Complex Made Simple

What climate change means for business before and after Paris

The recent international agreement on climate change is the most far-reaching pact in many years.

Forest Reinhardt, co-chair of Harvard Business School’s Global Energy Seminar, provides background on how business people are thinking about sustainability.

How have businesspeople’s attitudes towards environmental issues evolved over the years?

The response has never been monolithic. There are always people who see environmental issues as sources of additional short-run costs and who focus on minimising those costs. And there are always people who see the efficient use of natural resources as an economic imperative and who try to work out what that means for their business.

You can find both of those groups in any period, any industry, any geography.

What are some recent ways that companies have responded to sustainability challenges?

Many companies have good economic reasons to get creative – and you should never underestimate the actions that individual companies take in their own interests, but which also have positive social effects. In California, government management of water resources has been highly dysfunctional (though it’s getting better) – but even so, farmers are doing a much, much better job getting exactly the right amount of water to plants at the right time and doing the same with fertiliser. In a sense, they’re substituting information for resources: by knowing exactly when to apply water and fertiliser, they use fewer resources and do less damage to the environment.

This isn’t just a developed-world phenomenon. I recently visited a Heineken plant in Ethiopia that had been shipping barley from France – meaning that they had to ship it through the Suez Canal, down the Red Sea to Djibouti and then put it on a truck and drive it to Addis Ababa. Well, Ethiopian farmers have grown barley for centuries, the land is well-suited to that crop, but the methods were premodern – not because Ethiopian farmers are less competent than French farmers, but because they just haven’t had access to modern inputs and capital. It turned out that if Heineken helped them obtain modest amounts of modern seeds and fertiliser, they could double or triple their yields, supply barley to the malting factory and completely transform their economic circumstances.

The company loved eliminating the foreign exchange risk and the logistical expenses and the Ethiopians benefited from the improved agriculture, obviously. And by the way – the government isn’t subsidising this. Heineken is just acting in its own economic interests.

How optimistic are you about our capacity to “make the planet sustainable”?

Look at it this way. If I felt that we needed to reorganise our whole economic system, then no, I would not be optimistic. Most attempts at wholesale reform of institutions don’t turn out so well, right? But that’s not what we need. We need to internalise some social costs and get the prices right – we know how do that and we’ve done it before. We can certainly do it again.

© 2015 Harvard Business School Publishing Corp.