be carbon-neutral by 2050 currently saving around $239m a year. In 2010, Tesco opened its first zero-carbon store, which cost 30% more to build but uses 50% less energy.

Retailers are not the only industry to be implementing strategic 'green' policies. Miners BHP Billiton, Rio Tinto and Barrick Gold are taking advantage of the falling price of renewable energy. All three are investing in solar and wind projects to cut expenses where connection to a national grid is difficult and costly. This is a good defence against future implementation of regulation and an opportunity to grab limited government subsidies.

 Utilising Resource Scarcity

Firms are increasingly aware of how rising commodity prices and resource scarcity will impact their business. The Carbon Disclosure Project (CDP) states 68% of companies have global-warming as part of their core strategy. Those firms embarking on significant projects are not those that typically align with the ethical investor. Coca-Cola, Unilever, Nestle and PepsiCo have all been trying to improve environmental records for over a decade, in response to attacks on practices in developing countries and the commercial impact of water scarcity. These firms have become increasingly convinced about the benefits of being 'green' and sustainable.

As a result, Unilever has found additional markets which tap into these issues. In Asia, the company has begun selling detergents that clean at relatively low temperatures and are removed with minimal water.  Unilever has reduced its CO2 emissions by 44% and water use by 66% across its factories since 1995. The McKinsey Global Institute has released a report entitled 'Resource Revolution' in which it says that up to $3.7 trillion could be saved if resources are used more efficiently.