Is a Stringent Climate Change Agreement a Pot of Gold?

Reading this month's comments, HBS professor Jim Heskett wonders if we even need a climate change agreement as a catalyst to foster innovation and the VC investment required to support it. (Online forum has closed; next forum opens February 4.)
by Jim Heskett

Summing Up

Do we even need a stringent climate change agreement? Judging from this month's comments, a question can be raised about the necessity of a climate change agreement, stringent or not, as a catalyst to foster innovation and the venture capital investment needed to support it. Some readers asked whether the objectives of the kind of agreement being discussed are even relevant to the world's needs. While suggesting that major government initiatives will be needed, Phil Clark suggested a different direction for them. He said, "Let's step away from arguments … over where we are causing global warming and turn that energy and resources into actually improving our way of life with limited impact on our world."

Tom Dolembo questioned whether agreements are necessary. He believes that change driven by entrepreneurs seeing an economic opportunity is more important than, and might even be impeded by, an international agreement. As he put it, because "scale advantage is reversed" in the alternative energy field, change "will be driven from the bottom, not the top." In other words, will venture capital and change require a major agreement? In fact, as Jim Winkelmann pointed out, such agreements can be changed, providing little assurance that a "context" for change can be maintained long enough to allow entrepreneurs to earn a sufficient payout.

Zach Allen argued, in a sense, that a global agreement encouraging innovation to stop climate change assumes that it can be stopped. If this is not the case, as he suspects, it may encourage the wrong entrepreneurial efforts. In his words, "maybe jumping on this runaway bandwagon is good for short term profits, but … is terrible public policy." Gerald Nanninga saw another kind of problem. If entrepreneurial interests try to skew the response, in the form of an agreement, in one direction or another, it could limit the range of possible responses to be encouraged, thereby limiting innovation.

This is a debate more pertinent to countries with the venture capital to support the conversion of inventions into commercially viable innovation. As Allen Roberts points out, "… lacking as we do a worthwhile VC industry … the history of the last 100 years where Australia exports all its great ideas with little return will continue."

Michael Hogan teed up a number of questions by pointing out that without initiatives to create a vast infrastructure, progress achieved by innovators and venture investors will be piecemeal. In his words, "What will NOT emerge without collective government action are the transformations in the indispensable infrastructure … that will determine which types of non-finite-resource based opportunities innovators will be able to exploit beyond just curious little niche plays." What will it take to make this happen? Will it even take "collective" action? Or will it take a country with highly centralized leadership, like China, to lead the way, forcing other countries to act with or without an agreement? And should countries that will benefit most from the entrepreneurial opportunity, as Bharath Krishnan and Ajay Kumar Gupta implied, help finance others? What do you think?

Original Article

Entrepreneurship, as we study it, is defined by my colleague Howard Stevenson as "the pursuit of opportunity beyond the resources you currently control." In short, managers manage assets, entrepreneurs manage opportunity. And instead of taking risk, they manage it. Further, opportunity arises out of a change in something called "context," namely the competitive environment, whether it is due to legal, social, regulatory, or other kinds of change. For example, the rise of hackers changed the "context" in which information was communicated, providing an opportunity for entrepreneurs to create an Internet security industry. Let's apply this thinking to the recently reinitiated global conversation about climate change. If one subscribes to precepts of entrepreneurial management, there should be a pot of gold at the end of a climate change agreement rainbow, regardless of how one feels about global warming or its causes.

Carrying the hypothesis one step further, to the extent that climate change agreements change the rules governing national policies and actions (the "context"), they should represent opportunity. In fact, the more stringent the rules, the greater the entrepreneurial opportunity, a lesson from which U.S. automakers could have benefitted years ago. This should be the case at least up to the point at which shorter term costs become greater than industry or society can bear. Anything up to that point would be a net advantage, at least to some industries or nations.

