Sustainable Solutions – Page 5

Rethinking the Measure of Growth

Posted on 19 July 2010 | by Jay Kimball | 1 Comment

Lat year I posted an article (Nobel Laureate Joseph Stiglitz on Sustainability and Growth) about an interview with economics Nobel laureate Joseph Stiglitz at the Asia Society in New York City. Stiglitz talked about how “what we measure determines what we grow” and the dramatic negative side-effects a metric like GDP can have on societal well-being.

Today, Wayne Arnold at The New York TImes builds on this idea in his article Rethinking the Measure of Growth.

Highlights from NY Times Article

The quest for more plentiful and less expensive oil for fast-growing Asian economies has also brought a wave of offshore drilling from India and the Gulf of Thailand, to Vietnam and Bohai Bay, on the northeast coast of China.
In considering this risk and the increasing evidence of the toll that rapid economic development is already taking on Asia’s environment, economists and other experts in Asia have taken up the call to re-examine the prominence of economic growth as a measure of policy success, particularly the use of gross domestic product.
Asian governments have become particularly enthralled with gross domestic product (GDP) statistics for validation, becoming what Vishakha Desai, the president and chief executive of the Asia Society in New York, has called “G.D.P. junkies.”

For local officials in China, gross domestic product was, until recently, more than just a barometer for gauging policies, it was the measuring stick against which their futures in the ruling Communist Party were determined. Economic growth still ranks as one of the chief criteria for determining party promotions, according to Tan Kong Yam, an economics professor at Nanyang Technological University in Singapore who offers a course for mayors from China.

For such officials, “there is an enormous incentive to promote investments and industrial production,” he said. “This explains why there’s enormous pollution.”

Gross domestic product has come in for some particularly hard knocks since the global financial crisis, notably after a report last year whose co-author was Joseph E. Stiglitz, a Nobel laureate in economics, that said reliance on gross domestic product had blinded governments to the increasing risks in the world economy since 2004.
Overlooking that risk has possibly cost future economic growth, the report said, and has contributed to a looming environmental crisis.

“Market prices are distorted by the fact that there is no charge imposed on carbon emissions,” the report said. “Clearly, measures of economic performance that reflected these environmental costs might look markedly different from standard measures.”

Economists in Asia say the debate about gross domestic product misses the point. Gross domestic product as a statistic is sound, they say; what is wrong is the fascination in government with what it measures — the sum total of a nation’s annual production.

“The problem is not G.D.P.,” said Bhanoji Rao, a visiting economics professor at the Lee Kuan Yew School of Public Policy in Singapore. “The problem is the culture of consumption.”

Mr. Rao is part of a growing body of economists, largely in academia, who question whether rapid economic growth rates in Asia — from the 10.3 percent expansion in giant-but-poor China to an expected 15 percent growth this year in tiny-but-rich Singapore — are necessarily producing a happier, healthier Asia.
Some Asian governments, China’s included, have been trying to recalibrate gross domestic product to include the cost of growth to the environment, creating a green gross domestic product. Such efforts, said Mr. Tan, the Nanyang professor, have been frustrated by the difficulty in determining the future cost of environmental destruction.
What is needed instead, some economists say, is a wholesale re-examination of development’s goals. “There needs to be an internal debate within the developing countries about what is the path of development we want to have,” Mr. Rao said.

Andy Xie, a private economist in Shanghai, has long argued that the 1.3 billion people in China cannot realistically hope to live like Americans.

“That statement is truer than ever,” he said.

Beijing, at least, appears to have gotten the message, if its investments in green technology and public transportation are anything to go by. The Communist Party has also revised the promotion criteria for officials so that environmental conditions are included along with gross domestic product.

But economists like Mr. Xie and Mr. Rao warn that even with greener development, the result may still be the same if the goal remains an American-style standard of living. Asia may instead need to carve out a vastly different vision of prosperity that does not rely on ever-increasing levels of material consumption.

Creating Leaders Great at Performing in Uncertainty without a Clue as to Why

Posted on 14 July 2010 | by Belina | 3 Comments

There is an interesting phenomena going on in some of the major business schools in Europe. In some – you are not allowed to mention environmental factors as a major catalyst for new business models/thinking. It is “understood” that as a lecturer, you inspire the students with fresh thinking but only so far. Go further, and people just roll their eyes and pigeon-hole you as a treehugger.

