31 Oct 2007  HBS Cases

Climate Change Puts Heat on GMs

Ready or not, companies are being swept up in the increasing public debate over global climate change. How should firms respond? A case study exploring how financial service giant UBS thinks through the issues has students coming down on different sides. Key concepts include:

  • Firms are increasingly called upon to respond to public concerns and actions by competitors on the issue of climate change.
  • 'Green' responses that are simple profit maximization won't impress activist organizations looking to reward exemplars.
  • Companies who take leadership roles in the environmental arena also open themselves up as critical targets should something go wrong.
  • In responding to requests from organizations, general managers should think strategically about how, if they get the decision right, the company can serve society while also improving the bottom line.

 

What is the responsibility of business regarding social issues? And how does that jibe with maximizing profits? In "UBS and Climate Change—Warming Up to Global Action?" Associate Professor Felix Oberholzer-Gee and Professor Forest Reinhardt present the dilemma facing one of the world's leading financial services companies as it determines its stand on a matter of increasing public prominence.

Oberholzer-Gee teaches the case in Strategies Beyond the Market, a second-year elective that focuses on the interplay between business strategy, governments, and non-governmental organizations (NGOs).

"An MBA's basic intuition is that the less government involvement there is, the better," says Oberholzer-Gee. "In fact, a number of the competitive advantages enjoyed by companies have come from the regulations that governments impose on markets." In the course's last module, Oberholzer-Gee turns to NGOs and social activists, whose influence can equal any government's.

You need to do things that are about more than simple profit maximization.

Based in Switzerland, UBS is a financial services company with no obligation to comply with the Kyoto Accord or European Trade Union restrictions on carbon emissions. It has a strong internal culture of environmental responsibility, yet at the opening of the case UBS discovers that its stance on global warming lags behind industry competitors.

Is 'rational' the best decision?

UBS considers four options in its approach to global warming. First, it could do nothing and stabilize its emissions at the company's 2005 levels with internal energy-saving strategies and the purchase of carbon emissions offsets. A 10 percent reduction would fall in line with industry practice and cost $3.7 to $5.9 million; 40 percent would provide an innovative, positive story for the public and cost $6.4 to $8.6 million; and a 100 percent reduction would cost $9.1 to $11.3 million and match industry leader HSBC.

According to Oberholzer-Gee, about half the students voted for UBS to maintain emissions at 2005 levels; he says that these students tend to take the rational approach that it's fine to spend $100 on insulating a building if that brings down the energy bill by $100.

"The only problem is that if an NGO or activist organization like Greenpeace wants to reward the companies that contribute to the greater good, it won't know how to 'read' this company," he observes. "To send credible signals to the public, you need to do things that are about more than simple profit maximization."

A bit more than a third of the students suggested a 40 percent reduction in emissions, while others thought an even more aggressive stance would be beneficial.

Leaders pay a price

What comes out in discussion, however, is that leading the pack often isn't in a company's best interest.

"The moment you are the leader, you become a target," Oberholzer-Gee says. If BP is involved in an environmental accident, for example, it's much bigger news (and a much bigger problem) for a company that has made a point of publicizing its commitment to protecting the planet than it would be for a company like ExxonMobil, which is still contending with fallout from the Exxon Valdez oil spill in 1989.

"As a general manager you're going to get letters from organizations that say do X, Y, or Z," Oberholzer-Gee observes. "How should you think about them? There are a number of strategic moves that companies can make that will contribute positively to the bottom line if they get these decisions right."

About the author

Julia Hanna is associate editor of the HBS Alumni Bulletin.