Who would benefit most from stringent guidelines? Presumably, countries that spend the biggest proportion of their gross domestic product on new ideas, those whose stream of patents is greatest, and those in which the atmosphere for entrepreneurs is most favorable (in terms of venture capital financing, a socially positive attitude toward entrepreneurship and the failure that it often entails, and a market for new ideas). If that's the case, countries that should be at the forefront in advocating more stringent rules regarding global warming should be countries like the U.S., China, and Israel. India, on the other hand, is not well positioned to take advantage of the opportunity, as pointed out recently by Vikas Bajaj.

The problem is that one can't be sure whether or not climate change agreements are enforceable. But should that matter as long as people believe in the need for action? That is, in this case, does belief in the need to create the rainbow help insure that the pot of gold is in fact there and is attainable? The question for entrepreneurs, of course, is whether the level of uncertainty argues against starting the journey toward that pot of gold.

How strongly should venture capitalists around the world get behind climate change agreements? Should governments with highly-favorable environments for entrepreneurship, such as the U.S. and China, push even more strongly for stringent rules or guidelines? Should they go so far as to provide venture capital funding (through some form of sovereign fund) to those economies that are short of it? Is a climate change agreement a pot of gold or only the rainbow? Does it matter? What do you think?

To read more:

Vikas Bajaj, "In India, a Developing Case of Innovation Envy," The New York Times, December 9, 2009, pp. B1 and B7.

Howard Stevenson, "The Heart of Entrepreneurship," Harvard Business Review, March-April, 1985, pp. 85-94.

    • Tom Dolembo
    • consultant
    Timely Subject! I'm working with alternative energy entrepreneurs in Northwest Michigan, and reactions to recent world policy initiatives are mixed. Generally, the idea of some enormous world initiative driving their ventures would be interesting, but not really all that necessary or even desirable. Unlike traditional energy ventures, the new green industries are local, with models driving from the individual house up, not the power plant down. Rating houses (and prices) for efficiency has created a local boom in rehabbing older homes, as they are in Poland and many EEC countries. The disruptive nature of on-site energy venture models is interesting. Scale advantage is reversed.

    What has occurred here is that strategic alliances seem to be building between small advanced European companies and local start-up US companies, skipping the "big power plant" capital model for a flexible, light, local one. Instead of massive investment pools, targeted smaller investment outside regulatory perimeters is making inroads. Granted, Gulf of Mexico Wave Projects are billion dollar items, but the major change I can see from this Global Initiative is to induce a global alliance of smaller fast-growing technologies, which changes the cost of entry allowing smaller capitalizations to have high impact, and offer a very local profitability model to emerge in a formerly high regulation/high capital area. This is the IPhone of sunlight and wind, if you will. Individuals investing positively, locally, in a direct impact on their energy costs will massively change how this industry develops, not matter how stringent the actual rules are or who enforces them.

    Best Guess: this will be driven from the bottom, not the top.
    • Zach Allen
    • President, Pan EurAsian Enterprises
    Of course, the government has created an opportunity with imposition of regulations. Ask any lawyer or accountant about that.

    The question in my mind is whether or not the regulation, the opportunity, distorts the market for a supportable reason. I have real doubts about carbon dioxide regulations in this regard.

    Unfortunately, the argument over cliimate change has exhausted the public during debate over whether or not the climate was changing. That is unfortunate. I believe that there is significant and satisfactory evidence that it is.
    That leaves two questions: are the changes harmful, and what can we do about it.

    Neither of these questions has been satisfactorily debated to justify a major distortion of the world economy. As for what we can do about it, there is a significant amount of evidence that the answer is "little or nothing."
    If we can do little or nothing to stop climate change, then expensive programs to reduce and control CO2 emissions are badly misguided.

    When I point this out to scientists, who grudgingly admit I may be right, they seem all to reply uniformly, "But, we need to do these things anyway." Vere unsatisfactory.
    Maybe jumping on this runaway bandwagon is good for short term profits, but it is terrible public policy.
    • Gerald Nanninga
    • VP, Retail Ventures, Inc.
    If I understand correctly, the question is this: Should venture capitalists more aggressively try to influence governments to more radically change the status quo, because changing environments tend to favor the entrepreneur.