Here are three quotes from top business leaders:

“The era of ‘abundance’ is over. The future will see our natural resources, from oil to food, having some level of restriction placed on them.” – Andy Bond, CEO, Asda (May 2009)

“We must rapidly wean ourselves off our dependence on coal and fossil fuels.” – Richard Branson, announcing investment of all profits from Virgin transport business, estimated at $3 billion over 10 years, to be invested in fighting global warming. (21 September 2006)

“Sustainability is here to stay or we may not be.” – Niall Fitzgerald, UK CEO, Unilever

Now, none of these guys are particularly treehuggy. And most MBAs would give their eyeteeth to fill the shoes of these guys – and yet – in many MBA programs – coverage of sustainability issues is absent, apologetic, sidelined, or sketchy.

Let’s stop tiptoeing around the obvious. Business leaders can handle the truth. Though there is uncertainty on what the impact will be, climate change is a global issue that will impact business. Period.

In 2008 the US Director of National Intelligence (DNI) presented to Congress the DNI report National Intelligence Assessment on the National Security Implications of Global Climate Change to 2030. Here are a few excerpts:

“The United States depends on a smooth-functioning international system ensuring the flow of trade and market access to critical raw materials such as oil and gas, and security for its allies and partners. Climate change and climate change policies could affect all of these—domestic stability in a number of key states, the opening of new sea lanes and access to raw materials, and the global economy more broadly—with significant geopolitical consequences.”

“In addition, anticipated impacts to the Homeland—including possible increases in the severity of storms in the Gulf, increased demand for energy resources, disruptions in US and Arctic infrastructure, and increases in immigration from resource-scarce regions of the world—are expected to be costly. Government, business, and public efforts to develop mitigation and adaptation strategies to deal with climate change — from policies to reduce greenhouse gasses to plans to reduce exposure to climate change or capitalize on potential impacts—may affect US national security interests even more than the physical impacts of climate change itself.”

“Climate change is a threat multiplier in  the world’s most unstable regions.”

“From a national security perspective, climate change has the potential to affect lives (for example, through food and water shortages, increased health problems including the spread of disease, and increased potential for conflict), property (for example through ground subsidence, flooding, coastal erosion, and extreme weather events), and other security interests.”

These leaders are talking about fundamental shifts in ‘givens’ that require action, a joined up way of behaving, new ways of thinking, and new approaches. And our top business schools should be on the leading edge.

I first got interested in business schools ignoring the big elephant in the classroom two years ago when I was delivering a course on dominant business metaphors and implementing change. I wanted to say one line – one sentence inviting students to ponder how the nature of sustainability planning would be different if organisations, in addition to approaching business as a ‘competitive sport’, also approached it as a living organism. The professor who brought me in said ‘no’ – that the MBAs would feel they were being hijacked away from the course they had paid for. There was a specific elective for sustainability – and outside of that – best not to mention those issues.

Over the past few months, I’ve been speaking with several top MBA programs in Europe. Each is saying that leaders need, more than at any other time in history, to be able to lead in the presence of ambiguity, and to be able to perform collaboratively with high levels of uncertainty. Applied Improvisation skills are rather good for that, which is why I’m there in the first place.

What I find interesting in talking with these top MBA programs is that many are not contextualising the WHY of this new emphasis. Not addressing why managers/leaders would need to be so good at ambiguity.

“Growth for the sake of growth is the ideology of the cancer cell.” – Edward Abbey

I sat up when I saw this quote. It was refreshing to see in a lecture to potential MBAs at a leading business school in the Netherlands a few weeks ago. During my time at the school, two of the guest lecturers talked about sustainability – kind of…

The first lecturer used the Abbey quote (Abbey is a renown outspoken sustainability activist) and talked about the need to create ‘sustainable businesses’ quickly dismissed the notion of ‘sustainable’ as being linked to any ‘environmental’ issues… – it was about a business which can keep going, despite ‘adversity’. Given what scientists are saying about increasing disruptions over climate change, peak oil, peak minerals, peak water, how could adversity due to these factors not be mentioned?

The other lecturer had just hosted a biomimicry event two weeks before and deeply cared about the environment and sustainability. He works with top leaders in the best companies around the world on developing leadership skills. In his session, he talked about the profound need for leaders to be comfortable leading in the presence of ambiguity, but didn’t say why. In the break he confided that there are some groups with which you cannot talk about the environment directly. He had been gently testing the water with that day’s group and found he could mention it a bit…but only a bit. Several people were there for the express purpose of earning more money with an emphasis on value extraction, not particularly wealth creation/exchange.

Contextualising is a vital part of learning. The military does this routinely in their simulations – creating real world scenarios in the classroom. If we are facing a series of challenges (climate change, scarcity of water, oil, minerals, etc.) we must mention that as part of what leaders will face.

