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How can businesses reduce their environmental impact?

Joel Malen

Complex issues

My main research interest is examining how businesses account for the environmental impact of their business activities, how they recognize those impacts and account for them in strategic decision-making. In other words, how do they determine what's important, and how do they use that information?

These are complicated issues. To understand the impact of business decisions on the natural environment, we need a trans-disciplinary effort to include perspectives on industrial ecology, and on measuring what these effects are and where to look for them.

The challenge is that a company’s direct actions are only part of a large, often very long supply chain and product life cycle, which includes everything from taking resources out of the ground to the product’s eventual disposal.

Let's say we're an automobile manufacturer, and we eliminate all environmental externalities from our manufacturing process in producing cars. That's fine, but it ignores the impact of those cars downstream during their lifetime, putting CO2 into the air as they are used.

This is a very different way of thinking, because companies usually focus on what their business is, and how it can create, capture and deliver value for direct stakeholders. What happens not only outside of the transaction, but up- and downstream in the product life cycle, are things businesses typically don't think about.

Different scopes

Within the context of CO2 emissions from business activity, distinguishing between what are known as scope 1, scope 2 and scope 3 emissions can help shed light on the complexity of the challenge. Scope 1 consists of direct emissions from a company’s own processes.

Scope 2 emissions come from purchased energy. You need energy to drive the machines in your factory, and you’re typically not producing that on-site. You’re buying it from a local power generation company, and if it’s using fossil fuels, it’s emitting greenhouse gases.

Scope 3 emissions are up- or downstream from either direct emissions or energy source. This includes, for example, the emissions a car produces when it's driven.

For many companies, only a small proportion of emissions are likely to be under their direct control, i.e. in scope 1 and 2. For example, for a consumer goods company such as Unilever, the bulk of emissions are in the consumer use stage (scope 3). Unilever sells a lot of soaps and shampoos, which are typically used in a shower with hot water running, and that takes a lot of energy, usually generated by fossil fuels.

Another important component of this research is the issue of feedback. The tendency of companies to simply ignore environmental impact means that feedback processes that would normally draw attention to the need to change business activities -- for example negative financial performance impacts of a business decision -- are often absent with environmental impacts. How these critical feedback loops become closed is therefore an important dimension.

Addressing this point requires a systems perspective. Consequently, my research has been moving toward incorporating systems thinking and methods for understanding both companies as systems and their part in broader natural and social systems. Environmental impacts are multidimensional and vary across a product’s life cycle, and this introduces a substantial level of complexity into responding to them. I am interested in how firms can manage the complexity of environmental impact information and develop meaningful organizational responses to the feedback they receive. The strength of these responses depends on organizational purpose and goals—another component of my research.

Business challenges

To investigate these issues one area I focus on is decarbonization. Businesses taking the challenges associated with climate change seriously are adopting goals for carbon reduction. But adopting a target is only the first step. Developing effective strategies and processes for achieving the intended goals remains a major organizational and strategic challenge. Thus one current research project explores how firms modify strategy and environmental investments in response to performance feedback regarding the carbon reduction goals they adopt for themselves. Another project explores how firms are using internal carbon pricing as a mechanism for transforming the externalized cost of environmental harm into an actual cost for the business—a process that holds the potential to fundamentally change how managers think about the environmental impact of business activities.

I am also working with colleagues at Hamburg University in Germany on a long-term, international research project to identify best practices for businesses to achieve science based targets (SBTs) for decarbonization -- goals that align with scientific estimates of what is needed to reduce emissions to a level that will limit global warming to 1.5-2C and meet the commitments of the Paris Accord.

There are various ways of calculating SBTs, but basically they tell you how much you have to reduce carbon emissions to zero in a given timeframe. To do that, first you have to know your carbon footprint. You have to have the data, you have to measure it and you have to be clear about what's happening. And then the question is, what are you going to do about it? These are the challenges we're looking at.

To better understand the process of decarbonization my colleagues and I are conducting a longitudinal study looking at what companies actually do after setting these targets. We have begun the process of conducting extensive interviews and plan to perform statistical analysis of carbon and other related data of a small number of companies from each of several countries, including Japan, Germany, the U.S., China, Brazil and others over a period of five to six years. The goal is to use the insights and data we get at the company level to understand challenges and successful practices for achieving deep decarbonization.

Motivation to change

Business people are just like most people; nobody wants to do harm. But the way the economy is structured, and the way business is structured, can be barriers to action. The way we think about business also matters. Meaningfully addressing environmental problems becomes much more challenging when the purpose of business is narrowly conceived.

Creating, delivering and capturing value for customers and staying in business is hard enough. So if we start throwing all of these other issues and pressures at managers, understandably, there’s pushback. Not because of some deliberate desire to ignore environmental impact, or because people don't care -- it's because it's hard to do, and often managers don’t know how to go about it. Tackling these issues takes time, effort and resources, and it’s easy to let it slide. That is the value of this research -- it will give businesspeople a solid grounding on which to base their actions, and confidence that their resources are applied effectively.

Interviewed and written by Robert Cameron