    I think the answer depends on the type of change trying to be regulated. For example, if governments are narrowly pushed into looking at wind power as the answer, it will cut off entrepreneurial opportunities in non-wind areas. Hence, for entreprenuership as a whole, it may be wise to keep governments out of prescribing the particular solutions which the change necessitates.

    On the other hand, if you are an individual venture capitalist, you may desire such a narrow definition of solutions, since it reduces the risk of which technology to back. But then again, when risk is eliminated, there is a greater likelihood that the incumbant industrial giants will step in and crush the entrepreneurs.

    Therefore, I would say that venture capitalists benefit from using influence to upset the current status quo, but may not benefit from using influence with governments to help define what the new status quo should look like.
    • Jim Winkelmann
    • Manager, Blue Ocean Portfolios
    Any enforceable climate change agreements would impact many aspects of commerce around the world. Obviously in the short term the development of new products and services addressing compliance conformance issues should flourish. However enforceable climate change agreements could also disappear and with it the demand for these new products and services. Is it exceptionally risky to invest and execute a for profit business that is completely dependent on political whims? (remember ethanol a few years back!)

    Of course venture capitalist supporting enforceable climate change are in it for an economic purposes - but does that in itself lead to political corruption? Are we asking for trouble when well funded venture capitalists get in bed with politicians? Could we be creating an environment that creates scandals for all and gold only for a chosen few? Will venture capital acting under the guise of entrepreneurialism trigger political scandal and corruption?
    • Phil Clark
    • Clark & Associates
    There will be great opportunities to improve life and create new businesses that focus on how we use resources to support life on our planet. I agree with Tom Delembo that the most successful will be driven by the smaller businesses. I do think that a commitment by governments to large projects will still be needed.

    I do not think it is wise to focus on climate change inititives to limit global warming. Climate does change. To which we have little impact. We do impact the QUALITY of air and water on our planet more than whether we are causing warming. Let's step away from the arguments and battles over where we are causing global warming and turn that energy and resources into actually improving our way of live with limited impact on our world. When we do that we can open many doors to new ways of life, new businesses, and created policies that benefit man and our planet.

    I spent 35 years in the weather business and at one time managed the largest climate observation network in the world. I saw too much time and energy fighting over "global warming" and too little spent on understanding how climate impacts on our lives. I recently listened to an astronaut discuss what is needed to journey to Mars. He said that what we learn to be self-sustaining on a 5 year mission to Mars will open great opportunities to become more self-sustaining and less wasteful here on earth.
    • Anonymous
    Such rules and regulations must be based on facts and evidences that are unequivocal to form the necessary consensus and also to validate the need for stringent climate regulations. The very lack of which implies that the available facts and evidences are not sufficiently strong and convincingly verifiable and conclusive to carry the necessary weight to steer the need for stringent climate change agreement, globally.

    However, the perceived change of 'context' does seem to provide a window of opportunity for some to turn the ambiguity into an opportunity that may or may not turn out to be a pot of gold. Nonetheless, with or without stringent climate change agreement, innovation in green technology does seem a better way to a better future.
    • Allen Roberts
    • CEO, StrategyAudit
    There is no doubt in my mind that the emergence of climate change and the structural actions necessary to minimise the impacts has become an opportunity in waiting, irrespective of the regulatory framework that may evolve.
    The liklihood of a worthwhile global regulatory regime of any value is very small in my view.

    The impediment is the "sticky" nature of the status quo in each country, who wins and who loses as the changes evolve, and where the power to profit from the retention of parts of the status quo lies, and nature of the regulations that emerge in the individual countries.