One initiative that gives me hope is the UN Principles for Responsible Management Education (PRME) initiative. The head of a leading MBA program in the UK turned me on to it. Finally – a global effort is being made to transform business schools and the Assocation of MBAs is part of it. In theory – that should mean that the taboo-ness of sustainability issues being explicitly mentioned, or mentioned only in specific electives – disappears.

As I continue to work with MBA programs, I will keep you posted on what I see going forward in this arena. And if you know of any best practice in this area – please post it here. Let me know!

“Unless we change direction, we are likely to end up where we are going.” – Chinese proverb

Sustainable Energy Security: Strategic Risks and Opportunities for Business

Posted on 12 July 2010 | by Jay Kimball | 3 Comments

Lloyds of London, the insurance market, and Chatham House have published a white paper on Sustainable Energy Security that details the risks and opportunities for business.

Lloyd’s CEO, Dr. Richard Ward, doesn’t mince words in his foreword to the white paper:

This report, jointly produced by Lloyd’s 360 Risk Insight programme and Chatham House, should cause all risk managers to pause. What it outlines, in stark detail, is that we have entered a period of deep uncertainty in how we will source energy for power, heat and mobility, and how much we will have to pay for it.

Is this any different from the normal volatility of the oil or gas markets? Yes, it is. Today, a number of pressures are combining: constraints on ‘easy to access’ oil; the environmental and political urgency of reducing carbon dioxide emissions; and a sharp rise in energy demand from the Asian economies, particularly China.

All of this means that the current generation of business leaders – and their successors – are going to have to find a new energy paradigm. Expect dramatic changes:

Prices are likely to rise, with some commentators suggesting oil may reach $200 a barrel.

Regulations on carbon emissions will intensify.

Reputations will be won or lost as the public demands that businesses reduce their environmental footprint.

The growing demand for energy will require an estimated $26 trillion in investment by 2030. Energy companies will face hard choices in deciding how to deploy these funds in an uncertain market with mixed policy messages. The recent Deepwater oil spill shows all too clearly the hazards of moving into ever more unpredictable terrain to extract energy resources. And the rapid deployment of cleaner energy technologies will radically alter the risk landscape. At this precise point in time we are in a period akin to a phony war. We keep hearing of difficulties to come, but with oil, gas and coal still broadly accessible – and largely capable of being distributed where they are needed – the bad times have not yet hit. The primary purpose of this report is to remind the reader that all businesses, not just the energy sector, need to consider how they, their suppliers and their customers will be affected by energy supplies which are less reliable and more expensive.

The failure of the Copenhagen Summit has not helped to instil a sense of urgency and it has hampered the ability of businesses – particularly those in the energy sector – to plan ahead and to make critical new investments in energy infrastructure. I call on governments to identify a clear path towards sustainable energy which businesses can follow.

Independently of what happens in UN negotiating rooms, businesses can take action. We can plan our energy needs, we can make every effort to reduce consumption, and we can aim for a mix of different energy sources. The transformation of the energy environment from carbon to clean energy sources creates an extraordinary risk management challenge for businesses. Traditional models that focus on annual profits and, at best, medium term strategies may struggle. Parts of this report talk about what might happen in 2030 or even 2050 and I make no apology for this. Energy security requires a long term view and it is the companies who grasp this who will trade on into the second half of this century.

Executive Summary

Businesses which prepare for and take advantage of the new energy reality will prosper – failure to do so could be catastrophic.
Market dynamics and environmental factors mean business can no longer rely on low cost traditional energy sources.
China and growing Asian economies will play an increasingly important role in global energy security
We are heading towards a global oil supply crunch and price spike.
Energy infrastructure will become increasingly vulnerable as a result of climate change and operations in harsher environments.
Lack of global regulation on climate change is creating an environment of uncertainty for business, which is damaging investment plans.
To manage increasing energy costs and carbon exposure businesses must reduce fossil fuel consumption.
Business must address energy-related risks to supply chains and the increasing vulnerability of ‘just-in-time’ models.
Investment in renewable energy and ‘intelligent’ infrastructure is booming. This revolution presents huge opportunities for new business partnerships.

A change in the energy market balance between East and West

Advanced economies remain the biggest consumers of primary energy per person but by 2008 non-OECD countries led by China and India had outstripped them in terms of the share of world demand. This shift began in the 1990s, partly because manufacturing shifted eastwards. Meanwhile, lower population growth, de- industrialisation, greater efficiency, higher fuel prices and a concern for the environment are lowering demand for oil-based fuels and coal in the OECD.

These consumption trajectories mean there is likely to be a tipping point in 2015 when countries in Asia-Pacific need more imported oil in total than the Middle East (including Sudan) can export.

