Jonathan Lash and Fred Wellington

competive advantage on a Warming planet

Jonathan Lash and Fred Wellington’s article in the March 2007 Harvard Business Review, Competitive Advantage on a Warming Planet presents an overview of the predicaments facing businesses in an era where the environment is becoming increasingly important to a company’s bottom line. The authors give the reader an outline of the business risks associated with climate change and strategies that companies can use to mitigate risks and gain a competitive advantage.

Jonathan Lash and Fred Wellington’s article in the March 2007 Harvard Business Review, Competitive Advantage on a Warming Planet presents an overview of the predicaments facing businesses in an era where the environment is becoming increasingly important to a company’s bottom line. The authors give the reader an outline of the business risks associated with climate change and strategies that companies can use to mitigate risks and gain a competitive advantage. The overriding message that shines through right off the bat is that they are advocates of being a first mover in order to gain an advantage over competitors in tomorrow’s market.

Lash and Wellington open their argument by giving the reader a background on the global warming. Once the reader finishes the first sentence of the background section, little room left for debate about how the authors feel about the impact of carbon emissions on the planet. “Let us stop here for a second and state our belief that climate change does in fact pose a serious problem for the world.” They go on to site “numerous studies” that state the world is changing at an unprecedented rate. I’m not saying it isn’t or it is, but the authors should have provided some alternate views here, if for no other reason than to refute them. After reminding the reader that carbon emissions are constantly rising and so the temperature of the world is continuing to rise they point to the business implications of climate change.

The business implications are similarly dyer. The authors allude to an irreversible problem that the government (US) has offered no guidance on. The consequence is that companies are going to incorrectly adopt inaccurate risk profiles. They then go on to say that government regulators aren’t the only ones watching this. Hold on, didn’t they just say the government was not providing policy guidance? Anyway, astute investors are also now demanding that companies better disclose their information so as to be able to assess their risk profiles. This concept does sound reasonable from a company’s perspective. In response to shareholder upheaval, companies will disclose more information as it pertains to environmental policy.

Lash and Wellington go on to discuss six risk factors that companies need to be aware when considering their exposure to climate change. They are as follows:

Regulatory Risk - Policies or regulations that govern carbon emissions. The authors site Kyoto and the Kyoto mechanisms as their prime example. I found it interesting that they would advocate so strongly for a first mover position and then site the Kyoto Protocol as a success story of environmental policy. Kyoto does have merit in the fact that it will forever be known as the legislation that started the process of carbon emission regulation. Carbon now does and will for the foreseeable future carry a price. However, the protocol’s legislation that annex 1 countries reduce their emission outputs to 1990 levels by 2012 seems to be almost impossible. Furthermore, countries like Russia, who were a beneficiary of good timing and nothing more, hold a distinctly unfair advantage in the agreement. The US, China and India don’t even belong to Kyoto. Consequently, the protocol carries very little clout from a business perspective.

Supply Chain Risk – The concept of supply chain risk lies in regulation applied not only to the company, but also to the remainder of the supply chain. This would be more of a concern in the EU than anywhere else. If supply chains run out of Asia, India or the US it is unlikely to be a major concern. Even if new legislation occurs in the US it will have minimal impact.

Product and technology risk – An intriguing concept that goes to the heart of emissions trading. In essence it states that certain companies will naturally gain a competitive advantage in a carbon constrained world. This is a risk companies should be cognisant of mitigating.

Litigation Risk – Entails lawsuits being brought against companies by individuals or governments who are serious environmental offenders. This seems unlikely to occur so long as a company stays within governmental