    Politics has become the biggest stumbling block. As entrepreneurs & business people we look at the opportunities that the changed environment (in the wider sense of the word) throws up, and try to manage both the opportunity and the incumbent assets for which we are responsible, and the power of the latter will slow things down for incumbent industries and deny resources for those who have little to lose, and are therefore the ones who can drive rapid change.

    In Australia, lacking as we do a worthwhile VC industry, as distinct from the vulture funds, the opportunities will outweigh our ability to leverage them, and the history of the last 100 years where Australia exports all its great ideas for little return will continue.
    • Anonymous
    There are two reasons for venture capitalists to leave the political lobbying of global climate change off their action list:

    First, it seems to me that the economic principles of supply and demand are alive and well for carbon-based fuels. Increased demand has pushed prices high enough in the USA, Europe the and the rest of the developed world to economically replace carbon fuels with other energy alternatives. Many alternatives are green technologies and within the scale of venture capital investment. This is the 'context' that techno-entrepreneurship is all about. What more should venture capitalists want? If it isn't broke, don't fix it.

    Second, the science of climate change is not scientific enough to really know what will happen in the future. We can't even predict local weather forecasts beyond five days and even then they are often wrong. Using a treaty to make climate change a political fact in the face of scientific uncertainty is to change science from a methodology into a theology. Are we really ready a for globalized theocracy? In that 'context' we will surely be 'blinded by science'.
    • Anonymous
    Alas! That we came to this level and realized what has come to pass this late. Well the point here is not really whether a climate change agreement is a pot of gold or only the rainbow...the point is more appropriately addressed in the next question of whether it matters. No it doesnt. Now while I am not debating with whether entrepreneurs should or should not miss this opportunity, I only am concerned about the need for something to be done about this issue.
    • Anonymous
    In my view, this is a perfect example of paradox, the conflict between rationality and commerce.

    Conventionally, commerce is considered to be the game of rational players.

    What about science?

    As I understand it, true science without rationality is like daylight without the sun.

    If both science and commerce are based on rationality, then, what is going on? Is commerce becoming irrational? Or is it science that is becoming irrational? Where exactly is the inconsistency hiding?

    I believe the contradiction lies in the fact that for 'scientifically' minded people, the arguments supporting climatic change are rational and the arguments rejecting climatic change are irrational, even if there are no commercial benefits or losses (no 'pot of gold'), they only see the gravity of risk in ignoring the scientific warning; while for 'commercially' minded people, the arguments against climatic change are perfectly rational and the arguments supporting climatic change are utterly irrational if there are potential benefits for them and/or losses for the others ('pot of gold').
    • Sivaram Parameswaran
    It is a very pertinent definition of Entrepreneurship - pursuit of opportunities. In that sense, the world's attention towards the adverse effects of climate change does appear to be a pot of gold for many entrepreneurial minds. More than the stringent norms and monitoring mechanisms, it is the hope of a better future to human kind, that promises tons of new opportunities, with many ideas, innovations and industries in the waiting to exploit those.

    I would classify the opportunities into two classes. One, driven by the real need for stringent controls over the verifiable distraught of climate change and the real alternatives that try to alleviate that problem, in terms of providing a clean environment, safe drinking water and alternate energy sources, that leaves less stress on planet earth.

    And another class of opportunity, purely driven by theoretical numbers or the human paranoia over the possible adversities of climate change - on similar lines with the panic that shrouded some section of the human race around the Y2K problem. The Y2K problem did provide a huge business opportunity to many in the IT services industry - each churning out creative ways to solve the date problem - and in the end, it so appeared that the world did not miss a beat when the clock ticked past the midnight of the millennium.

    On the same lines, there has been this hysteria surrounding the possible armegadon and the dire need for a greener planet. Sure there will be an industry that is all set to boom - if not already there. Rating agencies, consulting companies, Green advocates, all providing their own wisdom to stay Green and to go eco-friendly. Already, I can see in many organizations across the globe, it is so out-of-fashion to be not 'Green' or not to have a 'Green Club' of some form.

