The ABCs of Addressing Climate Change (From a Business Perspective)

 
 
How can business leaders cut through the noise and actively address climate change from an economic perspective? John Macomber proposes a list of ABCs.
 
 
by John Macomber

It's Climate Week in New York City. The schedule features a UN Climate Summit, a People's Climate March, the Clinton Global Initiative, substantial criticism of the whole endeavor, and plenty of agitated interaction.

There is a lot of noise here. How can businesses cut through the commotion and do something? Based on my experience as a real estate and construction CEO and my academic research on urbanization, new cities, and the finance of sustainable infrastructure, I propose these simple ABCs (actually A-F) for business leaders to address climate change. These are approaches, business models, and concrete steps to describe an element of what financiers, governments, and even households must do to combat climate change. Some are close to home, some are in emerging markets. All are in the built world of infrastructure, buildings, and property.

 

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A: Actuarial Thinking. Assessing probabilities and portfolio risk is how property insurance companies look at what might or might not happen to a building in a flood zone. It's how financial managers cover the possibility of unlikely but high impact events. Why would asset owners—never mind groups of citizens—not want to use a probability-based approach to resilience of physical portfolios in the face of sea level and weather fluctuations? For example, Con Ed in New York has invested to elevate the number of waterproof transformers and switchgear in case the city has to face another event like Superstorm Sandy . This is not a noted warming alarmist utility. Globally, the new issuance of weather linked derivatives like catastrophe bonds exceeds $20 billion annually and continues to grow, according to the Wall Street Journal. These bonds are purchased by portfolio investors. Even the real estate industry's leading trade group, the Urban Land Institute, sees resilience-modeling and adaptation investments as mainstream tools of property (and of course human) disaster risk, response, and recovery preparation.

B: Basic Resources. There is massive growth in urban populations as hundreds of millions of people move to cities seeking opportunity (UNPD). Already, there is not enough clean water, clean air, or accessible energy. And there is too much garbage and too much traffic (McKinsey). Continued urbanization only exacerbates these shortages. Society needs collectively to address the basics of water, energy, waste, and transit so that we can all do more with the resources we have. Investments in efficiency and access benefit many sectors. My research in China, India, Indonesia, Brazil, Mexico, Peru, Poland, and the US indicates increasing pressure on these basic resources - and worsening inability of governments to self-fund investment in advance. Hence, there are increasingly more and better opportunities for the private sector to create value for everyone and to capture reasonable value for investors.

“Society needs collectively to address the basics of water, energy, waste, and transit so that we can all do more with the resources we have”

C: Cities. The UN activity this week focuses on federal and global regulations. But today's national leaders are largely paralyzed either by politics or by budgets. In practice, local leaders can often take more pragmatic action, faster. Mayors can influence municipal purchasing, building zoning for density and efficiency, taxi fleet selection, mass transit, waste handling, congestion pricing, and more. The annual capital budget for New York City alone is about in excess of $5 billion. In London it is £6.3 billion, or more than $10 billion. Add up the major cities of the world, and that's a lot of direct procurement power. Neighborhoods, districts, and cities are also the right scale for private investment in, say, water projects, power distribution, toll roads, energy performance, and contracting. Furthermore, businesses can figure out what to do regarding investment in basic resource infrastructure at the city scale much more readily than at the state or federal scale. As former New York City mayor Michael Bloomberg has said, "Nations talk. Cities act."

D: Demand Management. Many policy suggestions include blanket restrictions on activity (let's have mileage caps) or pure supply-oriented interventions (let's pump more groundwater even as aquifers get dried up). But managing demand - using modern sensors and valves, remote measurement, big data optimization algorithms, mobile apps, and other innovations - is a more powerful way to benefit citizens and businesses than just pumping more stuff through the same leaky pipes and wasteful devices. Companies like EnerNOC, in the demand response space, and Johnson Controls, in the energy performance contracting space, are business that create financial value from stretching resources farther. Everyone benefits.

E1: Economic Development. Economic development is accelerated in areas where the input costs (like land and energy and water) are available and are less expensive and where people want to live (because there are jobs there and it's pleasant). Human development also depends on effective provision and use of resources, as well as the ability to get to work and back quickly. Using water, energy, power, and transit capacity effectively is good for workers and good for business, as HBS colleague Michael Porter points out in Clusters and the New Economics of Competition. Hong Kong, New York, Santiago, and Singapore are all illustrations of this alignment.

E2: Emerging Economies. Why am I so interested in building the infrastructure of these nations with respect to business and climate? Here is an illustration. In Brazil, one of the ten most populous nations in the world, 34 percent of all energy consumption is used in transportation. According to the InterAmerican Development Bank, most of this is consumed in cars and trucks. Eighty percent of the fuel is from oil. Based on personal observation, I feel safe in saying that much of this fuel is burned idling in traffic jams. Investments in more efficient mass transit, more efficient cars, and more efficient traffic patterns would pay back in more growth, as Michael Smith pointed out in the National Review recently. Similarly, electric power accounts for another 26 percent of the energy mix in Brazil. While most of this is derived from hydropower, more than 30 percent is lost in waste, leakage, and heat. That's a lot to throw away. Investments in demand management and in investments in transmission and distribution allow people to get more work from the same kilowatts, allow renewable energy to go farther in the mix, and also reduce CO2 generation.

F: Finance. Finance matters. Too often I have heard of otherwise worthy projects, "We have it all figured out except the money." I'm not talking about rapacious financial manipulators making trading profits like Michael Lewis' Flash Boys. I'm talking about using the tools of finance to build subways, water treatment plants, bridges, efficient roads—all of which add to prosperity and, when well done, mitigate carbon. In emerging markets, people who work in infrastructure development often bemoan a "funding gap." But as Bertrand Badre, CFO of the World Bank, points out, there is plenty of capital in the world. There is not a funding gap; there is a project gap. Infrastructure projects are not up to investment standards. How can the tools of finance be applied to more and better build power, water, waste, and transit efficiency projects? This matters a lot, regardless of whether you are worried about carbon or not. The steel and concrete that is being placed all over the world right now is going to determine how hundreds of millions of people will live—their resource footprint and their economic prospects—for hundreds of years to come. Here's my infrastructure finance advice:

  • Projects must be additive. Don't fund a road project here, a water project there, an energy project a third place; instead, fund them from a rational pipeline where the projects add up to a competitive, resource efficient whole.

  • Capability must be additive. Work with lenders (and with borrowers) who have done this before. The money is better spent when the municipality borrowing for the dam or road or power grid is a competent counterparty.

  • Make the cash flow tradable. Don't require the early investors to tie up risk capital for the 30-year life of an infrastructure project; get the debt or equity in shape to sell to long term holders. This means less custom work for lawyers, consultants, and investment bankers. It means more capital at work on water, roads, power, and efficiency. And that contributes to more human development, more economic development, plus LESS wasted energy, less CO2, less wasted water.

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About the Author

John Macomber teaches the course "Sustainable Cities: Urbanization, Infrastructure, and Finance" at Harvard Business School