I get asked this question a lot. Read on.
Unlike other major global issues, climate change is one where businesses are front and center, as both the primary cause and as a solution. This is so for at least four important reasons.
First, countries don’t emit: companies and people do. If we are going to address this problem, we are going to have to start impacting behaviors at the point where emissions actually happen.
Second, valuation implications could be enormous. Consider just the firms in the S&P500, that emit between 2 and 3 billion metric tons of greenhouse gases (GHGs) annually. If the costs associated with this are required to be internalized, the impact will be significant. If there were a market price of, say, $30/ton of CO2 the S&P500 would need to sign a collective check for $60 billion to $90 billion annually. The present value of this liability could be as high as one-twelfth of the market capitalization of the S&P500.
Third, there is a potentially vast ‘climate economy’ emerging, in three key areas: one, from achieving greater carbon efficiency in existing operations, two, in obtaining new energy from non-fossil fuel based sources (including nuclear), and three, from capturing the emissions and putting it away for good (‘carbon capture and storage’). Investments, already starting in significant amounts, could run into many trillions of dollars across the globe.
Fourth, as companies have outsourced the upstream parts of their value chain to emerging economies, emissions from developed world consumption have essentially been supplanted with that from massively carbon-inefficient economies. It is these economies that, in turn, will account for a substantial part of global growth in the next few decades. The climate implications – and the larger sustainability implications for the natural environment – of that growth are mind-boggling to contemplate.
So, what does this all this imply for MBAs graduating today?
Careers of MBAs graduating today will unfold in a world in which the climate phenomena that scientists worry about could become reality, and in which there is a carbon price.
What will that mean? It will be a game-changer in the same way that the internet or the economic ascendance of the BRICs was. Just as we take for granted a ‘digital economy’ or an ‘emerging economy’ today, we will soon be talking about the ‘climate economy.’
Forward-thinking companies – the list runs into the hundreds today – are taking climate change concerns head-on. Many are committing serious amounts of management talent, resources, and capital to address climate change. Over two-thirds of the S&P500 measure their carbon footprints using globally accepted reporting protocols. Many have initiatives in place to manage this footprint, via investments in energy efficiency, renewable energy, and incentive-based, quantitative, time-bound abatement goals.
New career opportunities are emerging. Two-fifths of the large companies today have an E-level officer, with titles such as a ‘Chief Sustainability Officer’ to manage climate change concerns within the company. Over one-fifth now link employee incentives and goals related to climate change.
Many firms in finance, consulting, private equity and venture capital are positioning themselves for the emergence of the climate economy. Every major bank or asset management firm now has climate initiatives, often in partnership with NGOs. Advice on coping with climate change, as well as in related areas such as energy efficiency and renewable energy investments, is emerging as a vital area of practice for leading consulting firms. Investments in renewable energy have already become significant in private equity and venture capital.
There are now numerous climate change- and sustainability-related scorecards and rankings produced by major media outlets and NGOs to which companies are having to pay attention (including one that I developed for CFO magazine, called the ‘Fossil Fuel Beta,’ or FFß).
Link to Business Value
MBAs graduating today should ask – indeed, must be prepared to offer views on – four questions related to their future employers: Should the CEO, CFO, and members of the Board of the company care about climate change? If so, why? How? What they can learn from others that are getting in front of the issue?
My view is that it is crucial to take a hard-nosed view of whether and how something, indeed anything, ‘matters’ for a corporation. In a world of competing priorities and limited resources, an issue will get the serious attention of CEO only if we can articulate that it has a meaningful impact on the value of the business.
Thus, when we attempt to link climate change-related initiatives to value creation, we should be making a link to specific financial metrics – i.e., we should be seeking to anchor our initiatives on answers to the following questions:
- What is the impact, if any, of the initiative in increasing revenue?
- What is the impact, if any, of the initiative on decreasing costs?
- What is the impact, if any, of the initiative on the investment spending practices and processes that the company uses to achieve its future growth – e.g., capital budgeting practices, new product introduction or new market entry, M&A, supply chain configuration?
- What is the impact, if any, of the initiative in reducing the risks of future cash flows, i.e., on our cost of capital?
These are the questions that today’s MBAs will need to be thinking about in relation to whether and how climate change will affect their careers. This, in turn, is why the Tuck School of Business is in Doha. As a leading business school that trains future global business leaders, we want to not only understand, but be at the center of, this conversation.