    Creating awareness towards the real problem that we inflicted upon ourselves is one thing and creating mass hysteria is another. I bet, the pot of gold of opportunities would be heavier towards the later.
    • Michael Hogan MBA'88
    First, it's remarkable to me how many people have taken this as an opportunity to display unsolicited and uninformed opinions about the state of the science around anthropogenic climate disruption, the scope for collective action to reduce the chances of catastrophic acceleration of climate disruption, or the likely costs of such action. Suffice it to say, none of the posts above that elected to opine on these matters shows evidence of expertise either in the science, the technical issues and range of likely costs involved in converting to a zero-carbon energy system, or where the boundary lies between what science can tell us about our choices, vs what values, ethics and the discipline we learned at HBS about decision-making under conditions of uncertainty tell us about our obligations to act.

    Now, to the question posed by Prof. Heskett. Innovation and venture investing will both inform and be informed by the shifting zeitgeist, whether or not it is complemented by collective government action. That seems clear, though exactly what pots of gold will emerge are impossible to predict with any reliability. What will NOT emerge without collective government action are the transformations in the indispensable infrastructure upon which the electricity, heating and transportation fuel systems rely, and that will determine which types of non-finite-resource based opportunities innovators will be able to exploit beyond just curious little niche plays. In industries like energy, transportation and communications, the big pay-off from innovation follows infrastructure, though infrastructure is often pushed by innovation - see railroads, cars, broadband internet as just a few examples.

    Early innovation was important, but it would have come to little or nothing without the subsequent commitment by government or government-regulated monopolies to construct the infrastructure that opened the way to the technological revolutions that followed. So when it comes to finding opportunity in a transformation to a zero-carbon energy system - which as some above have said, is a no-brainer for energy security and economic growth reasons whether or not you accept the moral obligations to act on the basis of at least 100 years of accumulated scientific evidence of anthropogenic climate disruption - follow the infrastructure. If you're in "clean tech" and want to be the next Penn Central, General Motors or Google, push for collective action (what Tea Partiers like to call "socialism", but what less hysterical people recognize as "government") on the development or re-design of the necessary infrastructure.
    • Barry Shere
    • Director of Finance, LACIPC
    It's certainly a pot of something.

    As Mr. Allen points out in his reference to lawyers and accountants, the unholy alliance between business (those who should be producing things of real value) and the government/political/social worker class may be one way to achieve redistribution of wealth, but it will constitute a horrendous waste of resources.
    • Jay Somasundaram
    • Systems Analyst
    Where is this pot of gold coming from?

    Should we be demanding that early polluters pay back some of their excess profits.
    • Bharath Krishnan
    This isn't a debate of ethics anymore; it is what brings in a better ROI in the short-run (refer to "short-run" in this context as anywhere between one day and 20 years).

    What we need to be cognizant of is that as an "economic species," we have roiled the planet's natural resources and called it "development."

    Dr. Heskett has asked correctly. Countries that support entrepreneurship and industrialization should pay more.

    Only time will tell whether we should have had these discussions about a hundred years ago.
    • Dr. Ezzat Kenawy
    • Dr of Economics, Kafrelsheikh University
    Hi, it is a very pertinent definition of Entrepreneurship. I agree with Michael Hogan that innovation was important, but it would have come to little or nothing without the subsequent commitment by government or government-regulated monopolies to construct the infrastructure that opened the way to the technological revolutions that followed. There is no doubt in my mind that the emergence of climate change and the structural actions necessary to minimise the impacts has become an opportunity in waiting, irrespective of the regulatory framework that may evolve.
    • Philippe Gouamba
    • Vice President of Human Resources, Skyline Windows, LLC
    Climate change and global warming are NOT my area of expertise but I would like to share my humble opinion.

