Medium enterprise and the low-carbon economy

Climate change, whether you believe in it or not, is going to change every business on the planet, either by force of regulation, or by a competitive drive towards low-carbon business models. Medium enterprises have a great opportunity to be the next generation of big winners in a future low-carbon economy. Or big losers. Jyoti Banerjee investigates the balance of probability.

Last week BBC Radio 4 featured an interview with a Canadian academic who has developed a prosthetic knee that generates electricity every time the knee flexes. It’s a great idea for helping provide power to disabled people but it turns out that there are other applications as well. The military could generate electricity for their communications devices while walking. And the rest of us could walk around to power up our iPods, mobiles and GPS units.

Walking to generate electricity is not going to turn back the tide on climate change but it is just one more example of the way clean-technology approaches are gaining traction in the market.

Medium enterprises are probably as concerned as everybody else about climate change but many executives of such organisations that I have met wonder what they can do to really make a difference. After all, the industries that have to make the biggest changes to their carbon productivity, such as energy, transport and heavy industry, are usually not populated with medium enterprises. Executives in medium enterprises agonise over installing efficient heating, or motion sensors to switch lighting in less-used locations like toilets because they know that these things make good business sense anyway, but surely none of these are going to tackle the problem of climate change.

In order to get a sense of what medium enterprises can do in this era of extraordinary change, let’s take a step back and get a feel for the scope of the climate change problem in the context of its impact on business.
If current climate science holds true ( and there is considerable uncertainty with some of the estimates), global greenhouse gas emissions need to decrease from today’s levels by 90% as of 2050 in order to keep global warming to within two degrees centigrade. Or to put it another way, our emissions need to be back at the level they were in 1950. Currently economic growth is tied very closely to emission growth. In 1950, every kg of CO2 produced $0.60 of global GDP. By 2000, this figure was around $1, showing a growth in carbon productivity of around 1% per year. In order to meet the 90% reduction target, we need every kg of CO2 emissions to produce at least $15, maybe even as high as $30 of global GDP.

This translates to a ratcheting up of our carbon productivity from 1% per year to around 5-7% per year, according to estimates from the World Resources Institute and McKinsey Consulting.

Bottom line: we need to break the umbilical cord that joins carbon emissions to economic growth.

How can medium enterprises participate in, and help catalyse, a low-carbon economy? They can do three things.

Carbon efficiency
Every business already has existing assets and products that are part of our current carbon-based economy. Each business needs to optimise the carbon efficiency of its infrastructure (such as buildings, data centres, and factories), its supply chains, and its finished products. This makes good business sense anyway, and the rising energy prices provide immediate rewards for carrying out such optimisation. Of course, those in energy, automotive and heavy industries have the most to gain from this. But it is also hardest for them to change their basic practices. Medium enterprises can focus on the changes they can make, and rest assured that it is easier for them to drive such changes through than it will be for larger companies.

New low-carbon solutions
We are not going to quadruple (and more) our carbon productivity growth without coming up with whole new business models that are entirely based on low-carbon technologies and value chains. Masdar City, currently being constructed in the United Arab Emirates, features an ultralow-carbon, car-free urban area, with magnetic trains, zero-carbon electricity and strict norms for water usage and waste disposal. Such developments need smart technologies but they also need smart ways in which businesses can create value systems out of low-carbon products and services. Innovation rates in medium enterprises are high, and they offer great potential to be the big winners in coming up with new low-carbon business models.

Regulation
There are not enough planetary resources available for everybody in the world to live in the same energy-consumptive, space-consumptive, resource-intensive, and waste-generative way that we live in the west. Right now India and China are driving growth in the traditional high-carbon way. Nothing will stop them doing that without regulation.

But we need regulation in the west as well. In fact, it is quite possible that without regulation, no individual or business will take the necessary steps to act in a way that will counter climate change. Adam Smith’s “invisible hand” will certainly not do it – it is simply generating the wrong result.

But if regulators are going to play a key role in changing business behaviour in the sort of fundamental ways described above, we need medium enterprises to stop avoiding government and start engaging with them to jointly figure out the best way forward. For example, one unintended consequence of regulation would be to be shift manufacturing away from relatively carbon-efficient plants in regions with high carbon costs (most of western Europe) to higher-emitting plants in countries that have little or no regulation (such as India and China). Many medium enterprises are ill-prepared to engage with government, but learning to do this is going to be a necessary skill if you want to succeed in a low-carbon economy.

The fastest movers in the move to a low-carbon economy will be those companies that are built on low-carbon business models, with no legacy assets needing to be protected. Medium enterprises are well-positioned to be a low-carbon attacker rather than a high-carbon defender.