Middle East oil surplus vs Asia-Pacific deficit (Source: John Mitchell, Chatham House 2010)

The white paper goes on to detail market forces, energy trends, risk and opportunity. This is recommended reading for business and government leaders and risk managers.

Walmart Partnering with Patagonia on Sustainable Business Practices

Posted on 01 July 2010 | by Jay Kimball | 2 Comments

A recent article in Forbes describes how Patagonia, one of the early thought-leaders on sustainable business practices, and Walmart, are partnering to help Walmart move up the sustainable business learning curve fast. The article emphasizes the need for not just being sustainable inside the business, but up the supply chain as well.

Highlights of the Forbes article:

Patagonia is working with Walmart to develop a sustainability index for its products
This initiative is being driven by Walmart CEO, Lee Scott, working with Patagonia’s CEO, Yvon Chouinard.
Walmart CEO Lee Scott first articulated a sustainable vision for Walmart in 2005 saying Walmart “must operate in a world that is healthy.“
Walmart is assessing things like how much water is consumed in the manufacturing process of a product, whether pesticides are used, impact on climate change, energy efficiency, etc.
Walmart wants to place a scorecard on its store goods that rate products on eco-friendliness and social impact.
Walmart is evaluating its suppliers and will give preference to those who best comply.
Patagonia has helped others, including Nike, Gap, REI, and North Face.
Nike has gone on to form GreenXchange, a consortium of ten companies (among them, Yahoo) that will trade eco-friendly intellectual property.

Most businesses I talk with want to do the right thing in terms of caring for the planet, but it rarely shows up in their mission statements or operational imperatives. However, if you ask any business person if their business depends on a healthy customer and a healthy supply chain, the answer is an obvious “Yes!”

Sustainable Business Interdependence

When I talk with business about strategies and tactics for sustainable business, we invariably come to this picture:

If a business confines their view of global issues to within their own business, they might think that climate change, water scarcity or high energy costs don’t impact them. They might say “Well, we don’t use much water, so that’s not an issue for us.” But if the view becomes more expansive to include the supply chain and the customer, they find increased risk to “business as usual.” Everyone interdepends on everyone else. Just as the proverbial rising tide lifts all boats, if the tide falls for one, it falls for all.

For example:

Water tables are falling rapidly in China. If a production plant in China, making product for Walmart, depends on water for the production, and the price of water suddenly rises, or access is limited by government edict, that impacts Walmart cost of goods and product flow.
If Walmart customers can’t afford to buy as much because they are spending too much on energy bills and gas expenses because the price of oil is at $120 a barrel, Walmart top line revenue growth declines.

Even if a business isn’t selling directly to “the consumer,” there is risk. If a company has businesses as a customer segment, they must understand how those businesses will be impacted. For example, if Walmart customers choose to spend less money at Walmart because of rising energy prices or fear of losing a job, Walmart will place less orders with their vendors and vendor order volume will fall. So consumer wellbeing matters to vendors all the way up the supply chain.

Walmart is the biggest retailer in the world. They are taking the long view and understand the interdependence of their success with the health of their supply chain and customer base.

Regarding sustainable practices, as a business expands its field of view to include supply chain and customer, there are three key things to examine:

Mitigation – Understanding what impact global issues will have on the business and creating adaptive strategies and tactics to prepare. Shareholder value is protected.
Innovation – As a business understands the global trends and challenges, they can innovate solutions that will have real value for their business, supply chain and customers, and beyond the, open new markets and opportunities. Shareholder value is increased.
Advocacy – Are the steering directions a business gives to representative associations, lobbying firms, chambers of commerce and state and federal representatives in alignment with new found adaptive strategies and tactics?

Thinking like Walmart – What can a business do to ensure a healthy world?

Perhaps we should call it the The New Trickle Around Economy!

More on this in a future post. For now, here are some photos I took while visiting Walmart headquarters, in Bentonville, AK, for a book I am writing on sustainable business strategies. These pictures were taken while touring one of Walmart’s flagship stores in Fayetteville, AR.

Walmart store green steps program, sign at check out — Walmart store Green Steps program, sign at check out, in Fayetteville, AK

Walmart store green steps program, rain water harvesting catchment tanks at back of store

Walmart store green steps program, rain water harvesting description

Walmart store green steps program, wetlands for catching run-off, and purifying it naturally.

Walmart store green steps program, streamlined truck to reduce fuel consumption

Nobel Laureate Joseph Stiglitz on Sustainability and Growth

Posted on 22 June 2009 | by Jay Kimball | 8 Comments

My wife and I live on an island in the Pacific Northwest. We are in a county that has the lowest working wages in the state. As you can imagine, there is a lot of belt tightening going on as the economy craters.