    I have just returned from Tokyo, Japan. I spent Christmas and New Year there. I was amazed at the fact that in Japan, cell phones have cameras with up to 12.2 megapixels, their toilet seats are heated and their television channels broadcast in 1080p. My point is that we should never underestimate the strength of human ingenuity and creativity. If an entrepreneur can become a millionaire peddling pet rocks (how can we forget that one?), surely someone will figure out how to make a few bucks off climate change and global warming.

    Opportunities are everywhere. The only question remaining is: who will have the guts to identify a need and risk some seed money on a idea that he /she truly believes in, before the next man gets to it?
    • Ajay Kumar Gupta, AIM, Manila
    • Management Faculty, IBSAR, Belapur, Navi Mumbai
    The stringent climate change agreement mainly focuses on three things i.e. GDP, patents and opportunities for entrepreneurs. It also emphasizes that the more stringent the rule, the greater will be the opportunities for the entrepreneurs. Who will benefit from the climate agreement and why? The article also discusses that U.S., China and Israel are the major emitters of greenhouse gases or carbon and they will benefit the most since they spend a major share of their GDP on new ideas. Most of countries are not in a position to meet the expenditure in controlling the emission of carbon.

    I am a bit skeptical whether the climate change agreement is pot of gold. In present form it seems like rainbow. Why because imposing the agreement to the countries those are not prepared or capable to face the challenges either financially or politically may not render the encouraging outcomes. Instead, the countries most affected must sign the agreement first and provide example to other counties. The counties most affected with carbon emission are the countries with favorable government support, more patent rights, opportunities for start up or entrepreneurs and socially positive attitude towards climate change agreement.

    There are basically two sources of power that have the capacity to influence or impact the climate change agreement. They are capitalists and government. Since most of the industries are operated by these two forces, they should make public private partnership (PPP) to sign the agreement. If these two segments are ready to take action, the climate change agreement will definitely will a pot of gold otherwise only a rainbow.

    There should be a mechanism to segregate the counties in terms of carbon emission from highest to lowest and the agreement should be in Phase wise. At the same time, to make the agreement a truly pot of gold, the highest machinery or authority should make provision to help or support the counties with less or no capacity financially and politically. Political and capitalists willingness is required to create greater flexibility, freedom and good environment for entrepreneurs to operate. More stringent rule will provide greater opportunities for entrepreneurs.

    The analogy of hackers, internet security industry and U.S. automakers are classic examples. They show how the context provides opportunities of entrepreneurs. In this way the stringent climate change agreement is pot of gold. However, to make it more effective, executable and enforceable, countries like U.S., China and Israel should set up the example by signing the agreement in first phase and also supporting the less enabled countries.

    In my view rather than going for one time agreement by all the counties, there should be phase wise agreement. The countries having favorable environment in terms of political support, opportunities of entrepreneurs, society positive attitude should sign agreement first and execute the agreed norms so that other couriers in the pipeline can learn lesson from them.

    The developed countries should also provide means and resources to countries not capable or less capable of fighting against greenhouse gases. Countries with less capacities should be provided financial support with easier and flexible terms or with huge subsidy by developed countries. Then the stringent climate change agreement will definitely yield a pot of gold.
    • Narendar Singh
    • Retired from Defence Forces and also as a Professor in HR, Freelancer
    Historically climate has been growing warmer. However there is a curve in it. There are phases of increase and vice a versa. The earth in the celestial system is affected by many factors which are unknown to mankind. Hence, with progress of knowledge such isues will keep coming up.
    The main issue is that there is a bogey now to assist firms. The same bogey was raised for nuclear energy. With all its deficiency the future is in it for supplying the growing aspirations of mankind, and its use is expanding. Same the western countries are now doing by raising the issue of climate. The question is simple: why should citizens of US and Europe consume energy 100 times more than that of China and India. Let there be parity or the penalities are going to be severe.

    The man must be concerned of his environment. However, the burden is for all to share. The economic plunder of west cannot continue or else no treaty will now work. The companies can keep on advertsing and asking their governments to support them but their success will be limited.