23 Nov 1999  Research & Ideas

Bringing the Environment Down to Earth

Does it pay to be green? When it comes to questions about business and the environment, says HBS Professor Forest L. Reinhardt, there are no simple yes-or-no answers. In this excerpt from his article in the Harvard Business Review, Reinhardt stresses the importance of applying traditional business principles to environmental issues.

 

Treating environmental issues as business problems sounds straightforward, but it's not easy. The following assumptions, all of which are common in business thinking, make it difficult to reframe the issues.

Environmental problems are, first and foremost, matters of social responsibility. While considerations of social responsibility are important, executives who frame environmental problems solely in those terms may overlook the business opportunities and risks that come with such problems. Treating environmental issues like other business issues can lead to more creative problem solving as well as better bottom-line results.

Environmental questions are cause for pessimism. In most arenas, successful managers search for opportunity in adversity and find in complex problems a chance to separate their companies from competitors. So it's striking to hear how passive and pessimistic they sound when talking about environmental issues. They take that approach because they associate it not just with extra costs but also with a loss of control over their own operations. But, as the examples in this article show, it doesn't have to be that way.

Environmental management is a zero-sum game. For every winner in a zero-sum contest, there is a loser. Thus if the environment wins, the company loses, and vice versa. That view is prevalent in part because it fits with the widespread perception that environmental problems are political or moral issues. Elections and crusades are win-lose by definition and by design, but businesses don't ordinarily operate that way. Instead, they look for chances to benefit themselves and others simultaneously. Some environmental problems are inevitably win-lose, but it's a mistake to think that none of them can be recast.

Government and environmental groups are the company's adversaries. At times, that view is justified; some regulators and advocates are indeed hostile to business. But government and nonprofit organizations will always play a role in environmental management – the only question is what kind of role. Sometimes it makes sense to circle the wagons against an external threat. But sometimes it makes sense for a company to ally itself with regulators or advocates against the competitors.

While managers must remain on guard against undue pessimism and passivity in dealing with environmental problems, they also need to beware of wishful or insular thinking that can intensify their environmental problems and cost their shareholders unnecessary money. These are some of the common pitfalls:

Letting business interests sway your opinion of scientific and economic analysis. Managers shouldn't let the costs of solving an environmental problem affect their judgment of the scientific evidence that identifies the problem. Pulling the wool over your own eyes may convince you that you've averted disaster. In the long run, however, the fact that you can't see it doesn't mean you're hidden from danger.

Assuming that maintaining the status quo is an option. It is common to use the status quo as a baseline – to look at the way things are today and to think about how you can change things on your own. But some change is likely to occur in any case, and managers need to be realistic about their ability to keep things as they are.

Avoiding dissenting opinion. People find it comfortable to talk with those who share their views. Managers need to keep their minds open to the new perspectives and new facts that can come from regular conversations with government officials, environmentalists, and others outside their usual circle.

Those problems can all be overcome. If executives bring to environmental decision making the same kind of optimism, opportunism, analytic thinking, and openness that they instinctively bring to bear on other business problems, both their companies and the environment will benefit.

Five Approaches to Business and the Environment

Managers should make environmental investments for the same reasons they make other investments, says Forest Reinhardt: because they expect them to deliver positive returns or to reduce risks. Reinhardt has identified five approaches that companies can take to bring the environment down to earth and determine when it really pays to be green.

Differentiating Products. Through product differentiation companies create products or employ processes that offer greater environmental benefits or impose smaller environmental costs than those of their competitors. Such efforts may raise the business's costs, but they may also enable it to command higher prices, to capture additional market share, or both.

Managing Your Competitors. Some companies may be able to derive environmental and business benefits by working to change the rules of the game, joining with similarly positioned companies within an industry to set private standards, or helping to shape the rules written by government officials.

Saving Costs. A third approach to reconciling shareholder value with environmental management focuses not on competitors but on internal cost reductions that simultaneously improve environmental performance. Examples include reducing solid-waste generation, cutting energy use and redesigning inflexible or wasteful routines.

Managing Environmental Risk. For many businesspeople, environmental management means risk management. Their primary objective is to avoid the costs that are associated with an industrial accident, a consumer boycott, or an environmental lawsuit. Fortunately, effective management of the business risk stemming from environmental problems can itself be a source of competitive advantage.

Redefining Markets. Some companies are following several approaches at once and, in the process, are rewriting the competitive rules in their markets. This strategy, which can entail significant market, regulatory, and scientific risks, is usually undertaken by leaders in industries that face intensifying environmental pressure.

- Adapted from "Bringing the Environment Down to Earth"

Excerpted from the article "Bringing the Environment Down to Earth" in the Harvard Business Review, July-August 1999.

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