In a future blog post I’ll talk about how our community is finding ways to innovate in tough times, but for now, what I am thinking about is something Joseph Stiglitz said last year in an interview at the Asia Society in New York City. Stiglitz is a Nobel Laureate and professor of economics at Columbia University.

Toward the end of the interview, talking about GDP, he describes the dramatic negative side-effects a metric like GDP can have on societal well-being. In short, something as simple as a measurement can lift a society up, or crush it.

Here is what Professor Stiglitz said:

What We Measure Affects Our Behavior

Joseph Stiglitz during 2008 Asia Society interview

Accounting frameworks affect behavior. More generally, information affects behavior. What we gather our information about, and how we describe success, affects what we strive for. If GDP is what we think is success, people will strive for growing GDP. Politicians, for example, will then describe how they increased GDP x%, creating a sense of importance to the measure. By doing that though, they focus policies on things that will increase GDP.

We have identified a lot of ways in which GDP is not a good measure of economic performance or societal well-being. So we are working with others to try and focus a global conversation about alternative measures, and also come up with some summary accounting frameworks and statistics that more effectively represent the economic realities on the ground.

Measuring the Middle Class

For example, GDP doesn’t tell you about what happens to the typical citizen. This is an increasing problem because when you have growing inequality in society, you can have GDP going up, as it has in the US, but most people are getting worse off. Not just poverty going up, but the median income – 50% or more of people getting worse off.

We ought to know what’s happening to the median person. It’s very hard to find statistics about that.

Green GDP

There needs to be a focus on what we call “Green GDP” – taking account of environmental degradation and resource depletion. This is particularly important in developing countries that may, for example, be growing by cutting down their forests. But once they cut down the forests, there’s nothing there. And so unless they do something, it’s not sustainable. GDP tells you nothing about sustainability. Another example – the IMF thought Argentina was doing great in the early 1990s. In looking at the data though, in a more fine grained way, we found that their growth was not sustainable. If you only looked at GDP, you would not have realized that.

There are ways that you can adjust for depletion of natural resources and degradation of the environment. If you do that, China’s growth, for example, gets significantly lowered. It’s still doing well, but it is much lower than it otherwise would have been.

Special Interests – The Invisible Hand

Here’s an interesting story about the role of special interests: When we tried to push for this (Green GDP), and people in the Department of Commerce were excited about doing this, the coal industry basically threatened to pass a proviso to take away funding for any research that would support these alternative measures. Because they new that Green GDP would not be good for the coal industry. That reinforced our belief on why it is important to measure these things.

GDP and GNP

Here’s another example… the difference between GDP and GNP. Those of you who are older may remember GNP and around 1990 they switched to GDP. Well, everybody said it’s just a little bit of difference. It turns out that it makes a great deal of difference for many countries. And I am sure somebody is going to write an article about whether there was a political context to the switch. GDP looks at the output within the country. GNP looks at the income of the people, in the country. When you started privatizing a great deal, you had economic activity within the country, but the income from that economic activity more and more was going to people outside the country. So you have a mine, for example, somebody taking [resources] out of the mine, leaving behind environmental degradation, getting royalties in some cases of 1 or 2 percent, so almost none for the income from the mine goes to people in the country. So GDP is going up, but any measure of Green GNP would show the country going down. There are some really dramatic examples like in Papua New Guinea, where this actually is true.

GDP, Prisons and Healthcare

Two dramatic examples – The US has about 10 times as many people per capita in prison as other advanced industrial countries. That contributes to our GDP, because we have to spend money incarcerating them. In some states, we are spending as much on building prisons as we are on universities. That’s good for GDP, but any measure of societal well-being says it’s not good to have so many people in prison. And it’s a symptom of something dysfunctional. We can have a long discussion about what it is that’s dysfunctional, but the point is, it’s not positive.

Another example – We spend more on healthcare than any other country, as a percentage of GDP, yet our health outcomes are much lower than in other advanced industrial countries, and actually, lower than many developing countries. Well, the extra money we spent on healthcare shows up as a contribution to GDP. If we got more efficient our GDP could go down. But that is clearly not… you don’t want to… You’re looking at the wrong thing.

END OF INTERVIEW

You can watch the GDP portion of the interview video here.

For me, what Stiglitz is getting at is: We grow what we measure (GDP), and because we are measuring the wrong stuff, we are growing wrong.

It seems to be in our DNA to want to “grow,” but like a garden, don’t we have a choice about what we grow? Are there ways we can grow our economy that restore abundance rather than consume it? What are the essential things to measure so that we are growing good things?

What do you think? What would you like to see grow? What should we be measuring?